In the old days one of the things we loved about property was the received wisdom that property values double on average every ten years.
By the old days, I mean before the credit crunch (before 2007).
Although many of us talked about buying for cash flow, in our hearts of hearts, out of the corner of our eye, we were watching property values increase relentlessly and were quietly (or in some cases noisily) grateful that we were able to ride that wave.
As professionals, few of us would admit to buying purely for capital growth, but it made many ‘old time’ investors very wealthy.
Whole property strategies were built based upon roaring capital growth: “buy a property or two, wait until they’ve gone up in value, refinance them and take out the growth as income, as spending money. Don’t worry about the future or ever having to pay it back. This growth will go on forever…”
Great while it lasted but ….
Now let me be fair, because I am now mixing and merging two different themes.
Those who talked about property values doubling every ten years weren’t saying that we should harvest that growth using irresponsible strategies. Well, some did, but many didn’t.
Steady, strong growth was just a fact of life, and something to be appreciated.
Why am I even talking about this?
Today Halifax reported that “House prices across the UK have jumped by an average of 4% in the year to September (2017)”, as reported on BBC website.
Interesting use of language. “Jumped by 4%…” Clearly this has impressed the BBC but as self respecting property investors, is that what we want, need or expect?
Ten years ago many so called investors wouldn’t have got out of bed for 4% per annum. 4% is hardly a jump; compared to past growth rates it’s more of a stumble.
For property prices to double every ten years they need to grow by at least 8% per annum (technically 7.2%) so 4% is only half of what the received wisdom says is the average growth rate.
Now, again, just to be fair, I don’t think anyone ever said that property values doubled EVERY ten years.
What we used to talk about was property values doubling ON AVERAGE every ten years.
So in any ten year period property values may or may not double, but over the long term the growth would average as doubling every ten years.
So in some ten year periods property values would double, or more than double, and in other ten year periods they would grow at a slower rate, or even decline. But, over time, it worked out as an average doubling every ten years, or 8% per annum.
One of the reasons why I’ve been so interested in, and keen to talk about the Hometrack City Index (see last’s weeks newsletter) is that talking about average UK prices is meaningless. It’s obvious that the UK has more than one market – that all perform differently and independently.
As I said last week some parts of the UK are still waiting for property values to catch up with 2007 peak levels (yes, they still aren’t there) whilst other regions have raced ahead, looked like they have hit a new peak, and have declined again (London?).
It’s a classic illustration of the north/south divide.
One thing that strikes me, and has has struck me for a few years now, is that property value growth since the credit crunch has been below 8% per annum (on an average national level).
That’s not to say that growth rates in some areas haven’t been at 8% per annum, but there are plenty of areas/regions/cities/suburbs where growth rates over the last 7 or 8 years have been well below an average of 8%.
So, for the time being, it looks like the days of property values doubling every ten years is well and truly over.
Un-scientifically I have a feeling that for the last few years growth rates have been running at half the required rate, meaning property values now double on average every TWENTY years.
Of course, something could happen to spur values on in future and they could catch up.
I have a sneaking feeling (again un-scientific) that values in the north will jump at some point before this current economic cycle runs it’s course, and close the gap with the south.
Some areas in the north are now looking SO cheap (in comparison to the south) that I can see buyers (investors piling in to get yield.
But for the old doubling every ten years to happen, in those regions values will need to go galactic – and that looks unlikely.
So we could could be into new and uncharted times.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
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