Like an Empty Nester cocooned in equity in a four-bed detached house overlooking the Green Belt who frets about what his daughter will do to afford a £200,000 bedsit in Brixton, I’ve got a split mind when it comes to UK residential property.

• UK houses still feel expensive, not least by the traditional measure of the house price to earnings ratio.

• On the other hand, I agree there’s a shortage of houses in the UK – or at least of property for sale of the type people want to buy (within reason), where they want to buy it, at prices they can pay.

I was therefore able to post in late November 2011 that given the various attempts to prop up the ailing property market (especially the latest NewBuy mortgage indemnity scheme) shares in house builders looked a better bet than the houses themselves.

As a group, the UK’s seven largest listed house builders are up more than 30% since I posted. Not bad for middle-class dinner party chat turned into an investment thesis!

But I’m not gloating. While shares in house builders have done well in double-fast time, my investment has barely dented the opportunity cost of missing out on six-figure gains from London property over the past decade.

More importantly, there’s a flaw in my two-handed view of the market as glaring as a three-story extension without planning permission in the Antarctic.

The contradiction: Prices are set by supply and demand, so if there’s a shortage of houses and strong demand, then houses can’t be too expensive. Can they?

A quick recap on higher house prices

Most people – even most homeowners – seem to think UK house prices are pretty high, even after the falls of recent years.

But a commonplace view isn’t necessarily correct – and a knee-jerk ‘sticker shock’ reaction to a very large number is a dangerous way to judge value. Before you know it, you’re an 80-year old grannie who complains about the menu at Pizza Express, on the grounds that a meal with a decent bottle of wine used to cost 50p, plus a quick snog at the end of the night.

To illustrate my point, check out this graph of house prices since the 1960s, courtesy of Nationwide (via Finance Blog):

The 1960s: Flares were big but house prices were not

More clued-up grannies are well aware that inflation means 50p isn’t what it used to be (although I’m sure a snog remains welcome). The prices of many things rise a great deal over time – sometimes far faster than inflation.

We saw when we looked at historical house prices that price growth isn’t quite so shocking when viewed in inflation-adjusted money (i.e. in ‘real’ terms).

Indeed, real house price growth has recently fallen a little behind trend:

(Click to enlarge this graph of UK house prices in real terms)

Real house prices have been growing at about 2.9% per year since the mid-1970s. In other words, houses have been getting more expensive relative to the average basket of goods for most of the past four decades.

Now, the official RPI basket includes a nearly 24% weighting towards housing costs, so there’s some element of circularity to this.

It’s probably more useful therefore to look at the cost of houses relative to earnings, since that’s where most of us find the money to pay for one.

House price to earnings ratio

Comparing house prices to earnings was what scared me out of buying in London around 2003/2004. And on the historical measure of the house price to earnings ratio, UK property still looks superficially expensive.

Here’s a recent-ish graph of house prices to earnings from The Telegraph:

Don't look down!

The house price to earnings ratio approached 6.5 before the property slump – a level unthinkable just a few years before. You can see that even though it then declined sharply towards its long run average, by 2011 the ratio was still above the level at which the last property boom peaked in 1989.

The price to earnings measure in the graph is also higher than when I first got cold feet about buying a house, partly due to graphs like this one. That decision cost me at least six figures as prices continued to rise regardless, so be warned about putting too much store in this ratio.

Since 2008 the house price to earnings ratio has been coming down, partly as wages have increased a little despite the recession, but mainly because prices have been falling.

But can we really say the ratio ‘should’ fall below some average level, as per the graph above, before we can call houses fair value?

I don’t think so, for the simple reason that this ratio has been rising for years. I plotted my own graph setting the latest house price data from Halifax against the UK National mean full-time wage for men (same source) and added a trend line as follows:

House price to earnings ratio for UK houses (Click to enlarge)

The black line shows that over the past 20 years, the house price to earnings ratio has been creeping higher. In fact, houses now look slightly good value on this single measure.

Of course, you can quibble.

Firstly, the bigger the boom – or bubble, if you prefer – the more the trend line is potentially distorted.

Also, it clearly matters where you start and end your graph. I’ve used the two decades of data Halifax makes available, but the trend line would look very different over say 1990 to 1995, or from 2007 to 2011.

I seem to remember that when I started closely watching this statistic around the turn of the century, 3.5 was said to be the ‘natural’ level of house prices versus earnings. Looking at the graph above, it now seems this view came about largely a result of the depressed prices of the mid-1990s.

Another criticism might be to ask why the ratio should be based on male full-time earnings, when so many women have entered the workforce over this period.

I think that’s true – but it’s also another reason why the ratio may have moved permanently higher. More women bidding for houses against (or in partnership with) men will clearly increase the ratio for single male salaries, too.

All this – and other weaknesses, such as the fact that the ratio is based on gross income, not mortgage affordability, for example – means I now think the ratio should be taken as just one of several factors in judging whether house prices look too high.

If somebody had tried to bet on the long-term trajectory of food prices based on the average household’s grocery bill in the 1950s versus wages, they’d have ended up bankrupt.

If food spending can decline over five decades as a percentage of our spending, then might we not spend more on housing? Or cars? Or smartphones?

I’m not saying spending more money on houses is desirable either individually or for society. I’m just pointing out that we have been on a long march from subsidence living to buying the latest iPad.

Perhaps housing has become a luxury item for many, in that they’re prepared to spend more of their discretionary income to get the best they can?

But… salaries do influence mortgage sizes

There’s one important caveat to all this.

Before the lending was relaxed over the past couple of decades, mortgages used to be rationed out by banks on a much stricter basis of salary.

One repeatedly hears that 3x your salary was the limit, though I can’t remember ever seeing concrete figures.

If banks do go back to old-fashioned lending as a result of the credit crisis, as some suggest, then perhaps this lending ratio will come down again to reflect tighter access to mortgages, rather than the demand for housing.

Indeed, in London the price to earnings ratio remains more elevated – by my calculations it’s turned higher again, in fact – partly because so many properties are bought with a far higher proportion of cash, or no mortgage at all.

That in turn means the technical constraint implied by bank lending is less relevant in London. Mortgages don’t matter so much.¹

Household income and inflation

I’ll probably get hate mail from property bears for suggesting the price to earnings ratio isn’t written in stone.

Before my email server blows up, I should stress that while I now believe the ratio of house prices to average earnings is a bit of a moveable feast, I agree there’s a commonsense relationship between how much people earn, and how much they can then spend on their largest single asset in most cases, their home.

