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Bad time to buy property, says Capital Economics

Buying residential property at the moment is unwise, says Capital Economics.

Paul Diggle, property economist at Capital Economics, says that growing fears over inflation and high house prices means house price rises can not be relied on.

He adds that residential property is currently a poor prospect for those looking for decent real terms capital gains over anything less than the very long-run.

Diggle says: “Real house prices look to be something like 20% too high relative to trend. If they fell by that amount over the next two to three years, it would take a further ten years of trend house price growth before investors broke-even in real terms.

“And that’s before factoring in mortgage interest payments, running costs, depreciation and the opportunity costs of the equity tied up in the property.”

He also warned that inflation will be more of a problem next year than either we or the Bank of England expects.

He also claims that Nationwide’s prediction of 2.9% house price growth in the future is reasonable but can’t take place alongside huge unemployment.

He says: “Certainly, we do not believe that the current level of real house prices would be sustainable in the face of a renewed labour market downturn, let alone a sharp rise in interest rates that would be triggered by a period of entrenched inflation.”

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  • Ken 17th December 2010 at 5:05 pm

    The question here is why the high inflation is to affect Producer, Retail or Consumer but not (as much) Property. A classical theory would suggest that the excess liquidity and weak currency would hike them all.

    The double-digit interest rate in the 80s had certainly made mortgage payments difficult to meet, which in turn depressed the house price. No matter how much one loves (and lives in) one’s home, one had to go through repossessions if one cannot meet mortgage payments. This is however politically very taxing and any govt would try to avoid.

    In the meanwhile, the bond mkts is currently rapidly pricing in the inflationary prospect (already UK PPI 10%, RPI 5%). And Paul Diggle is right about supply side of credit very scarce due to the record low successful mortgage applications together with the regulation on interest-only mortgage (another form of leverage).

    And anyway banks are hugely under-capitalised in order to meet Basel III, and they will be more than happy to tighten their lending criteria, hike their existing mortgage rate while sitting cozily on low wholesale rate. They will not hesitate to hike mortgage rate if they feel the repayment is at risk (of inflation, borrower bankruptcy etc.).

    Also would the govt take the side of home owners and banks to keep the rate (and QE) intact, or take a hawkish stance and hike the prime rate in line with inflation? They seem to be in a very “austerity” mood so far.

  • Chris Gardner 17th December 2010 at 2:03 pm

    Capital Economics are the economics industries noisy little brother with tourettes. Seems to me they will say anything to get headlines.

    The piece also seems to presuppose that peole only buy for investment rather than a place to live.