In my line of work, I have the privilege of speaking with landlords and investors quite frequently and when I discuss with them their intentions to extend their portfolio, the main concern for some of them seem to be around how the market is performing which is understandable. Some are resistant to reinvesting or refinancing due to the level of economic uncertainty given current events such as Brexit as well as the sheer level of Government intervention in the buy-to-let sector over the last three years. Coupled with all the increasing levels of media hysteria and York property prices at an all-time high, one question I’ve pondered is are we on the verge of the next property crash?
Let me start by pointing out that I am not a regulated member of the Financial Conduct Authority and would recommend anyone who wishes to get financial advice, speak with an approved Financial Advisor regulated by the FCA.
Caveats now in place, without turning this article into an Economics lesson, the fundamental driving forces of property prices are seemingly supply and demand, sentiment within the market and availability of finance. In essence, if you imagine the basic supply and demand graph, with an increasing demand and limited supply, the market will drive up property prices. Secondly, investors who have seen property prices in York continue to rise significantly will be incentivised to invest to ‘get a piece of the action’ and not miss out. Lastly, as there is now confidence in the market and as banks also want to maximise their profitability, and as there are more than ever mortgage lenders in the market, there is greater access to lending. When property prices achieve ‘critical mass’ the market becomes untenable and prices fall rapidly.
With the above information it could be argued that York is on the brink of the next property crash. However, all may not be as bleak as it appears as studies indicate that property booms and busts are cyclical and can be attributed to the ‘18 Year Property Cycle’.
An Economist, Fred Harrison wrote the book Boom Bust where he noted trends in the price of property over an 18-year period. As per the graph below, the cycle starts at the end of the crash, exhibits recovery growth, due to some event property prices dip and then grow at an unprecedented rate before the inevitable crash.
In York, prior to the 2008 property crash the last recession believe it or not was 1990 (18 years previously) where property prices had risen on average in the 80’s by 12.3% each quarter. In Q4 1989 prices all of a sudden started to decline (Recession phase) and continued in this downward trajectory until Q2 1993 when the market stabilised (Recovery phase) bearing in mind prices had fallen by 20% in this three-year period. The York housing market started to recover until Q1 1995 where prices declined on average by on average 0.26% per quarter for the next two years (the Mid-Cycle Dip). From here York property prices exhibited significant growth over the next 13 years, growing by a staggering 248% (Explosive Phase) until 2008 where the property bubble burst and prices again began the slippery slope downhill (Recession phase).
Property prices in York have since recovered on average at a rate of 1.04% per quarter to date. So what does this tell us about where we are at now? Well whilst this isn’t an exact science (due to fluctuations in years etc), there is an argument to say we may be at the mid-cycle dip with the uncertainty of the economic impact Brexit amongst other reasons has caused. However, if we look at past trends, the exciting part is about to happen.
Lessons we can learn from historic events are, like investing in the stock exchange, it is nigh on impossible to time the market. However, the above graph indicates that even at the bottom of a Recession phase, property prices will level off at a higher point to where they were at the beginning of the cycle. So, whilst we can’t time the market exactly, we can invest in York property for long-term knowing that we can rely on capital growth and that property prices after a recession will inevitably recover and then some.