Whatever multiple banks happen to apply, salaries remain the key criteria they use to decide how big a mortgage to grant, which in turn (partly) determines how much money is chasing property at any given time.

Mortgages aren’t everything, especially in the current depressed market – a record 40% of homes were bought with cash in early 2011, more than double the rate of five years before, for example.

But in most of the UK, cash-rich buyers are in the definite minority and mortgage finance drives the market.

Even in a world without mortgages where we saved up to buy a home, salaries would still ultimately dictate house prices (alongside inheritances and winnings from spreadbetting, presumably).

And the fact is salaries have not gone up at the same pace as house prices.

This lagging is captured in the elevated house price to earnings ratio. But a closer look at inflation-adjusted earnings is also revealing.

Using data from Measuring Worth, I created the following graph of nominal and real wage growth in the UK between 1982 and 2010, which neatly covers the same period as the house price to earnings graph above:

A graph of real earnings in the UK (Click to enlarge).

Over the period from 1982 to 2010:

• The increase in nominal earnings in the UK from around £5,600 per year to £23,500 is an impressive 320%.

• But in inflation-adjusted terms, the rise in earnings is much more modest – just 52%.

Eye-balling the graph of real house prices above suggests real prices rose by around 200% from 1982 to their peak in 2008. Far faster than earnings!

This couldn’t continue forever – and it didn’t.

Earnings aren’t everything

So what have we discovered? Nothing definitive, which is why house prices remain an enduring subject of conversation at a certain kind of dinner party, just ahead of “no, those aren’t my car keys…”

It’s clear growth in real earnings has massively lagged real house prices, and that’s partly captured in an increasing house price to earnings ratio.

If you accept the rising trend over three decades to spend more of our incomes on property, then the ratio no longer looks so stretched, especially outside of London. This might indicate house prices are closer to fair value.

However by itself, the house price to earnings ratio doesn’t seem to be a solid indicator as to whether house prices are cheap or not, or whether they will rise or fall.

In particular, the simple ratio overlooks a vital component of mortgage affordability – the very likely reason why prices didn’t fall as much as they might have in the downturn.

That key missing variable is of course interest rates, which determine how much of your earnings will actually be gobbled up paying off your mortgage.

As anyone who has read this far will know, interest rates have plunged over the past 30 years, which you’d think must be a big factor in driving house prices.

I’ll therefore look at house prices and interest rates in my next post in this series.

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1. The London property market is really a beast in itself. I may do a separate post on the other factors that drive it, which range from foreign buyers and bank bonuses to true scarcity and, recently, the Olympics

Further reading:

1. Historical UK house prices
2. Playing chicken with house prices
3. Are UK house prices too high?

Before you can decide whether you think UK prices are too high, you need to have some notion of where they’ve come from.

Below is a graph showing roughly the past 30 years of UK house prices, which I’ve compiled using data provided by Lloyds/Halifax.

Since the Halifax began tracking historical UK house prices in 1983:

• House prices have risen nationally by 428%.

• London house prices are up by 559%.

If you’re interested in a specific UK region (as I am with London) then download Halifax’s data and create your own house price graph. Admirers will swoon, and strangers will stand you rounds at the pub.

The graph shows UK house prices in blue, and London prices in red:

A pretty impressive looking slope – enough to make a minor Alp self-conscious. But note that this is a graph of nominal house prices. In other words, the prices are not adjusted for inflation.

We can use the Bank of England’s cute inflation calculator to work out roughly¹ what the price rises cited by Halifax represent in real terms.

In approximate real terms, according to Halifax, since 1983:

• UK house prices have risen by 101%.

• London prices have risen by 124%.

That’s obviously a lot less vertigo-inducing than a 400-500% rise in nominal terms, although as we’ll see later on it’s still a lot faster than wages have risen – which is probably why we keep hearing about a housing crisis. (It’s also a reminder of how property has generally tended to protect against inflation).

The Nationwide produces a house price index too, and it helpfully offers inflation-adjusted prices from the get-go.

Here is its graph of UK real house prices, which tells much the same story as the Halifax data:

(Click to enlarge this graph of UK real house prices)

The red trend line is the Nationwide’s, not mine.

Are real house prices beginning to bottom out like they did in the 1990s? Looks like they might be, albeit with a jerkier graph that hints at market dislocations such as emergency interest rates and the restricted supply of mortgages.

How have shares done compared to house prices?

We might also compare house price inflation to the historical return from other assets, such as shares.

The FTSE 100 was introduced on the January 3rd 1984 at a base level of 1,000 – very close to when Halifax began tracking house prices.

• Since then the FTSE 100 has risen 440%.

• If you’d invested £10,000, your real return would be 105%.

On a 1984-ish to 2011 snapshot, then, it looks like a draw between residential property and shares.

But remember that those houses would have required money to be spent on their upkeep, and many home owners would also have splashed out on price-boosting enhancements like loft conversions and extensions. None of those costs are factored into the house price index.

In contrast, the equivalent costs to companies should be reflected in their share prices in the long term.

Are you also thinking that shares pay a dividend, which isn’t caught by the index’s return? Good spot – and true – but remember that houses also deliver an equivalent, in the form of giving someone somewhere to live (or imputed rent, in economic terms).

Finally, the day-to-day level of the stock market is much more volatile than house prices, making point-to-point comparisons with housing a little dangerous. What if we’d done the comparison in 1999? Or 2009?

I’ll be coming back to look at this more deeply in a later post.

UK house prices down, a bit

In historical terms, UK houses have clearly been a decent long-term investment for the past 40 years. Over shorter spans, though, the data shows that the property market undergoes booms and busts just like any other asset class.

As we’ve seen in the graphs, in recent years boom has most definitely invited cousin bust around to stay, and he’s totally trashed the living room. Prices have accordingly come down a fair bit in the past few years, especially in real terms, though less so in London.².

Arguably, the falls are not as much as we might have expected, given how unemployment has risen, and how difficult it is to get a mortgage. And recently house prices have stabilised, despite neither of those conditions reversing.

It’s also worth noting the Halifax and Nationwide data is likely skewed because it’s based on those who need a mortgage – and we’re in a credit crunch.

Cash buyers (oligarchs, bankers, wealthy Greek and Italian refuges, and football stars) can bid up prices without any such piffling restrictions, as we’ve seen in Mayfair and Knightsbridge.

So the building society data probably over-estimates the price falls.

