July 13th, 2007 by john
For years, the UK property market has been on a phenomenal run, outstripping inflation by a significant amount. The upshot is that young people can no longer get on to the housing ladder and it is reported that average property prices now exceed five times national income. But is this a one way bet? Why are prices rising? The answer is that property prices will rise until the costs of servicing the debt consume such a proportion of income that prices can rise no further. So if interest rates are low properties seem cheap because they consume a smaller proportion of income. Interest rates are now standing at 5.75%. Within living memory of anybody over the age of about 30 interest rates have been at 12% or more and it looks like interest rates are gently moving upwards while inflation is potentially reappearing. Much of the reason for no inflation recently has been the phenomenal growth in
China where cheap manufacturing is providing us with cheap goods at ever-reducing prices masking local inflation. Eventually this has to stop as
China will become increasingly wealthy. Its citizens will be paid more , while material prices will rise and the disinflationary effect must stop. At this point surely global interest rates will start to rise as governments seeks to choke off real inflation. As interest rates rise and the cost of servicing debts reaches a point where buy-to-let investors are losing money (which they are already) and house holders can no longer afford their own mortgages, property prices must fall. There are other forces afoot. How many people do you hear saying that their buy-to-let property is their pension. Well that is a great idea all the time that you are fit and able to go round and collect your rent but what happens when you are in your 80’s and you have to collect your rent from some character who can’t pay you? What will you do? Well if you have any sense you will sell the property long before you get to such a point. So if the baby boom generation begin to sell their properties at the same time surely property prices ( at least in the buy-to-let market) will fall and if they fall what happens to all those people who strapped themselves to the hilt to get in, in the first place. Surely this is not a question of if but when. Let’s see.
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