It now seems to be fairly widely acknowledged that central London house prices have recovered to their pre-recession highs of September 2007. That is certainly our experience in the areas we are most familiar with – Chelsea, Pimlico, Notting Hill, Bayswater and Clapham.
The market has recovered far more quickly and more strongly than most commentators predicted. What we think is particularly interesting about the recovery is that it has been so much stronger than the recovery in the FTSE. While Central London property prices are back at their old highs (and higher), the FTSE is still 15% below its pre-recession high.
Normally one would expect the stock market to recover before the wider economy as it prices in the expectation of a recovery. We would have expected the housing market to track the improvement in the wider economy – i.e to lag the stock market. That’s what happened as we emerged from the 90’s recession.
So why is the housing market performing so much more strongly this time around and why is it outperforming the stock market?
Bigbleu thinks it’s a combination of much cheaper money and higher underlying demand than in the 90s.
Much Cheaper Money
In the 90s rates fell from 15% in 1989 to 5.25% in 1994 (a 65% fall over 5 years). This time around they have fallen from a high of 5.75% in 2007 to the current low of 0.5% (a 93% fall in under 2 years). Money is clearly much cheaper now than it was back in the 90s and the % fall has been much greater and much faster. That explains most of the housing recovery, but it benefits the stock market too, so doesn’t explain the outperformance of housing relative to the stock market.
The difference is that in the 90s we had “cheaper money” because of the recession and this time we have “very cheap money”. That’s inflationary. Many people are watching CPI and saying that inflation is under control. At school we were always told that interest rate changes take a year to start to impact the economy and longer where sentiment and activity is weak. That means, in theory, we are only just beginning to feel the impact of much of the fall in rates from 5.75% to 0.5%. That’s scary.
Bigbleu thinks inflation bulls are largely responsible for the rise in property prices relative to shares. Property is a better hedge against inflation than shares. Not only does the value of property respond better but it enables private individuals to make leveraged purchases (debt is eroded by inflation) which is complicated and expensive for private individuals to replicate with share purchases. UK property is a particularly good inflation hedge compared with most other property markets in the world because the UK is a highly desirable place to live, but is a small island with very limited supply - like gold in many ways.
Higher Underlying Demand for Property
For a number of reasons, Bigbleu thinks that coming out of this recession there is much higher demand for UK property than there was in the 90s. This high underlying demand is unique to the housing market and does not impact the stock market.
Firstly, pre slump there were a large number of people predicting a crash who were waiting to buy or trade up. The crash happened but then reversed overnight catching many of them by surprise. That means there are now lots of buyers who have missed the bottom and are afraid to get left behind.
Secondly, we now have buy-to-let. We think an amazing 10-15% of people we know have a property that they rent out, many times more than in the 90s. Added to all the first time buyers etc we now have buy-to-let individuals, increasing demand by maybe 10%? Not only has the increased demand driven house prices but the commercial, entrepreneurial buy-to-letters were buying ahead of the recovery in the wider economy – in the same way as stock markets are traditionally bought pre recovery.
Thirdly, we have more European buyers. Talk to any central London estate agent and they’ll tell you there is a lot of foreign buying. Talk to us and we will tell you that Europeans are spending a lot of time looking at the BIGBLEU “Properties with Land” and “Waterfront Properties” sections. This is the result of a combination of the cheap pound and cheap European travel which we didn’t have in the 90s. It’s an exact reversal of the situation in the noughties when the French and Spanish complained about the Brits buying whole villages and forcing out the locals by inflating prices.
Fourthly we have “moral hazard”. We’ve mentioned this before. At the end of the 90s recession people were terrified of owning property. Everybody had a bone chilling story to tell about negative equity or a repossession. That’s so different to this time around. Housing has outperformed most asset classes – including cash if you compare the yield on property with the yield on deposit accounts. People can be forgiven for thinking that property is “as safe as houses” by comparison with other investments. There is no doubt in our minds that the authorities’ bail-out of the housing market has introduced moral hazard which can only increase demand and speculation.
Lastly, we have a lack of supply. For all the reasons above, nobody wants to sell property!
Not only do we think it’s interesting that housing has beaten the stock market out of recession but we think it’s relevant to the future as well. None of the factors driving house prices we’ve mentioned are going to go away in the near future. This means we’ve hopefully got a few more years of very healthy rises ahead of us!
Disclosure: Not applicable