Don’t believe the hype.
Last week we highlighted a story that suggested house prices were about to crash. The article was based on Rightmove’s asking price figures.
Two days later Rightmove provided data that was heralded by the bulls: it reported that national average asking prices are now 8.2% higher than the May 2008 peak. Asking prices in all parts of London are up by at least 30% while they were down by an average of 6% in the north.
The Evening Standard on Friday then published a thoughtful and indeed subtle article entitled:
“Today’s children ‘will have to pay £6m for a flat in 30 years'”
The article continued:
“A baby born today will have to find £6.3 million to buy a one-bedroom London flat at the age of 34 if prices continue to rise at the current rate, according to research.
Even if they are lucky enough to have sorted out a decent deposit and a mortgage by the age of 25, the same property would still cost £3 million, online estate agent eMoov.co.uk calculated.
The current asking price for a one-bedroom property in London is around £380,000, but by 2048 it is estimated that it will cost 16 times as much. For a two bedroom-flat, the average price will be £9 million, based on prices continuing to rise by the average annual 8.6 per cent of the last 60 years.”
Now, I have to admit that this is great journalism if you want people to read your article. However, I would suggest that the article omits a few important points such as what was the real rate of return after inflation? For example the average weekly wage in 1954 was just under £10.
Also just because prices have risen 8.6% over a period of 60 years does not mean that they will necessarily do so for the next 60 years. Indeed how have the prices of other investments and indeed the cost of essentials like milk and bread changed in that time (actually I can’t stand milk but you know what I mean)?
This is not to detract from the great performance of property over the years. It has clearly been much wiser to buy property than leave money in the bank. However, it is essential that you take most of the information you read on property with a pinch of salt. It is invariably over hyped in one direction or another: we will either experience a a crushing crash in prices or a stratospheric rise into the heavens.
The fact is that you need to focus on the information that is pertinent to the area, price range and style of property you wish to acquire. The only way to do this properly is to view as many properties as possible and keep a detailed log of everything that has sold in the area.
But there is one obvious theme that has come out of the last 60 years. People have done exceptionally well by simply staying in the market, i.e. they did not try to time the market and indeed were unaffected by the massive crashes of 1972, 1990 and 2008.
As long as you never become a forced seller then you should do well. So very simply, the best advice I can give is do not overstretch yourself. This is the secret of those who bought property in 1960. If you plan to own property for the long term it is irrelevant what the market does over the short term.
Indeed this is a similar philosophy to Warren Buffet’s investment advice of “lethargy bordering on sloth” (thank you to Chris Hunter for this quote). Simply buy well and then don’t do anything unless the facts/reasons for investing in the company materially change (as opposed to being swayed by market movements).