House prices are a hot topic of discussion in the industry, with market trends subject to rampant speculation in the media; everyone is trying to get a handle on what will happen next. As a result, experts drafted in will often lay down predictions based on their particular field of expertise, bias, or agenda, often presenting a narrative where one or two simple overriding factors contribute to a case one way or another.
In a brave new world where 'Black Swans' are as common as pigeons, nailing your colours to the mast like this is a dangerous game. A more measured and critical thinking approach may be needed. So this week's blog will invert the traditional argument, discussion, and conclusion model, cut straight to the chase, start with what we believe, and go from there.
Black Swan events aside, we believe that a comparatively short-lived house price decline has begun. Still, a measured retraction from the current trajectory isn't a doomsday signifier; it's necessary to sustain future growth and the asset's utility. In a world where house prices go straight up forever, the gap between people's earnings and property values will become so detached from economic reality that, eventually, the market breaks and all participants suffer.
Nationwide in their annual house price growth forecast, commented on the importance of this and commented that in the immediate aftermath of the disastrous mini-budget, first-time buyers were subject to a price-to-earnings expectation at circa 45% of their take-home pay. It was also noted by Robert Gardner, Nationwide's Chief Economist, that the last time that particular indicator flashed was just before 2008. It is, however, essential to note that this was a micro event, and in the updated forecasts, swaps rates have declined slightly, showing some more positive sentiment returning to the market.
The housing market's growth performance in recent years has been staggering, with house prices, according to the latest Halifax House Price Index, up 25.7% over the last three-year period. We believe there is still ample headroom for a contracting market to continue providing handsome returns comparable to other more volatile investments that may have steeper retracements.
Inflation has had a considerable part to play in forecasts, ignoring the day-to-day crises eroding the confidence in government debt; several factors are at play here, specifically around housing. In 2021 we saw a flood of entrants into the market as the mechanics of it shifted back into life post-lockdowns. Low rates and the fact that real estate assets historically hold their value better in times of high inflation were the catalysts for a gold rush that set the market on course for today's prices. The widespread consensus is now that the Bank of England needs to reduce inflation to free up cheaper debt in the mortgage markets, and their ability to do that will correlate with the value of the housing market.
Savills in their Mainstream Residential Mortgage Market Forecast are very bullish in their analysis of the situation. Their economists predict a dip in 2023, followed by growth in line with rate reduction into 2024. This scenario is the likely outcome if one believes that the Bank of England can operate as designed, and we are working from that place, as we have no evidence yet to suggest it can't. Furthermore, they forecast house price growth beginning again as soon as 2024; an assessment backed up by Oxford Economics.
Housing Supply is a final point of note in terms of pricing. On the one hand, we believe supply issues have underpinned an element of pricing stability, but I want to caveat this point by saying that failure to provide adequate housing is not a good thing. The knock-on effect of a supply and demand squeeze bidding up the prices in the short term, coupled with difficulties in construction, has created a situation where houses have been overbought and under-produced, benefiting only one side of the equation. However, long-term, it's detrimental to the economy; assets must be created, not just acquired and held, for the economy to function; otherwise, there is no trickle-down effect and no balance with the market's needs.
So, in conclusion, In a downward market, one is reminded of the shark parable; people lost at sea see a shark on the horizon; one casually reminds the others, locked in a state of panic, that they don't need to out-swim the shark to survive, only their peers. Therefore, being the comparative best-in-class option is the best bet; in a volatile market, especially if you're looking for the best placement of funds to protect your capital for future growth. Which we firmly believe can be found in any asset class backed by the long-term robustness of the housing market.
Invest & Fund has returned over £120 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.