Many economists would have predicted a much bigger house price crash, if they were told a few years ago that the UK would undergo its deepest recession since before World War 2, or that so few first-time buyers would be able to get a mortgage.

Maybe things are different this time?

I think it’s too soon to say whether house prices having finished falling, given the economic uncertainty. The declines may well resume when interest rates rise, or if unemployment heads higher.

For now though, the failure of house prices to drop as much as many predicted before the crash (including me) makes me wonder if I underestimated a structural shift to higher UK house prices in real terms.

It’s claimed that Albert Einstein said the definition of insanity is doing the same thing over and over again, and expecting a different result.

I agree. I’d like to own a house someday, and I don’t want to keep sitting out the property market if it’s for no purpose, only to watch prices take off once more.

“When the facts change, I change my mind,” said the economist Lord Keynes.

So did I miss some changed fact in my previous analysis of house prices? As the old socialists used to chant: What about the workers?

Next: The house price to earnings ratio.

1. Inflation data for 2011 is not yet available, so I have approximated by using 2010 as my base year. These figures will likely be slightly a few per cent lower when the 2011 data comes in.
2. Prime London prices are at all time highs, which is I’d put down to the weaker pound and the influx of foreign buyers.

Further reading:

1. Are UK house prices too high?
2. House prices versus earnings
3. Playing chicken with house prices

Whether you choose to buy a house or rent is one of the biggest financial decisions you’ll ever make.

The sheer cost of houses compared to crisps, cars, and fancy shoes means this was true even 50 years ago.

Nowadays you could pay five or six times average earnings to get onto the property ladder. At today’s high house prices – even in the midst of a slump – the risks of making the wrong decision look greater than ever before.

Is there reason to believe today’s levels are justified, or will UK house prices fall?

In the next few posts I’ll explain how we got to today’s high house prices, and consider if there’s any justification for them.

I can’t tell you for sure if or when UK house prices will fall further, but hopefully you’ll feel in a better position to make your own mind up.

Why house prices matter

Most older people (say 50 or over) will tell you that you can’t go wrong in buying your own house.

Few of the older generation invested much money outside their home. The capital gains they saw from rising house prices – even as inflation reduced the burden of their once-daunting mortgage – was beyond their wildest dreams!

A few gnarly veterans do however warn that prices can go down as well as up.

I see both sides.

I know that house prices can go down. But I also think that NOT buying my own home a decade ago was my biggest financial mistake.

True, saving hard for my aspirational loft apartment (hey, I was young!) got me interest in investing, which is my passion now.

Would that be true if I’d bought a flat and spent my surplus income on broken boilers and Banksy prints?

I doubt it. Buying a house would have been a far easier path to wealth, however.

A little knowledge is a dangerous thing, and my knowledge that London property looked expensive compared to incomes and renting kept me from buying. Yet prices still kept rising.

• Friends who bought naively thinking “London house prices never go down” made a killing.

• Those of us who knew prices had fallen before and so could again have paid for it.

Should you care about house prices?

You might ask what does it matter? Why are the British obsessed with property?

After all, you could choose never to buy a house, and to rent all your life. Some people do exactly that.

The huge advantage of buying your own home is that you lock in the cost of living in it when you buy. Once you’ve paid off your mortgage, you only need to pay the cost of maintenance to keep living there. No more rent!

In contrast, someone who rents will need to pay ever rising rents throughout the next 25 years, when they could have been paying off a mortgage – and beyond that into retirement, too.

They’ll also miss out on any capital gains from rising prices, which are especially attractive because price gains on your own home are tax free.

On the other hand, it’s much easier to move if you rent. You don’t have to pay for decoration and upkeep, either, which you can estimate will cost you about 1% of your house’s value over the long-term, unless you fancy living with the equivalent of an avocado bathroom suite for your whole life.

It’s worth noting that the house price indices completely ignore these extra costs of ownership, and also the cost of adding value through loft extensions and other improvements.

Even so, most people have made a good profit by buying a home in the UK over the past 40 years.

Are UK house prices too high?

This is a financial blog, and I am not going to consider the lifestyle benefits of living in your own home in any great detail.

I’m also not going to go into the morality of high house prices, and the fact that young people are disadvantaged compared to the old by endless house price appreciation.

What you want to know is are house prices too high, or will they come down? The rest is personal opinion.

Next part: Historical UK house prices.

Further reading:

1. Historical UK house prices
2. Low rental yields suggest house prices will fall
3. Playing chicken with house prices

The following guest post on the reasons to rent a house instead of buying is from Graeme Pietersz, the man behind Moneyterms.

A previous guest poster, Tejvan Pettinger, gave us some reasons to buy a house rather than renting. So why would anyone rent?

Well, the argument over whether it is better to rent a house or buy is far from one-sided.

The core of the argument against renting is that rent is wasted money that you could instead save and invest in buying a house. The flaw in this argument is that your entire mortgage payment is not an investment.

A mortgage payment is two payments combined:

• One is the repayment of the amount you borrowed: this is an investment.

• The other is a payment of interest to the lender: this is not an investment.

If paying rent is a waste, then so is paying interest.

Rent a house or buy? The true cost comparison

You need to compare the cost of rent to the cost of paying mortgage interest. You cannot just compare rental yields to mortgage interest rates.

You need to look at where both are likely to go over the lifetime of the mortgage. For future interest rates (beyond any period for which mortgage rates are fixed) you look at a yield curve and add the spread over it that you expect to pay.

The amount you need to add is obvious for tracker mortgages, but the principle is the same for any variable rate because banks approximately follow market rates.

The Bank of England provides some nice graphs for UK rates. Similar data is available in other countries.

Model behaviour

The bad news for buyers is that it looks like we can expect yields to go up. Your mortgage payments will probably be a lot higher in five years.

To forecast future rents, the safest assumption is that they will, like house prices, roughly follow income growth over the long term.

By now you may be feeling that you are being asked to do a lot of financial modeling to decide whether to rent a house or buy. Sorry, but this is an important decision that does not have an obvious answer. It demands at least as much analysis as buying a share.

And we have not finished yet! There are more costs to be taken into account – and we have not even talked about risk.

Other costs of owning a house

Mortgage interest is not the only cost of owning a house:

• If you own a house, you have to maintain, insure, and furnish it. Doing this costs you not only money, but time as well.

• You need to take care to ensure that you maintain valid insurance (I know people who have happily paid for policies they did not realise were not valid).

• You have to find plumbers and builders when needed — and pay them.

