Why House Prices Will Rise In 2010

I sold my house in autumn and rented. It was partly circumstance and partly because I believe property will be cheaper in five years and possibly in ten.

In the boom years, I wrote repeatedly of how the economic boom inflating house and share prices in developed nations would end in bust in the late Noughties and linger for most of this decade. I wish, I’d acted a little sooner on my convictions.

Now, with house prices on the rise and above peak levels in patches of London and the South-East, am I beginning to regret that sale? Today I might be able to get 10% extra. That’s annoying. But I have no regrets – I’m thoroughly enjoying the DIY-free merits and cheaper cost of renting.

A year ago, I wrote a blog post estimating house prices were still at least 38% over-priced and predicted a return to the norm… eventually. I also said a reflex short-term recovery in prices, due to rock bottom rates, was a likely scenario [repeated a few weeks later] – it was.

So what next?

House prices remain wildly over-priced: 29% against the long-term relationship with rents, some 50% against the long-term average against wages. They will fall, but probably not this year. Why? Because the drastic anti-recession measures still have plenty of gas in the tank.

A crude survey by property website Zoopla earlier this month concluded that, based on the fact that rates are low and have made repayments dirt cheap, property affordability is at its best level since 2003. So surely prices will rise? Quite possibly, but remember that the survey doesn’t consider that low rates are largely only being enjoyed by those with large amounts of equity in their homes.

The second, far more important point is that when rates rise, that affordability pendulum will swing in an instant. A rise to just 3% would send mortgage costs soaring. A rise to 5% would precipitate an outright collapse.

Rates may not rise this year, and maybe not even next year given the parlous state of the economy. So for now, the property market’s renaissance will continue. The dangerous notion that house prices always rise lives on and will be further reinforced… for now.