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The Future for House Prices

Long time readers of my property blogs will know my preference for buying real estate when interest rates are high but falling. The logic is irrefutable. When interest rates are high people are paying more for their borrowed money, so they can afford less, so house prices will fall. That's when you want to buy. Not when they are going up. And as interest rates fall your mortgage becomes cheaper, not more expensive, so life becomes easier for you, and as the cost of money falls, so house prices rise because people can afford to borrow more. It's first grade economics.

I have not been keen on buying real estate for some time. House prices have indeed gone up, but the problem is that you are entering an asymmetric bet which can ultimately only work against you. That doesn't appeal to me. After all, if interest rates are low they can only go up. If they are high they can only come down. I prefer asymmetry to work in my favour, not against me. I like crashes. That's when you can walk in and pick up decent places for knock-down prices. I want to buy when the prices have halved. You make your money when you buy, not when you sell. Think about it. The maths stack up far better when you do things that way. Admittedly most people are hopeless at maths, which is why so many people are so hopeless at managing their money. Let's look at a simple situation.

Suppose you buy as the housing market is approaching a peak. I can give you a real-life example from my own dealings. It's in my book on real estate. Someone bought a three bed apartment overlooking the sea on the south coast of the UK. They paid £47,000 for it. A couple of years later I bought it for £20,000. I sold it for £120,000 ten years later.

If I'd bought at £47,000, and sold twelve years later for £120,000, I would have more than doubled my money which would be great. I, however, increased my money by 600%. That is quite some difference. But I haven't finished the calculation.

Buying at £47,000 on a 90% mortgage would have meant me paying, say 5% on the money borrowed, that's £2,115 in interest every year. Buying at £20,000 at the same interest rate would have meant me paying roughly £900 in interest every year. Quite some saving. Perhaps you can now see why I say you make your money when you buy, not when you sell.

Fast forward to today. Where are we headed right now?

Interest rates are rising. That means the cost of paying for a house is rising. In the UK the rise in the cost of money so far this year has been 1%. That doesn't sound much. But you have to ask yourself if that is the end of the rises or the beginning. If we only get more similar rises this year that will push the cost of existing mortgages up by 2%. What will that do in terms of real monthly outgoings?

Let's say you have a £200,000 mortgage. A 2% increase on a loan that size amounts to an extra payment of approximately £80 a week.

Now have a look at the Green packages that the governments around the world are subsidising. Add to that the constriction of existing energy sources, and the consequences of all those measures. Most estimates are for energy prices to double this year. What does all that do to the monthly payments system of an average family? Some of the figures I am quoted by readers make alarming reading.

Now add in the cost of rising inflation. We are currently talking about a figure in the UK of 6% for february and rising. How long before that hits 10%? How well can the average family handle a 6% increase? Or a 10% increase? Already in the USA real interest rates are above 10%, and they are rapidly heading that way in Germany and other countries.

All this is going to push most countries into a recession. What is going to happen to wages when that happens? They go down, not up. And what is all this catalog of woe going to do to house prices? They sure as heck are not going up. We are probably hitting a pause in prices at the moment. By the summer that pause will have turned to a move downwards. By the autumn, who knows? I don't have a crystal ball, but the outlook is not good.

I'll pursue this bit further next week.

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