• You have to replace old furniture, even if it has only suffered ‘fair wear and tear’.

So you need to add an estimate for all this to the cost of owning a house, and compare that number to your rent. Buying a house is probably looking a lot less attractive by now.

It looks worse when you consider the risks.

The risks of buying a house

The most obvious risk is that house prices will fall. In the long term, this risk is ameliorated by economic growth, as house prices have had a fairly stable long term correlation with incomes. The question is whether you have the will and means to last through crashes.

Also, the risks of owning a property are not just the risks to the property market in general. There are risks specific to the area you buy your house in, and to the particular property itself.

House prices do not follow the same trends all over a country. There can be huge divergences between regions. In addition, there are risks attached to your local area. It may become more or less desirable as an address.

Local facilities (schools, transport, shops) may improve or deteriorate. Changes to rivers or flood defences may make your house prone to flooding. Similar risks exist in areas vulnerable to erosion.

We touched on one of the risks peculiar to a particular property: the cost of repairs. There are a whole range of risks that can leave you badly out of pocket, from dry rot to fire. Some will be covered by your insurance, some will not be covered at all, and a good many will be inadequately covered. Regardless of who pays, it still costs you time and worry.

The price risk is far worse than similar volatility in any other investment, because most people borrow to buy a house — very few borrow to buy shares. Buying a house with a mortgage is therefore a massive margin trade

Buying a house also ties you down. If you rent a house and you are offered a job in another city, or even another country, you can be there in a few weeks. It may cost you a few months rent, but it is quick and easy, and the cost is predictable.

So, rent a house or buy?

There are times when it is obvious that buying is a good decision, often in the wake of a crash. When house prices are low enough that you can pay the mortgage and also other costs with the equivalent in rent, you can’t really lose. Such high rental yields are a strong sign that prices are too low.

Most of the time it is much less clear that you are likely to benefit financially.

If house prices rise rapidly it may turn out to be a mistake to rent a house – but so would buying if they fall or stagnate. So why not keep your options open and your expenses predictable?

Readers: Do you think it is better to rent a house or buy? Let us know below!

Further reading:

1. Reasons to buy a house instead of renting
2. Sell-to-rent gamblers return to property market
3. Should you buy or rent your home?

There was never much doubt that George Osborne would want to do something for first-time buyers struggling to get onto the housing ladder in the Spring 2011 budget.

His response – a new FirstBuy scheme that will provide a £250 million fund to help first-time buyers get on the housing ladder, via a shared equity arrangement in new-build property. It will be jointly funded by the housebuilders.

Osborne claims FirstBuy will help 10,000 first-time buyers, which is non-trivial in a market where only 43,000 or so mortgages were approved in February 2011 – way down from the 80,000 or so that was previously seen as required for stability in the housing market.

Yet in reality the £250 million FirstBuy fund is likely to prove a drop in the ocean compared to the total size of the mortgage market, which in January and February of 2011 was running at around £9.5 billion in mortgage loans advanced a month.

Who wins from FirstBuy?

Certainly, the government. In fact, it’s a double win from a politician’s perspective.

• Firstly, Osborne is being seen to support struggling first-time buyers, which goes down well with voters.

• Secondly, FirstBuy also helps prop up the wobbly housing market, which the authorities have decided – rightly or wrongly – that they can’t afford to let find its own level.

• Finally, anyone looking to sell a house or move up the ladder needs a healthy market with decent turnover (including a bottom level influx of first-time buyers or buy-to-let landlords). Existing homeowners may benefit if FirstBuy keeps the overall market moving, though the programme itself only applies to new build homes.

But whether first-time buyers will benefit from being used as cannon fodder in the fight against a house price crash remains to be seen.

It’s true that first-time buyers have struggled to get a mortgage at all, due to the banks’ suddenly stingy requirements for a high deposit in the wake of the credit crisis. This inability to get a mortgage has meant that first-time buyers have ironically been denied access to the only thing making homes affordable despite the elevated level of prices versus average earnings and rents – that is, historically very low mortgage rates.

So superficially the FirstBuy scheme may seem attractive, and it doubtless will be to anyone desperate for a house who feels locked out of the market.

But I can’t help thinking first-time buyers would be better served by house prices falling the 20% or so that would seem a minimum to bring them back to their long term averages. It’s no coincidence that the FirstBuy programme is being jointly funded by housebuilders, who’ve been running their own increasingly inventive schemes for the past 18 months or so.

True, nobody who sees what the true house price crash in the US has done to that economy could be sanguine about the impact of lower prices more in line with long-term ratios here.

Yet the frightening thing is our bubble was far bigger than the American house price bubble. And there will be a price to be paid by some segment of society the longer we continue to puff it up. Rather unfairly, given they didn’t benefit from the boom, it’s surely the first-time buyers who are paying it.

Also, if you were a housebuilder, would you be thinking of increasing or reducing asking prices on your new developments in the wake of this announcement of lots of government cash coming your way?

Exactly.

Further reading:

1. House buyers could be paying off their mortgage in retirement
2. Abbey 5% savings account helps first-time buyers where government doesn’t
3. Reasons to buy a house instead of renting

The following guest post on the reasons to buy a house instead of renting is by Tejvan Pettinger from The Mortgage Guide UK.

The UK has one of the highest property owning rates in the world. No matter how many boom and busts we have, the British like the idea of buying their own house.

Part of the attraction is not just financial, but the sentiment of owning your own house, not worrying about having dodgy landlords, and being able to paint your walls whatever colour you want.

Owning a house does bring more responsibility. But unless we are frequently moving around the country, most people would buy given the opportunity.

Yet, for first time buyers, the ratio of house prices to earnings mean that it is currently very difficult to buy – unless you can borrow from The Bank of Mum and Dad.

Is it really worth the effort, or are we better off renting? Does our sentimental attraction to buying our own castle actually make sense?

Let’s first consider the advantage of buying a property.

The end is in sight

A mortgage may last for 25 or 30 years. But there will eventually be an end to the mortgage payments, which means the hope of being able to live rent-free for your last remaining years.

In a way, paying off a mortgage is similar to saving for a pension. If market rent is £800 a month, then finally paying off your mortgage will be the equivalent of saving that cost of renting.

With rising life expectancy, people are living longer. Therefore the benefit of paying off your mortgage is increasing, too . The old saying that ‘rent is dead money’ is true.

