16th September 2013
Warnings about rampant house price inflation and a house price bubble are wrong because prices have fallen not risen in real terms, a London specialist property investment firm is arguing.
The firm, the London Central Portfolio, an adviser about retail property investment, has criticised those worried about serious house price inflation and warned of the grim consequences of Government intervention in the market from past experience.
LCP says that government ministers led by Vince Cable are warning of ‘serious housing inflationary signs’, following an encouraging 1% monthly price rise for England and Wales in July and reports of a growing army of real estate workers, but that this risks a kneejerk reaction such as that proposed by the Royal Institution of Chartered Surveyors which wants limits on house price inflation to 5% a year.
There may, of course, but a strong element of ‘they would say that wouldn’t they’, but it is interesting to examine the opposing view from LCP.
LCP says that Office of National Statistics suggest that average annual price growth in the UK has been 9.4% since 1969, the date from which the data was first published. This represents a doubling of values approximately every seven years.
It says that current price growth is vastly under long term average. According to the Government’s other house price data set, the Land Registry House Price Index, published since 1996, growth has been just 0.67% per year over the last 7 years (July 2006 – July 2013). This equates to a fall in real prices of -3.1% per annum.
It says that this compares with growth of 13.22% p.a. in the 7 years before (1999 – 2006) and argues this reflected the recovery of the housing market after the price doldrums of the 1990s and a booming economy. Few, if any, commentators reported a bubble then, suggesting that house price rises were taken for granted in a dynamic economy.
The firm says that Land Registry data shows that this long term cycle of doubling prices on average every 7 years reported back in 2006, suggests that the housing market had corrected following the downturn in the 1990s and that growth started slowing in 2006, well before the credit crunch.
It adds: “The dramatic fall in prices of 17% in 2009 was not a kick back from growth in the early 2000s but a result of the UK hitting a brick wall during a period of global meltdown. A significant uplift in prices can now be expected as the economy improves. This will be a market correction, not atypical inflation.
“Kneejerk reactions to short term movements are not helpful and should be tempered by a proper understanding of market dynamics. Residential property prices in the UK move in cycles. Periods of growth are generally followed by periods of consolidation. A rise one year may be offset by a fall in the next. Capping growth at 5% a year, as RICS suggests, completely ignores this dynamic.”
Naomi Heaton, CEO of LCP, says: “Any market manipulation has a dangerous precedent. The bust in 1989 was exacerbated by an artificial boom in sales created by tax changes introduced by the Thatcher Government, which coincided with a doubling of base rates to 15% in October 1989, with devastating consequences”.