Magazine article The Spectator

Don't Bet the House on a Property Plunge

Magazine article The Spectator

Don't Bet the House on a Property Plunge

Article excerpt

The bubble may have burst, says Ross Clark, but a crash looks unlikely. For now, property remains a sensible investment - better than sticking cash in a low-interest account

I'm getting fed up with my 2.5 per cent Northern Rock Super-Sucker's Account. It was OK when it was paying 6 per cent and Alistair Darling was promising by the hairs on his chinny-chin-chin to repay every penny in the event of the bank going belly-up. But I can't see the point now: why risk your capital for some measly little apology for interest which isn't even keeping up with inflation? I keep wanting to hook out the money and put it into something solid: gold or property.

I know I am not the only one who feels this way: that is why property prices unexpectedly started rising in the spring of 2009, a time when they were almost universally expected to keep on plunging. Almost everyone in the property business to whom you talk speaks of gnarled old tight-fists raiding their piggy banks to put their hoarded savings into a buy-to-let or a place for their kids.

The trouble is there are only so many cash savings to be mined, and they seem close to exhaustion. There is suddenly too much property on the market to sustain the pretence of a lively property market. The main house price indices - the Halifax and Nationwide - have for several months now started to register declines in prices. The monthly figures, which cause great excitement on front pages - are pretty meaningless swings with the margin of error. But after three months of falls you can be pretty sure: yes, prices are falling.

It isn't cash-buyers who ultimately drive the property market, but the mortgaged masses. And they are still starved of credit. You can't go from a situation in which banks were happy to lend buyers a mortgage worth five times their salaries and for 100 per cent of the value of a property to one where they are loathe to exceed three times salary and 75 per cent and not expect it to have a massive impact on property sales and prices.

The continuing constraint on mortgages for homebuyers is one reason why I remain convinced that we face a second correction in real property prices. The other reason is that buying property for investment doesn't make a huge amount of sense at the moment. Rental yields remain too low. I've scoured the country for properties which promise me a better return on my money than my Super-Sucker's account, but I can't say I have had too much luck. At a push it is possible to find a property which seems to offer a gross return of 5 per cent. But once you have taken off the letting fees, the management fees - or the value of your own time for doing the job yourself - the loss of rent during 'void' periods when you have no tenant, the maintenance costs, the insurance costs etc - you will be lucky to have a net return of 3 per cent. During the mid-1990s - which turned out to be a genuinely good time to buy - net yields were twice this.

And yet still I don't believe that investing in property is necessarily a disastrous thing to do at the moment. A fall in real property prices, yes, but a crash in actual prices? I wouldn't bet on it. The next phase of the property correction may well resemble the great hidden crash of 1974, when stagnant prices disguised a 17 per cent fall in real terms. Why? Because I suspect that the coalition, for all its assurance to the contrary, will ultimately do just as Labour did:

try every trick to generate inflation rather than suffer millions more being plunged into negative equity. …

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