Of course, it depends how old you are, and how long you imagine you may live. If you are 40-years old, getting a 30-year mortgage may not seem to give much benefit. But, if you live to 90 years, that would still be 20 years of rent free accommodation.

Rents also rise with inflation; often in the UK they rise faster than inflation.

What about fluctuating interest rates?

Interest rates are currently exceptionally low. The most likley scenario is for rates to increase to 5% in the medium to long term, though it is not a foregone conclusion – Japan has had zero rates for over a decade.

Clearly, affordability is being helped by these record low rates. When buying however you need to budget for rates of 5%, and bear in mind that rates have risen to over 10% in recent memory.

It may seem the prospect of base rates jumping from 0.5% to 5% would dramatically increase cost of mortgages, but many lenders have not passed on the full base rate cut onto consumers. If base rates rise to 5%, the actual mortgage payment you pay is unlikely to go up as much.

As a rule of thumb, look at the cost of the longest fixed rate mortgage and not the variable mortgages.

Housing as investment

There are two types of house buyers. One type buys a house to live in rather than rent. The other type invests in property – usually via buy-to-let – hoping for an equity gain.

The first type, the average householder, is less affected by fluctuations in house prices. The key thing is the cost of mortgage payments and the other bills.

In contrast, the buy-to-let investor is much more concerned with gaining equity in addition to income. And that requires rising prices.

Forecasting UK house prices is a tricky business. The professionals often get it wrong, and some have actually given up trying to make house price predictions.

• On the one hand, house price to earnings ratios are still high by previous decades and also compared to other countries.

• On the other hand, the UK has a shortage of housing that is unlikely to be solved anytime soon. This shortage of housing compared to the number of households means property could continue to be attractive for the medium to long term.

Conclusion

It is worth looking at your local area, and considering how much you pay to rent versus how much would mortgage payments cost (assuming a good fixed rate mortgage).

In my own experience of living in Oxford in 2005, I tried very hard to buy. The reason was that renting was very expensive – around £800 a month plus bills. So I though why not pay £800 a month on a mortgage?

I borrowed from my parents and got a dodgy 2005 style self-certification mortgage. It was the best thing I ever did.

Mortgage payments have fallen a little; the fact house prices have fallen recently doesn’t really bother me. The main thing is, I couldn’t face prospect of paying £800 a month rent (that will continue to rise with inflation, if not more) when I retire, whereas mortgage payments will become a smaller percentage of income.

If I was an investor, considering to buy a second home, I would be much more circumspect. Equities or the bond market may offer a better rate of return.

Further reading:

1. Reasons to rent a house instead of buying
2. Warning: buying a flat in West London will cost you thousands a year more than renting
3. Low rental yields suggest house prices will fall

I thought I’d round up a bunch of house price predictions for 2011, like I did last year.

Well, obviously last year the predictions were for 2010, not 2011. They ranged from the bearish -10% of Capital Economics to broker John Charcol’s indecisive and unfeasibly bullish 4-9% rise.

As it turned out, UK house prices fell 1.6% over 2010, according to the Halifax House Price index.

The decline left the ‘average’ UK house 18.5% cheaper at £162,435, compared to £199,766 at the 2007 peak. Quite a drop – and those are in nominal terms, too. Adjusting for inflation, the real decline will be more like 25%.¹.

The entirely honorary prize for the most accurate prediction for 2010 goes to upscale estate agents Savills, which predicted a 3% decline, easily beating the rest. Who said you couldn’t trust an estate agent?

Down your way?

Of course, you don’t need me to tell you that the ‘average’ UK house is a phantasm at the end of a cul-de-sac off the Watford Gap, and that local prices are all over the place.

Conwy in Wales, for instance, saw prices rise by 13% in 2010. In Aberdeenshire prices remain 46% ahead over five years, compared to just 1% higher for the UK as a whole.

The Halifax figures are less reliable than they once were, too, due to the mortgage drought. Here in London, many expensive homes are now purchased mortgage-free, and for the past 18 months they’ve been largely bought by upscale overseas buyers flush with a valuable currency.

That’s pushed prices in the top postcodes to all-time highs. But due to it only recording properties bought with its mortgages, you won’t find this recorded in Halifax’s index, which still has London prices well down on 2007.

Nevertheless, I like to follow the Halifax index because it’s the longest running data set. The trends all tend to converge over time, anyway.

House prices in 2011

Without further ado, here’s what the pundits predict for 2011:

All predictions are for movement in the UK average national house price. The ‘source’ column links to where the prediction was cited. No predictions are more than a month old.

In some cases, these are summaries of more nuanced views – or more dubiously specific ones, depending on your perspective.

The Council of Mortgage Lenders, for example, offers a very detailed rationale for its forecast, which I couldn’t really summarize. Then again, its members aren’t doing much lending, so I guess it has a lot of time on its hands!

I feel prices should be going lower, but I have to be wary of my London bias. Truth is I am surprised to see prices down so much across the rest of the country. Affordability has improved in the provinces, too.

Another 10% off and I’d start wondering if it was time to load up on housebuilding shares. As I’ve written several times, I don’t think the spending cuts will be half as painful for working people as is popularly supposed, and my prediction last year that Britain had recovered is now evident on the ground.

Interest rates are still low, too, and given the way they look set to hand out big bonuses, the banks may have the money to increase the flow of mortgages.

On the other hand, my prediction of a 5% advance in prices in 2010 was well off the mark, especially as while I predicted any surprise would be to the downside, I said it would be probably be due to a shock interest rate rise. Oops!

Also, property still looks expensive by several measures. I’ll recap these ways of trying to value houses in a future post, so please do subscribe.

Where do you think UK house prices will end the year? Tell us below, with a link if it’s not your prediction. Maybe I’ll give a prize if we’re all here in 2011!

1. Sorry, it’s late and I haven’t worked out the accurate deflated figure. 25% is a guess!

Further reading:

1. UK house price predictions 2010
2. Halifax’s UK house price index plunges 2.5% in March; falls year on year
3. Weekend reading: House price affordability

The following guest post on buying a property overseas is by Rick Todd of Expat Investing. These are Rick’s views, not necessarily mine — so let us know what you think in the comments below.

Most people who are in a position to buy a property overseas are buying for their retirement or because they live abroad.

Only the wealthiest investors can afford to buy a property overseas and then hire someone to manage that property while they live elsewhere. For the rest of us, the option to buy a property abroad is intimately tied to our work and our time after work.

The traditional view of property

Until recently, the purchase of property was seen as a reliable investment that was sure to go up over time and to make its owner a decent profit upon its sale.

