The outlook for the UK property market grows more dire by the day. Even before banks started pulling mortgage products this month as borrowing costs surged, the picture had been darkening. Some data released in May, including the first increase in prices for eight months, had offered hope that the slump was abating or even reversing. That now looks like a blip. The prospect of a peak-to-trough decline approachinAg 20% doesn’t appear outlandish.
I could have told you that the positive April price figures weren’t to be trusted. After several weeks of house-hunting in London, the sense that the market was weaker than the data suggested was tangible. Few sales agents had anything positive to say. They have little incentive to acknowledge that conditions are slow and buyers have nothing to lose from waiting. “They’re not exactly flying off the shelves,” one agent told me at a viewing a few weeks ago. With feedback like that, the logical choice was to hold back. We decided to buy anyway.
That decision, which came as a surprise even to myself, gives cause for reflection on the peculiar nature of property as both financial investment and consumer good-cum-lifestyle choice. The contrary impulses provoked by this dual function led to internal conflict. With my head, I probably considered the financial aspects more important. My name on the offer letter says otherwise.
It’s one reason why I expect the correction in the property market to be slow and drawn out, no matter how high interest rates rise. Theoretical value is only one element in an equation that is also emotional.
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For me, it was something about how the light came in through the front window and shined out through the back. There was also the fact that the owner bought the house 49 years ago — the same year my parents bought their house in Slough, an unloved suburban town west of London. It seemed like a serendipitous echo; good feng shui, as some Hong Kongers might say. The cracks in the cement of the front yard reminded me of my childhood home.
On a more practical level, it had the space we needed for a family that includes one grown-up daughter, one teenager and a toddler. And while dated, it has been well enough cared for not to need immediate changes. Neither of us had the desire to take on a major renovation project, while a newly refurbished property of sufficient size would have been well outside our budget.
The other deciding factor was that we both liked it, the first time we were in agreement in our search. By that stage it felt like a minor miracle not to be spurned. I was more attracted by period properties, while my wife preferred new builds. It was a lot easier in Hong Kong, our home until last September, where mass-residential developments are made up of hundreds of cookie-cutter apartments that are difficult to tell apart. That market is so uniform that same-sized apartments can be priced precisely by floor; one story higher equates to $5,000 extra in our old block, according to a valuation tool on the website of HSBC Holdings Plc.
Having struggled to sell our place into a falling market for more than a year, we unexpectedly found a buyer in January, and completed the deal in March. After several weeks of searching fruitlessly around the outer fringes of London, we had semi-decided to put the proceeds into a one-year fixed deposit, book the interest and then resume our hunt in a year’s time.
On a purely financial calculation, this would have been the rational thing to do — even before the latest batch of market data. London house prices were down 5.4% as of March from their peak in June last year, according to data from Nationwide Building Society. While the decline in real terms is greater after factoring in inflation averaging 10% over the past year, it’s still much less than a 4.4-percentage-point increase in benchmark interest rates would imply. From an investment perspective, even minor changes in discount rates can have an outsize impact on the present value of real estate’s perpetuity-like income stream.
Look at it another way. Why would investors put money into residential property yielding 3.5%-4% — about what you could expect from a semi-detached four-bedroom house in outer London these days — when they can get 4.5% from a bank deposit, with next to no collection risk, and no depreciation or maintenance costs?
There are structural reasons why property prices remain higher than the change in finance costs might dictate. Tax is a big one. Say, for argument’s sake, you have £1 million ($1.28 million) of capital available to invest in. You could buy a home for £500,000 and, to be prudent and diversify risks, invest the other £500,000 in stocks, bonds, or a second property. However, you will pay tax on the dividend or rental income at your marginal rate (ignoring tax-free programs such as individual savings accounts, or ISAs, which in any case are capped at £20,000 annually), plus 25% capital gains tax when these investments are sold. Put the entire £1 million into a property that you occupy and when you sell you can take the profit tax-free — plus you get to live in a nicer, bigger home in the meantime (though stamp duty does add a substantial upfront cost). If policymakers really want to reverse the slow withering away of London’s equity market, maybe they should think about this.
Then there’s that unquantifiable emotional aspect. People will continue to buy houses even though financial logic might suggest it would be better to wait. Life goes on, and most of us aren’t willing to put such decisions on hold in the hope of picking the optimal time to buy. Folk wisdom says it’s futile to try picking the top or bottom of the market in any case.
Management guru Peter Drucker once said that profit is not the purpose of a business, but rather the test of its validity. I feel the same way about buying a home. You don’t buy a house because it’s cheap but because you want to live in it: Price isn’t the reason, it’s the limiting factor. Human beings are driven by deeper motivations than money even when we don’t fully realize them. I may have just bought into the worst of the London downswing. I’m at peace with that.
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