9 Feb 2011: Is now a good time to buy a house?

With lots of media coverage about inflation, interest rates, house prices and real wealth, it seems appropriate to ask, “Is now a good time to buy a house?”

Gross domestic product (GDP) and house prices both fell at the end of 2010; Inflation (RPI) is high (4.8%); VAT has increased; The Governor of The Bank of England, Mervyn King, claimed that households face the longest squeeze since the 1920s; and the number of house sales is half the long term average.  Surely with all this bad news house prices can only go down?

Well, let’s have a look behind the headlines and examine the statistics.

The GDP figures were severely affected by the bad weather in December, and GDP grew 1.4% in 2010: Not bad coming out of a recession.

House prices are now 10% higher than they were at the bottom of the recent slump.

One measure of inflation, the Consumer Price Index excluding indirect tax changes, is at 2%: bang on target.

So to house sales and prices.

House sale activity is low.  There are few houses for sale and few purchasers.  But the market is still ticking along with over 40,000 sales per month.  Fewer mortgages are available, but does the market really need thousands of different mortgage deals?  There are only so many options.  The higher mortgage deposits required do mean that first time buyers need to save, but that’s not necessarily a bad thing.

Since the second world war, house prices have increased broadly in line with wage inflation (long term average of 2.9% pa real growth), reflecting that people pay what they can afford to pay.  With house prices currently on the long term trend line and with the population of England forecast to increase by about 9 million by 2030, there is reason to believe that house prices will continue to rise in the long term.  With low inflation, you could expect a house worth £300,000 today to be worth £1million in twenty years.

So, what about the next 2 – 5 years?  People do have a little less money in their pocket, and the headlines make people ‘feel’ less wealthy, which effects sentiment.  By historical standards though, inflation and mortgage rates are low.  I expect prices and activity to hover for a few years, then house prices will gently increase.  Until the next boom …

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Daniel Sutherland