Property Prices: Are They Heading For a Fall?

- We have already enjoyed weeks of sunshine and shirtsleeve temperatures way above the 6-13 degrees, which is the supposed average for the time of year. And it’s set to continue says the BBC’s online weather forecast, at least for the next 5 days there will be clear skies and temperatures averaging around 20 degrees celsius, 3 degrees above the higher end of the average range for May.

- Is this the start of the long-hot summer talked about?

Already your editor’s modest garden looks like it’s close to peak and will be disintegrate into a brown, desiccated patch well before summer officially arrives. And in passing what did happen to that hosepipe ban?

- So as the UK braces itself for a possible long, hot summer ahead, what else is feeling the heat? Well few investments have had more global warming from cheap money than property. From Miami, to Madrid, Moscow to Mumbai property prices have risen spectacularly. Even former pariah towns such as Belfast have joined the party.

- In the UK, those on the property ship are mostly sitting pretty, but those trying to board increasingly find they’ve missed the boat. When a modest but unattractive London house can set you back somewhere in the seven figure range, you have to wonder where it will end. Won’t buyers wake up at some point? That house is not so much a fantastic opportunity in an up-and-coming neighbourhood, but an aging wreck with a pile of hidden problems to be discovered that will cost you another fortune after you’ve bought it.

- Former Bank of England MPC member Sushil Wadhwani, writing in today’s Times, says the "overvalued" housing market cannot be ignored when considering the ten year performance history of the MPC. He warns on something forgotten by many these days, property prices can fall.

An economic shock that forced up rates would mean "considerable potential for a significant fall in house prices and consumption" he says.

- Question is where can we expect a shock to come from?

The Rumsfeldian known knowns...oil, credit markets, international terrorism...or even, something totally unexpected and unforeseen, an unknown, unknown. A meteor blasting Wall St or Canary Wharf...an earthquake in the English Channel...

- Wadhwani also reckons the Bank could have raised rates on the pretext of cooling the housing market over and above the current outlook for inflation. Seems like house price targeting taking precedent over the MPC’s inflation targeting objective, but it’s within the bank’s remit says Wadhwani.

- Central banks should not to take their eye off asset prices to avoid monetary policy errors, he continues, citing the economic horror story of Japan’s price bubble and subsequent "lost decade". That brings to mind the oft quoted marker from the peak of the boom that the Japanese Imperial Palace was worth more than the state of California.

What price Buckingham Palace today?

- Meantime, money is readily available to buy property in the popular UK buy-to-let market in spite of deteriorating conditions. The FT reports lenders are offering buy-to-let mortgages "...without requiring any minimum rental cover or proof of income, even though returns have sunk to record lows..."

- Last month the Bank of Ireland lifted its maximum to any one buy-to-let landlord from £2.5m to £20m. Given that now the average "net yield" on residential property is 3.5%, less than the 5% or so you can expect from a decent bank savings account.

It sounds like great timing. 

Regards
Rob Mackrill
for The Daily Reckoning

This article is from The Daily Reckoning. With over 500,000 readers every day The Daily Reckoning has become essential reading for anyone who’s interested in their money. If you think you'd enjoy witty, irreverent and often hilarious commentary on economics and investment - for FREE - then sign up today.