Looking back over the past half-century, housing appears to have been a no-brainer investment, with houses bought for tens of thousands of pounds now worth millions—but that disguises a bumpy ride. There have been notable reverses, such as the one prompted by the financial crisis. More recently, the property market has been in the doldrums, with London in particular knocked off its perch since the Brexit referendum. The downgrade to Britain’s economic prospects has curbed the growth of household incomes, feeding through to the housing market because most home purchases are financed by mortgages serviced from earnings. The market has also been blighted by uncertainty, which looks set to persist into 2020.
High stamp duties on expensive property transactions could further dampen the housing market. A drive to build more homes will also tend to curb house prices, though its effect should not be exaggerated. In England 164,000 dwellings were completed in 2018, way off the target of 300,000 a year by the mid-2020s. Even if that could be achieved, additional supply would be small compared to a housing stock of 24m in 2018.
Despite these downward pulls, house prices are likely to stall rather than weaken further. This may seem surprising, since they remain expensive by historical standards when compared with income. But that is because another crucial influence on house prices is interest rates.
In the short term, there is abundant evidence that homebuyers gauge affordability mainly by how much of their income is absorbed in servicing mortgage debt. One factor supporting the housing market in 2019 has been a fall in mortgage rates that are fixed for two or more years.
[su_pullquote]“Well-timed decisions to trade up or down can pay off handsomely”[/su_pullquote]
More fundamentally, long-term interest rates are crucial in determining property valuations. This is because housing is a long-lived investment that pays rent either explicitly to landlords or implicitly to homeowners (the rent they would otherwise have to pay). When you buy a property it delivers a stream of future income in the form of rent, just as an equity delivers a flow of dividends. To work out what those prospective payments are worth in present values, you discount them using long-term interest rates. The lower those rates, the higher will be the present value of rents and thus the worth of owning property.
Hence, when long-term interest rates fall drastically as they have done in the past 25 years, that drives up house prices. Crucially, long-term rates swooned further in 2019. As long as they stay low the market should remain relatively stable.
Even so, the advantages of property investment for buy-to-let landlords in particular have diminished. After seeking to stimulate a private rental market through tax breaks the government switched to trying to restrict it through fiscal disincentives. Further steps to strengthen tenant rights are likely. The housing market will not offer thrills in 2020. But it might avoid spills.
