Why house prices will probably fall

Unless earnings rise a lot

House price crash

I realise that this message (that house prices will probably fall) will not be welcomed by a lot of homeowners – and I’m sorry about that.

But this site is about education and, from time to time, the facts about asset prices (houses or shares) don’t make for easy reading.

That said, I think younger folk, who are yet to join the housing game could benefit from this one.

And if you agree, please share.

Let’s start with the myth about house prices

Earlier this year, I attended a promotional event on property investing from the folk at Rich Dad education.

Rich Dad education uses the Robert Kyosaki brand to promote its message and is part of the Legacy Education alliance in the UK.

Legacy Education alliance also offer ‘property’ workshops under brands including:

“Making money from Property” with Martin Roberts, “Robbie Fowler’s property academy”, “Perform in Property” with Steve Backley and Roger Black and “The Independent Woman”

Anyway, the aim of this particular (and FREE) Rich Dad presentation was to sell us into an expensive (£997 on this occasion) weekend seminar.

The sales pitch was for us to attend the paid weekend to learn how to make big money on property.

I didn’t buy the weekend  gig. I just attended this FREE event – as I often do – to research my work 🙂

However, I can tell you about the biggest secret that the presenter claimed would be revealed on the course.

Apparently, I could have learned . . .

. . . “How to buy property – below market value”

or BMV as the presenter lovingly (and repeatedly) called it throughout the evening.

Now, don’t get me wrong . . . buying a house at BMV is clearly a magical piece of knowledge to have, right?

The only problem is that it’s misleading to suggest that you’re likely to achieve it 🙁

Let’s get real shall we?

Residential property is a market – just like many others.

So, unless you’ve involved in some kind of shady deal – you will be in competition with others when you buy a property.

And if you offer a price that’s significantly below market value – you will be outbid by another buyer who will offer something closer to the current market value.

That’s how markets work. Simple.

The presenter also mentioned several times how property buying was the perfect road to riches for us.  And according to him –  the reason was simple – because house prices ‘always’ double every 7 to 10 years.

House prices double

Sadly, this is just another false claim

Road to riches

And you don’t need to look far to find the facts on that

Over the 7 year period between 1989 and 1996, many UK house prices halved rather than doubled.

And that’s just one example of a severe crash in house prices as you can see here.

House prices and earnings, historically connected

So, what are the prospects for house prices from this point in time?

Well, you can find my quite detailed thoughts on that here

And on the possible fallout in the ‘buy to let’ sector here.

But let’s simplify this and look at the issue with a story today.

Imagine we follow the fortunes of someone called Sam – who is looking to buy their first property – a flat in their local town.

Now, Sam earns £30,000 p.a. gross (before tax) which results in a take home pay of c. £2,000 per month.

And he decides to allocate 40% of that net income to mortgage repayments.

Sam’s bank agrees that he could afford the £800 per month repayments and offers a mortgage of £159,000 at 3.42% interest* over 25 years.

*That’s about 0.5% p.a. below the current standard variable rate

Sam will be a bit stretched with this mortgage – taking account of other outgoings and ‘essential’ lifestyle expenses for holidays and going out 🙂

But he wants a place of his own.

And with modest deposit of £16,000 (plus enough to cover costs) he buys his first one bedroom flat for £175,000.

Now let’s roll the clock forward 3 years

And let’s assume that interest rates have ‘normalized’ a bit  – such that the standard variable mortgage rate is now 6.5%

Yes, I know, that’s a fair bit higher than today’s rates.

But, as you can see here, it’s still quite a low mortgage rate by medium term historical standards.


Obviously, this increased rate will impact heavily on Sam’s repayments which by now will have jumped by more than £250 per month – or £3,000 per year.

This means that Sam is now having to give up on holidays and a lot of going out  – and is getting thoroughly fed up with the situation.

So he explores the possibility of selling up and renting again for a while.

Unfortunately, there isn’t anyone interested in buying his flat at anything like the price he paid for it.

And the reason for this is quite simple.

You see, in 3 years time, someone with similar earnings and desired lifestyle outgoings to Sam will only be able to fund a mortgage of £117,000.

This assumes a similar target monthly repayment of £800 and mortgage interest rates @6.5%

And assuming that this potential buyer has saved the same deposit as Sam (of £16,000) then, they will only be able to make offers on properties for sale at around £133,000.

That’s £42,000 less than Sam paid for his starter home just 3 years earlier.

What could happen in this nightmarish but very possible scenario?

Well, one thing that could clearly happen is for home prices to fall – and by quite a lot.

Alternatively, people’s incomes would have had to have risen by about 25% or so – to make that ‘starter home’ affordable at the price Sam paid for it. But that seems unlikely in the near term.

I guess the only other option that could support home prices at their current, quite frankly, ridiculous levels – is for interest rates to be kept down for a lot longer.

But interest rates are at emergency levels at the moment. And we’ve never had such low interest rates in the near 400 year history of the bank of England.

BOE Interest rates since 1694

And I don’t think anyone (including, most importantly the members of the Bank of England Monetary Policy committee) is predicting that rates will stay this low for much longer.

More thoughts on that here.

So, what should you do?

Well, that really depends on your situation.

If you have a mortgage that could ‘super stretch’ you if rates go up – talk to a mortgage broker to explore what terms you could get on a fixed rate and whether that might be suitable for you.

Everyone’s situation is different – and those people with little or no mortgage may have less to worry about provided that they’re not relying on house prices to stay up where they are.

The people that worry me most are the youngsters because between me and my partner – we’ve got 5 of those in their early 20s.

A lot of their friends are telling them that they NEED to get onto the ‘so called’ housing ladder quickly.

I think they’re wrong and that ladder could turn out to be a very nasty snake.

Whoever you are, be sure to sign up to my newsletter (below) if you’d like some more ‘intelligent’ commentary on these and other money matters.

And, whatever you do, do NOT listen to stupid seminar sales people (regardless of the ‘brand’ name behind them) who tell you that house prices double every seven to ten years.

That is simply not true – and from this point in the cycle – home prices could very well go backwards – a lot.

And you shouldn’t simply listen to me on this matter.

Paul Cheshire (A professor at the London School of Economics) said on 2 July 2017 that,

“We are due a significant correction in house prices. I think we are beginning to see signs that correction may be starting,”

He told the Mail on Sunday that prices could fall by as much as 40 per cent and said,

“Historically, trends seem always to start in London and then move out across the rest of the country. 
In the capital, you are already seeing house prices rising less rapidly than in other parts of Britain.”

In fact, in some parts of London house prices are now falling since the professor said this.

Cheshire said that a fall in real incomes is likely to spark a crash.

Falling real incomes is precisely the situation we’ve had for some time – as inflation ticks up ahead of earnings growth.

See that first chart above.

What’s more, his fellow LSE professor Christian Hilber has warned that,

“If Brexit leads to a recession and/or sluggish growth for extended periods, then an extended and severe downturn is more likely than a short-lived and mild one,” 

So, review your personal situation and take good care out there


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