Nick Garner here, founder of Invesmore.
I’ve been asking myself an important question: is it better to pause and wait for a market cooldown, or keep looking & buying?
The reason I care about these big questions; get your timing right and you’re more likely to see capital growth and therefore a good return on your investment. Of course, there are numerous caveats including buying in the right area, the right kind of property, having the right kind of tenants and so on.
But setting aside all of these other basic considerations, if you get the timing right with the property cycle, you’re far more likely to do well because capital growth tends to affect all reasonable properties within whole areas.
A while ago I wrote about the 18 year property cycle and how this particular cycle coincides with the end of the long-term debt cycle, which also coincides with Brexit in the UK. We have a confluence of three extremely stressful events, which can only end up with a challenging outcome. My article: https://nicholashgarner.medium.com/uk-18-year-property-cycle-and-the-end-of-the-long-term-debt-cycle-fb4aa4abadce
We have a confluence of three extremely stressful events, which can only end up with a challenging outcome.
I previously made the mistake of believing the market would cool down due to Covid. i.e. it would cause massive financial hardship, which would then drive supply of property and therefore be attractive to investors. I hadn’t factored in the massive amount of government financial stimulus which is now driving the lower end of the market in certain areas.
We are now seeing an intensely competitive ‘first-time buyer’ market in Greater Manchester. Arguably because:
Of course, that first-time buyer market isn’t ‘hot’ everywhere. For example in the north-east of England, property prices have declined by 35% in real terms from 2007.
This article from BBC highlights the issues facing one homeowner: https://www.bbc.co.uk/news/uk-58747051
BBC: “Steve bought at the top of the frenzied 2005-07 boom, but has been unlucky on multiple fronts – says Prof Paul Cheshire of the Centre for Economic Performance at London School of Economics (LSE).
“The British housing market is notorious for booms and busts, but the cheaper sector in Middlesbrough was one of the most volatile of all.”
Prices went up by 50% in just two years, then fell off a cliff – says the professor – with Steve buying at the very top of that boom, having been drawn in by the developer’s offer to pay his deposit.
“He then got caught in a market collapse and was lumbered with an escalating service charge.”
And in the years after the worst financial crisis, Middlesbrough’s housing market has not seen strong rising demand – says Prof Cheshire – so prices haven’t risen as fast as in other parts of the country.
The reality of homeownership for Steve has been nothing like he imagined. His dream became a nightmare.
These screen grabs show capital decline in Middlesbrough from 2007 to beginning of 2021.
Essentially, anyone who bought property in that area has lost around 35% of the true inflation-adjusted value of that property. Data is from office of National statistics and land registry and interpreted in our system.
Around 15% of the overall market is what I call ‘investable’. It turns out Manchester has been a huge hotspot. Why? Manchester seems to have the most functional citywide economy of all the major cities in the north of England. And this ends up being reflected in house prices, where people compete to live in this city, thus driving up the price of property.
Manchester screen grab showing capital growth in real inflation-adjusted terms from 2007 to early 2021.
And in case you wondered, Liverpool hasn’t done very well.
Liverpool as a whole shows poor long-term capital growth.
Long-term capital growth across ‘greater Birmingham’ has been relatively patchy. And overall not wildly impressive.
It’s important to say that long-term capital growth is more of a ‘long-term’ indicator for how an area is doing. You will have short-term rises in certain markets. For example in 2019, Blackpool had some substantial growth, but long-term real values had declined by around 35 to 40%.
Whenever I analyse capital growth, I look at the long-term picture first. If that checks out reasonably well, then I look at capital growth over the last five, three and one years and from there I can build up a general view of how capital growth will unfold in the years to come. Very simply, if the city has done well in the long-term, it’s likely to be resilient in difficult times. And, the opposite is true.
Back to Manchester and reiterating a few points.
It turned out the market became incredibly heated because:
All of this means that good properties constantly sell above asking price and will typically sell within three or four days.
The impending crash
People believe with the end of furlough, something like 1,000,000 people will be off the scheme, triggering huge rounds of redundancies. In theory, these redundancies might force more supply onto the housing market and drive property prices down.
One of the problems with sitting on the side-lines waiting for furlough redundancies to take effect, is the two-year lag between cause and effect. For example 2008 crash saw the market bottom out two years later.
Sitting above everything is the spectre of inflation. we’ve already seen the first cycle of inflation. And in my view we will probably see inflation grind along for another eight or 10 years. Based on historic precedents, inflation tends not to be constant. Just as with current inflationary pressures, these work in bursts. I.e. cost of utilities going up.
This decade is similar to the nineteen forties. There was a calamitous event: World War II, high inflation and a rebuilding of economies. In these circumstances one might think property in the UK would have gone down in value, but it turns out the opposite was true. (See chart below)
Another inflationary decade was the nineteen seventies, and we can see periods with declining house price affordability.
It’s worth reading the Schroders article: https://www.schroders.com/en/insights/economics/what-174-years-of-data-tell-us-about-house-price-affordability-in-the-uk/
What would stimulate the housing market over the next four years?
Politics…and inflation driving people out of cash and into stable assets like property.
Homeowners tend to vote Conservative. An important point when thinking about the housing market in the UK for the next four or five years.
Where would Manchester prices ‘top out’?
Whenever I look at house price data, I prefer to use median house price rather than average house prices. A median number is the ‘middle number’ i.e. let’s say you’ve got 100 numbers, the median one is the 50th largest number. Whereas average is just adding up all the numbers and dividing by 100. In property, averages tend to get very distorted because you can have an outlier property which sells for a huge amount of money and distorts the rest of the statistics.
London versus Manchester as of Q4 2020:
Let’s say median house prices in Manchester rise to roughly half that of London i.e. £250,000 from £195,000… My rationale being:
What about now?
A good way of understanding interest in property is to look at a service called Google trends. It shows the approximate search volumes for certain key phrases the people search for on Google. For example, the key phrase ‘Rightmove’ shows that people are searching the name of the website to look at property.
Source: https://trends.google.com/trends/explore?date=all&geo=GB&q=rightmove note: the seasonal dips coincide with Christmas.
and the same applies for Zoopla
As you see from the screen grabs, interest in Property is intense.
Yet, transactions have remained stable even though we’ve had a stamp duty holiday, which in theory stimulated the market.
And when you look at the long-term picture, there are about 2/3rds number of transactions occurring on average versus 2007. However, there was a recent massive spike in transactions due to stamp duty holiday.
Dip in house prices
You can see there has been a slight tailing off in house prices for July 2021. This is the most recent data I can get hold of.
This chart above shows the percentage change in price over time. Essentially up means the market is going up and down means the opposite. 2008 is a good example of market decline. And now we are seeing an overall decline in property prices from the peak in June 2021
However, this is just average house price data. It doesn’t factor in house prices at the lower end of the market. Unfortunately I can only give you an anecdotal view of what’s going on:
Putting all this together
In final conclusion:
As much as it hurts to pay above the asking price for property in Manchester, I absolutely believe median house prices will end up somewhere around £250,000 in the next four years. Or in other words, I see at least another 25% real capital growth when adjusting for inflation.