As an estate agent, I get asked quite a lot of difficult questions.
Some of these include “Which way does the garden face” and “Why is the vendor selling”.
The answers to both are pretty obvious. “It doesn't matter, the sun doesn’t shine in this country” and “because they’re fed up with living in such a beautiful house in an unrivalled location”.
But the one question that’s actually harder to answer than most is “how’s the market”. Lately, it’s also the one that I’ve been getting asked the most.
It’s hard to answer because it’s so nuanced. There’s London, and then there’s the rest of the country.
There’s family houses, and then there’s apartments.
There’s apartments within purpose built blocks, and then there’s ones within converted houses.
There’s different buyer demographics too. Buyers with cash, buyers from overseas…I could go on, and on, and on.
There’s a micro market for everything, and depending which one you’re asking about, my answer is different.
So In the words of the much loved (by me anyway) Lloyd Grossman from the enthralling ‘80s TV game show that was Through The Keyhole; “Let’s look at the evidence”.
Actually, let’s not do that, because frankly the evidence shows exactly what you might imagine it would. In general, thanks to rising interest rates and rampant inflation, there’s fewer buyers in the market than there were, the number of transactions are down, and fewer mortgages are being approved.
And yet despite that, the market, but particularly the market for family houses in London, is showing remarkable resilience.
So I thought that it might be more interesting to look at how we ended up with interest rates at close to zero for the best part of 15 years, what that did to the housing market, and what the effects of a return to a more normal rate might be.
Between March 2009 and November 2022, the Bank of England bought £875 billion worth of Government bonds in an effort to reduce long term interest rates and increase the amount that people were spending.
Without these policies, things would have looked a lot different.
Looking back at the series of events between 2008 and 2022, it’s clear that interest rates and quantitative easing were the best levers available to central banks in order to stop the global economy from going into total meltdown.
But as the principle of causality will tell you, every action has a set of consequences, both intended and otherwise.
And the unintended consequences of this quantitative easing and zero interest rate environment haven’t been entirely positive. Because whilst this wave of money spared a lot of people from a lot of pain, it also ended up causing a few issues.
Let’s start by trying to find some unicorns. It’s actually easier than you might think.
Next, let’s look at a bit of Bitcoin.
And finally, we can analyse London house prices.
In hindsight, solving the issues by inflating the economy with cheap money was going to be a sticking plaster, not a panacea.
Those who have put their money in property over this period have arguably made better long term investment decisions than those who bet on fast growing companies or crypto. Particularly in the last few years.
Even so, the average price for a detached house in London rose from just over £562k in 2008, to just under £910k in April 2018. Given what happened to the housing market through the pandemic, it’s almost a given that by now the figure is well over £1m.
And whilst some of this price inflation was driven by owner occupiers, much of it was a result of overseas buyers purchasing property in the capital. This wasn’t just a London phenomenon either.
In Canada, the influx of foreign investment made it so hard for locals to buy homes, that in January this year, the government implemented the foreign home ownership ban.
Like it says on the tin, this prevents non-Canadians from purchasing residential property in Canada. For at least the next two years.
This won’t happen in London. The government is too scared of killing the Goose which lays the golden eggs.
But it’s now undeniably much harder for young people to get on the housing ladder. Not that it was easy pre-2008.
But still, in one sense these policies worked well. Until of course, they didn’t.
The pandemic didn’t help. Terrified and in uncharted territory, central banks slashed interest rates even further, pumped billions more into economies, and the UK government rolled out a series of micro economic policies too. The furlough scheme, a stamp duty holiday and VAT cuts for the hospitality sector, to name a few.
As a result, we’ve now gone too far the other way and both governments and central banks are scrambling to bring inflation under control.
It’s not just interest rates that have reached an inflection point either. The tech industry, a standout performer in the years since 2008, is also having to ask itself some tough questions.
So far this year US technology firms have announced 118,000 redundancies, adding to the 140,000 jobs cut last year.
So now the question is really this;
What effect will a return to a historically normal interest rate environment have?
“A well-functioning UK economy needs the base rate well away from zero, with a figure beginning with a four not to be feared by households or businesses.”
Savvas Savouri - Chief Economist, Toscafund.
I think that I agree with this.
Servicing the debt on our homes became an incidental cost in the years between 2008 and 2021. But as Savvas says, (or doesn’t quite say) perhaps this should be expensive.
And maybe a return to a healthier overall market, with more income being spent on mortgages than anything else, is also a more sustainable model for the future.
This idea is reflected in the data, at least so far. Whilst we’re some way off the high number of transactions and house price inflation that defined the pandemic years, it looks like things are returning to similar levels as they were in 2019.
I can only assume that for some buyers, this means spending less on non-housing related costs, which will hopefully help reduce inflation too.
It’s only in the fullness of time that the effects of the most recent shift in economic policy will be properly understood.
In the intervening period, and in some markets at least, it seems like business (more or less) as usual.
Data provided by Prime Resi, Savills, RICS, Crunchbase, The Economist, the Office for National Statistics and the Bank of England.
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Things I’ve been paying attention to
“The problem here isn’t Forbes, of course; the problem is the vision of success that we’ve been sold and the fetishising of youth. 30 Under 30 isn’t just a list, it’s a mentality: a pressure to achieve great things before youth slips away from you. The pressure can lead certain ambitious people to take shortcuts. And, in fact, shortcuts are encouraged: millennials, after all, grew up being told to “fake it till you make it”, cash in now until you become a withered, irrelevant, 30-year-old prune. If you exaggerate a little bit, that’s not fraud, that’s hustle! Until, of course, the justice department comes knocking”