Yes, there were those unlucky few who bought home next to a uranium mine or a new expressway and saw it depreciate in value, but for most investing in property was a great way to get rich.

And then came the crash.

Many markets worldwide saw property plummet as in many cases property prices were closely correlated with most other asset classes in the global market crash. In many countries, particularly in such places as the United States, Spain, and places over-reliant on property sales like Dubai, the property market will not recover for years if not decades.

Property is no longer seen by everyone as an investment, and to many now it is probably not viewed as a necessity to purchase. In many parts of the world, most people rent property throughout their lives and suffer no consequences at all.

In my opinion the crash has taught us a valuable lesson: speculating that a property will appreciate in value is very risky.

It is not a given that it will appreciate enough to be worth selling, either now, or far into the future. However, I believe the purchase of a property, regardless of the location, does serve a purpose: it can act as a hedge against inflation.

Property as an inflation hedge

Most property is purchased in the form of a personal residence and most personal residences are purchased with bank loans that fix a monthly payment for a considerable period of time, say 15-30 years. [In the UK shorter fixes or variable rates are still more popular, but they shouldn't be! - Ed].

During the life of the mortgage the payments stay the same but inflation begins to act. While the initial payments on a home loan will probably be more than the monthly rent on a comparable place, as the years pass and inflation affects the local currency more and more, the fixed monthly payment made on the home loan stays the same. Someone renting property over the same period sees their rent increasing year after year.

The result is that over time, a home owner saves a tremendous amount of money. By the time the loan is paid off, the home expenses are related only to maintenance and taxes. When a person with a paid off property reaches retirement, the home is not a burden on the person’s retirement savings, and their house or apartment can continue to be lived in or sold to further fund a retirement.

Of course, this only works if property is purchased with a long term fixed rate loan, and the person who buys it intends on keeping it for a long period of time. Someone who moves frequently will find it difficult to accomplish.

A worked example

In the past 100 years, the UK has experienced about four per cent inflation annually on average. The US has experienced a little over three per cent. So I’m going to assume that a stable developed economy experiences about three to four per cent per year.

So let’s say Person A buys a property for the long run, and Person B decides renting is the way to go for the long run. Both Person A and Person B are going to live in identical properties.

• Person A pays £1,000 a month in rent.
• Person B agrees to a loan (with 20 per cent down payment) with a monthly payment of £1,500.

The premium Person B pays per month is a reflection of buying into a healthy market, when most properties are purchased.

If we assume that a landlord is going to raise your rent annually to at least match inflation, we can expect a four per cent rise in rent per year which would directly affect Person A. Person B has locked in his monthly payment with a long term fixed rate loan.

So Person A pays £1,040 per month in year two, Person B continues to pay £1,500 per month. In year three Person A pays £1,081.60 per month, while Person B continues to pay £1,500 per month. This continues with Person A’s rent compounding upwards by four per cent per anum

In year 12, Person A begins to pay more than Person B, when Person A’s monthly rent hits £1,539 per month, and Person B’s rent is at the same £1,500 per month.

By the end of the twenty year period where Person B has finally paid off his loan and is paying nothing monthly, Person A can expect to be paying at least £2,106.80 per month in rent.

I have only adjusted the rent for inflation and I have not added any arbitrary raises in rent a landlord might ask for over and above inflation.

As you can see, the savings are considerable for a person who is willing to commit to ownership for the long run. But anything less than a decade or so of ownership isn’t worth it. In short, if you are investing in a home, you are asking yourself to predict that you will have a stable income over the next decade and a half in order to see yourself to a profitable result.

These rules also apply to someone who wishes to move overseas for their job. An expat who intends to stay for years in their new country is better able to buy a property than an expat who is going to move from country to country.

Also, someone who is older and closer to retirement may not want the burden of a home loan when they retire with a shorter time horizon than someone in the beginning or middle of his career. The purchase of a home is probably more realistic for someone younger.

Currency risk

Of course, the purchase of property overseas makes you an unintentional player in the currency market.

If you purchase in a developed country, I would argue that your risk of currency depreciation for your property is low. Is it likely that a developed country will revalue their currency in order to pay off external debt? No.

Historically, the countries most likely to default have been developing economies. The world’s largest developed economies have not really defaulted since the Second World War, and the low interest rates on their bonds reflect the market’s confidence in their credit worthiness. Even if they were to default, the IMF and other countries would quite likely bail them out, as we have seen in Greece.

In developing economies, it’s a completely different matter. Buying a overseas in a developing economy is where you take on the most currency risk.

If you buy a home in a developing economy that devalues its currency, the first group that is going to be scared away from purchasing your property is going to be foreign investors. You may list your property in your home country’s currency because that’s all you’ll accept, but unless the property has a lot going for it, many potential buyers may be scared off if there’s been a recent devaluation in your property’s country.

Buying property for retirement

What about buying a property overseas for retirement? I think it’s extremely risky and not a good idea.

• When you retire, you retire on a lower income that is often reliant on investments. These may no longer grow substantially as you are not increasing them through a salary.

• People in retirement are generally in worse health than those who are working and younger, and the burden of a new property can take its toll.

• Ownership can act as an anchor if you wish to move back home for any reason.

In short, my advice to people who are thinking of moving overseas is to put themselves in the uncomfortable position of predicting what they will be doing for their next few decades. Are they planning on staying in the same place?

If yes, then buying a property is a good idea. If no, forget it. And if you are retiring and moving abroad, rent a place instead

Rick Todd posts at Expat Investing where he writes on such topics as to whether retiring abroad is right for you.

Further reading:

1. Commercial property: I’m buying
2. Why investing in overseas markets will diversify your portfolio
3. Reasons to rent a house instead of buying

Most first-time buyers are celebrating the removal in the Budget of the 1% stamp duty tax on their first house purchase costing up to £250,000. The stamp duty has been scrapped for two years.

According to the Council of Mortgage Lenders, 92% of first-time buyers buy properties costing less than £250,000, and these first-time buyers will save up to £2,500 when they purchase their home.

In London and the South East, however, first-time buyers are making stuffed straw versions of Alistair Darling and setting them alight with flaming torches fashioned from estate agents’ listings.

The reason is that in the South East, away from the Labour heartlands, £250,000 buys you… not half as much as in Macclesfield.

Properties in or near London costing less than £250,000

So what can first-time buyers working in London shoot for? A Wendy house? A false passport and plane ticket to Australia?

