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Property prices are rising but I’m happy to rent for now - The Times

Early this year, when the housing market was still on its knees, a fellow guest at a Burns Night supper remarked: “Have you seen how house prices are falling? Soon I’ll be able to buy a house for what it’s actually worth.”

This statement poses a number of challenges to any housing market analyst, but particularly to me, as I have been wondering whether to let or sell for the past nine months. The notion of a “correct” price for property is deeply ingrained in most homeowners’ (and some economists’) psyches. But it is self-evidently flawed: buyers nearly always think the market is about 20 per cent overvalued, while sellers think their home is 20 per cent undervalued.

One fact is clear: enough buyers have entered the market in the past few months to make prices bounce, as reflected in this week’s house price indexes. The canny “bottom feeders” who were waiting for distressed stock and repossessions to be flogged, US-style, on the courtroom steps have been disappointed. People like our Burns Night reveller are still renting, confounded to see prices once again climbing. So is now really a good time to buy?

First things first: no matter what the state of the market, there are always good reasons for some to buy. People with new or growing families, or relocating for work or schools, will always form the backbone of demand, just as death, divorce and debt always provide stock.

The three best reasons for buying, taken together, are that first, you love and/or need to live in the property; second, that you can afford it and third, that you will need it as a home for at least the next decade or so. Set against these criteria, no postwar house purchase has been a disaster for the individual involved — at least for market reasons. Even those who bought at the height of the 1980s boom in 1989, and those who bought in 2007, will walk away unscathed, provided they keep up their mortgage repayments.

For others the question is not whether house prices are at the right level, but whether they are sustainable. To answer that we must look at what is driving demand.

The very low rates of interest being paid on deposit accounts have lowered the opportunity cost of money for equity-rich buyers. Even relatively low rental returns from residential property look attractive set against them.

As a result, the market is seeing much more activity on the part of those with cash looking for improved income returns, and from first-time buyers funded with large slugs of cash from the Bank of Mum and Dad. They are either buying the sorts of family homes that aren’t made any more, such as Georgian rectories, or buying rental properties or first homes. In all cases they are searching for quality. New homes are selling only when the site and product meet discerning criteria.

It is these relatively low numbers of equity-rich buyers competing in a market with few properties for sale, who are driving up prices. But this will change if and when interest rates rise, perhaps in 12 months’ time.

If that is the demand side, what of supply? Exceptionally low levels of stock are creating something of a panic-buying frenzy in some locations. There seem to be parallels with the pre-Christmas rush in 1983 for the undersupplied Cabbage Patch dolls. Any competitive bidding in the present economic conditions is more the result of scarce supply and, perhaps, just a touch of hysteria than a true reflection of the market in a leading asset class.

This won’t last for ever, leaving a big question mark over whether price rises can be sustained as more sellers are encouraged on to the market. It may prove unwise to buy when competition is so fierce.

In the short term, the direction of house prices depends on economic factors — whether the prospects of recession, unemployment, lack of mortgage finance, repossessions, higher taxes, inflation and potential rises in interests rates have abated. Savills’ research department thinks they have not. We predict a second round of price falls starting this winter and continuing in the first half of 2010 and not growing until later in 2011. I am acting on this forecast. I have moved my family for lifestyle reasons but, even though I would like to own, I am renting until there are more homes to choose from.

In the long term, however, there is no escaping the inelastic nature of UK housing stock, especially of the best homes in the most desirable places. This makes price rises permanently in excess of general inflation likely. I don’t want still to be renting much after 2011 and, for my dream property, I would definitely jump earlier.

In the depths of the last recession, an astute Middle Eastern billionaire bought a spectacular house in Belgravia, just before the market plummeted. He said: “You can never pay too much for quality — you can only pay too soon.” He was proved right then and probably will be again.