COVID has certainly shook up the planet yet the great British public remains optimistic on property prices.

Two-thirds of British homeowners expect prices to rise over the next six months, says the Zoopla Housing Market Sentiment Survey. However, property analysts at Hometrack predict “slow downward pressure”. So who’s to believe, and what to do?

Since the financial crisis kicked off, the UK housing market has been in a strange, semi-frozen state. The crisis saw mortgage lending dry up, which in turn saw sales collapse. From peak to trough, house prices nationally fell by about 20%, give or take, depending on which set of statistics you look at. The fall in prices could have been much worse, but it was arrested by the Bank of England’s decision to cut interest rates to 0.5%. This slashed the mortgage costs of many homeowners, enabling them to keep paying their monthly bills at a time when many were under threat of losing their jobs.

However, banks remain reluctant to offer new mortgages. And for good reason - with too much property already on their books, and under pressure to repair the state of their balance sheets, the last thing they want to do is take on a lot more property exposure. So now we’re in a stalemate position, where sellers are under no pressure to sell, but buyers are unable or unwilling to pay the prices that sellers think they should be able to command. As a result, the volume of sales is still way below where it would be in a ‘healthy’ property market.

It’s true that prices have seen something of a rally since the Bank of England started printing money. But the strength of the bounce depends very much on where you live. You just need to look at Nationwide house-price statistics to realise that not all housing markets in the UK are equal. Essentially, the further north you go, the harder prices were hit. If you exclude Northern Ireland (prices there have fallen by half, due to the double whammy of being exposed to the Irish house-price crash as well), the northwest has seen the biggest slump.

In London, meanwhile, prices are just about back to their peak, according to Nationwide. And if you’re looking at ‘prime’ London (the expensive bits), then prices have gone beyond their peak levels, driven largely by demand from wealthy individuals and overseas buyers. So what happens next? The government continues to come up with various schemes to try to ‘defrost’ the market. The Bank of England is lending money to banks at cheap rates, as long they promise to lend it out. There have been various bits of tinkering with planning rules, and incentive schemes for house-builders and first-time buyers.

None of these measures will work. The fundamental problem is that house prices in most parts of the UK are still too high. What would really get the market going is the one thing that no one in power wants to see happening - prices falling. That could happen for a number of reasons. Firstly, much of the money propping up the most expensive part of the market - central London - is foreign money. It’s from wealthy Europeans trying to get their money out of the eurozone, or rich Russians and Chinese looking for trophy assets - or a bolthole in case things ever turn nasty at home. This can’t go on forever.

Secondly, it’s easy to forget, but the UK’s main interest rate - the Bank of England base rate - has never been lower (and this is a data series that goes back to 1694). While rates show no sign of being raised any time soon, it’s impossible to predict when that will change. If the cost of borrowing rises sharply, house prices will have to come down as monthly mortgage payments become unaffordable.

Of course, buying a home to live in boils down to far more than just the price of the property. Your own circumstances, the degree of flexibility you require, and your own preferences all affect the decision. So, if you’re planning to buy a home, your biggest financial consider- ation should be whether or not you can realistically afford to pay for it, rather than trying to second guess whether the market is heading higher or lower.

But what if you’re thinking of buying a property as an investment? If you’re an experienced landlord and you know exactly where to look, and are comfortable with managing a property and know the kind of rental yield you need to achieve, then making a move into the buy-to-let market at any time is fine; highs or lows, peaks or troughs, it doesn’t matter as long as it stacks up and income covers outgoings. And if, as I advocate, you should consider buying property and renting it out on short-term holiday lets, then you’re laughing; you can achieve a yield of 8%, and I would wager (and I’m not a gambling man) that mortgage interest rates aren’t going to go back up there for a generation.

Whatever the state of the market, and wherever it’s going, there are deals to be had and progress to be made, because ultimately it doesn’t really matter if it swings up or down so long as your portfolio can at least wash it face. Property is a long-term play, and historically – and history always repeats itself – prices go up as wages and inflation rises, and 7% pa average capital growth will assuredly return, as it always has, and those are tax-free gains that eventually become your pension.
 

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