I poured myself a stiff drink and fired up FindAProperty to see.

Along the way I found some truly dire dwellings, such as:

• The crack house with a tenant/customer still in place.
• The flat where the owner is currently ‘negotiating access’.
• The house whose neighbour has not one but two mattresses in the garden.
• The ‘flexible accommodation’ in central London that consisted of a 12-foot room, and a side closet with a loo in it. (It was flexible in that you needed to be a contortionist…)

But why depress would-be first-time buyers in London even more than they’re already depressed? Especially as I am one. (Long story…)

Here instead are a few decent looking homes around London suitable for stamp duty dodging first-time buyers.

A one-bed flat in Shepherds Bush, West London

This well-presented one bedroom flat in a decent period building costs £249,950, and is situated on Askew Road – a fairly busy thoroughfare with grimy bits, on the fringes of Acton but essentially in ever almost-trendy Shepherd’s Bush. (According to the listing, Askew Road is ‘pleasant and vibey’. I stand corrected). You get 448 sq feet for your quarter million quid – the two main rooms are a reasonable size, but the kitchen is an alcove. Never mind, the new Westfield Shopping Centre down the road is full of fancy eateries. Or, says the listing, there’s Ravenscourt Park for the more ‘pastoraly inclined’. (Does that mean a member of the church?)

A two-bedroom flat in Deptford

Head south of the river to up-and-coming and only mildly dangerous Deptford and you too can live the life of a pixel-perfect 3D model from those computerised images that housebuilders create to advertise their developments. Down Deptford way you get a two-bedroom flat for your £249,950, albeit it a purple one. Never mind, it makes it easier for the locals to spot you and mug you welcome you to the area. In case you were wondering, the flat is ‘nestled between the vibrant regeneration of Deptford and the cosmopolitan lifestyle of New Cross’ – which basically translates as ‘halfway between a knocked-down council estate and a kebab shop’. But seriously, cool people do tell me Deptford is the place right now. I’d rather sleep higher than the ground floor though, whatever they say.

A two-bed house in Uxbridge

Move out to Uxbridge (that’s in Zone 6, Londoners) and this little house can be your very own castle. I’m not certain what the snag is here, except for the minor matter of Uxbridge being somewhere that would make you think twice about wasting your bombs on Slough. I love the way the agent talks about how this little terraced house is ‘set in leafy grounds’, as if you’ll have to drive down a long gravel road to your front door in a coach, with Mr Darcy trying to cop a feel of your knee. Cynicism aside, this does appear to be a reasonable starter home, though you probably didn’t expect to pay £250,000 to live in what looks suspiciously like sheltered accommodation when you left your provincial village with a pocket full of beans, big ideas, and a condom.

3-bed house in Romford

Novelists, bankers, and tramps aside, anyone not born in London eventually decamps to the dormitory towns to raise their own children who can one day be amazed at the cost of living in London for themselves. Cut out a decade and move to Romford, where you can bring up your kids as authentic Essex guys and gals, and get a great deal on chrome hubcaps. The step up in size to this 3-bed house is pretty remarkable considering Romford is as close to central London by train as Uxbridge is by tube. I don’t know much about Romford except that it has an excellent tropical fish shop – I was once mugged on a train in Stratford on my way there – but we’re assured this house is in a ‘popular turning’. Turning into what, guffaw, guffaw. Also, I don’t like the agent’s call for an ‘internal inspection’. It makes it sound like the house has worms.

A cottage in Wendover

Wendover is a pretty, happy village in Buckinghamshire that will soon be swallowed up by the less pleasant Aylesbury to the North. It’s on a cracking little train line out of Marylebone, and has all the essentials a village needs – pub, French restaurant, chocolate shop, and Citybloke’s wife’s profit-shirking art gallery. First-time buyers discovered it years ago, so don’t expect bargains. This former farm cottage has two beds and two little reception rooms. Costing £249,950, I think it looks quite sweet. And bigger through binoculars.

A two-bed flat in Brighton

Ah, Brighton – I remember when it was all pensioners and junkies as far as the eye could see. Now it’s the same, but with some trendy delis and an awful lot of ex-Londoners trying to recreate Camden and Notting Hill by the sea, and getting about as far as a duck pond in Dollis Hill. I jest, mostly. Brighton is a pleasant if slightly violent seaside city, with a center full of creative and attractive young people, fringed by criminal and tattooed ones (and that’s just the schoolgirls, etc etc). Still, where else in the South East would first-time buyers get to live in a swanky Regency flat within a stone’s throw of the ocean – or indeed, within a stone’s throw of a stone thrower. (I’m only making fun of Brighton dwellers because I’m secretly jealous of their pseudo-San Franciscan lifestyle. And their rock).

Conclusion: First-time buyers can buy for under £250,000

Yes, even in the South East. Much as I’ve been a bit silly in my commentary above, these six properties look reasonable options for first-time buyers – just so long as you don’t insist ‘reasonable’ means ‘worth £250,000 of hard cash in a way your grandparents would have recognised as value for money’.

Finally, I wouldn’t hang about if you’re determined to buy and you want to avoid paying over the odds.

The not-so-unintended consequence of the Chancellor’s generosity towards first-time buyers could be a sharp rise in the price of houses approaching the £250,000 barrier, as all the good cheaper ones get snapped up.

Further reading:

1. New stamp duty bands for UK houses
2. House buyers could be paying off their mortgage in retirement
3. Should you buy or rent your home?

Chancellor Alistair Darling tweaked the stamp duty bands for UK houses in the 2010 budget to favour first-time buyers.

• No duty will be payable by first-time buyers who buy houses costing up to £250,000 (a special measure that expires in two years).

• However stamp duty is to be raised from 4% to 5% for houses costing more than £1 million, to pay for the measure for first-time buyers (a permanent change).

This means the bands are now as follows:

• 0% on houses between £0-£250,00 (for first-time buyers)
• 0% on houses costing up to £125,000 (non first-time buyers)
• 1% on houses costing £125,000 – £250,000
• 3% on houses costing £250,000 – £500,000
• 4% on houses costing £500,000 – £1 million
• 5% on houses costing £1 million or more

Note that unlike income tax the rate applies to the whole amount you’re paying for the house.

So you don’t pay £250,000 at 1%, and 3% on the next £250,000, and so on. You pay the full rate on whatever band you’re in.

What is stamp duty?

Stamp duty is a tax you pay to the UK Government when you buy a house.

In 2003 it was given the official name Stamp Duty Land Tax to distinguish it from the different tax you pay when you buy shares (which was renamed Stamp Duty Reserve Tax).

The different rates are payable depending on the purchase price of the property (as opposed to say the size of your mortgage you use to buy it with).

From time to time special rates are brought in to secure votes encourage redevelopment in disadvantaged areas or zero carbon home building. The current rates are available on HMRC’s website.

In my view stamp duty is a cash crop for the Government. It has increased the rates of stamp duty several times since coming to power in 1997.

It has also raised more revenue from the tax every year by not redrawing the bands to compensate for price inflation. (This is known as fiscal drag, jargon fans!) Far more people pay the tax now than a decade ago, as a result of rising house prices.

Note that the new £1 million-plus category, which covers quite a swathe of family homes in London, will be permanent, whereas the special tax-free rate for first -time buyers spending up to £250,000 expires in two years.

The tax also adds friction to the home buying process, by making moving house much more expensive, and it doesn’t do much to restrain prices. All it really does is distorts asking prices around the different band divisions.

For instance, it’s pretty much impossible to sell a house for £255,000, because buyers will not want to pay three times as much stamp duty by being pushed into the 3% bracket.

In practice, you’d have to reduce the house to £249,999, or else wait for prices to go up enough to enable your house to be sold for around £265,000.

Finally, some sophisticated buyers have employed various tricks such as paying separately for ‘fixtures and fittings‘ to stay below a band limit, or by using an Islamic mortgage to avoid paying the tax, but the Revenue may take a dim view of such methods.

Tread carefully and do your own research. Remember, tax avoidance is legal but tax evasion is not!

Further reading:

1. What can a first-time buyer in the South East buy for less than £250,000?
2. Buy shares in house builders, not new build houses
3. Should you buy or rent your home?

One of the most tedious aspects of the bursting of the property bubble has been the endless bleating that lower house prices are universally bad news.

In fact, lower house prices can be good news for at least two important reasons:

• If you don’t own a house, lower prices mean you (or your children) are more able to afford a home.

• Lower house prices mean extra money to go into more productive and economically useful assets.

You can repeat these facts to homeowners and financial journalists, but the truth bounces off their skulls like moral justice off a banker’s back.

But perhaps they will listen to Warren Buffett?

In his 2009 shareholder letter, the World’s Sometimes Richest Man has channeled the dreams of every first-time buyer, as well as warning there will be no quick return to insane house price inflation.

Buffett writes:

Prices will remain far below ‘bubble’ levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits.

Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.

It’s a testament to Buffett that he says this despite owning the US’s largest producer of manufactured houses, Clayton Homes.

Fewer houses – better than sex!

Describing the current state of the housing industry as ‘a shambles’, Buffett says it is paradoxically good news that US housing starts fell to just 554,000 in 2009, the lowest level in 50 years.

Again, note the difference between Buffett’s views and mainstream opinion!

Buffett writes:

People thought it was good news a few years back when housing starts – the supply side of the picture – were running about two million annually. But household formations – the demand side – only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.

Buffett explains there were only three ways to cure the overhang:

1) Blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the ‘cash-for-clunkers’ program.

2) Speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers.

3) Reduce new housing starts to a number far below the rate of household formations.

Our country has wisely selected the third option.

Buffett says it will be another year or so before the residential housing market has been put to rest. And he thinks some problems will persists with high-value houses and those in certain localities where overbuilding was rampant.

(Image by: iLoveButter)

Further reading:

1. Sell-to-rent gamblers return to property market
2. Northern Rock nationalised: A nation now in hock to a housing bubble
3. Now the UK government wants banks to bail out borrowers

The housing charity Shelter is highlighting the over-valuation in UK house prices by comparing house price rises with the price inflation of milk, bread or a chicken over the past four decades.

Comparing with 1971, Shelter says UK house prices have gone up 40-fold.

• In 1971, the average UK  house cost £5,632

• By 2008, the price was £227, 765

If various foods had gone up at the same rate we’d be paying:

• £47 for a chicken
• £20 for a jar of coffee
• £24 pounds for a small portion of mushrooms

Of course, inflation always has an element of ‘sticker shock’. It’s incredible to read that a dozen eggs cost 23p in 1971, whereas they’d now cost around £2.

But that’s still far less than the £9.30 you’d be paying if they’d increased at the same rate as house prices.

Comparing apples with pears?

I believe UK house prices are too high. The average house costs 7-times the average salary – far above the normal ratio, and only made affordable by low mortgage rates.

Nevertheless, while the Shelter chicken in a basket method does make you think twice about accepting crazy prices as normal, it’s also flawed.

Firstly, food has crashed in price over the past few decades, due to everything from supermarkets to globalization. It would be more relevant to see a historical comparison between house prices and rent.

Second, you get more for your money today when you buy a house. Houses in 1971 were poorly insulated, many had dreadful wiring, few had conservatories or loft conversions, kitchens were dreadful, and so on. But eggs are still eggs.

Finally, property is an asset. Anyone who filled their trolley in 1971 and stashed the results in their shed would be nuts to expect it to be worth anything in 40 years. Half of your shopping would rot in a week, and even the tinned food would be suspect in a decade or two.

This is not a trivial point – homebuyers factor in an expectation of having a future asset to sell into what they’ll pay for a house.

Food shoppers simply price in an expectation of how tasty their dinner will be!

House prices will correct – but how?

Whether you compare house prices to rents, to salaries, or to the price of a Black Forest Gateau in 1971, they are clearly still too expensive: Some first-time buyers won’t have paid off their mortgage by retirement!

Yet the house price falls of 2008 didn’t turn into a rout, mainly because of quantitative easing and interest rate cuts that staved off a banking collapse.

Bank rates of 0.5% are not being set with inflation in mind – not even conventional inflation, let asset price inflation.

Analysts at Investec think inflation is going to be twice its target:

Investec predicts a 4.2% inflation rate for January, more than double the 2% target, due to the rise in Vat to 17.5%, higher petrol prices and the impact of the snow on food prices.

For anyone like me who sat out the housing market believing it would correct, low interest rates and high inflation is a terrible combination.

Inflation will whittle down the value of today’s houses more painlessly, with low rates enabling the profligate who over-borrowed to keep their homes, denying the prudent the chance to buy a home at a sensible price before their savings are devalued by inflation.

Further reading:

1. Low rental yields suggest house prices will fall
2. Are UK house prices too high?
3. House prices versus earnings