History Lessons

We are experiencing another downturn in the UK housing market. The number of new loans has fallen to around half what it was four years ago. Although many people want to move house, or even buy their first home, they are limited by the supply of credit. Lenders are even asking first time buyers to save a deposit with them before being considered for a mortgage.

Stagflation, that dreaded combination of negative economic factors where the inflation rate is high, the growth rate slows down and unemployment remains high, threatens to prolong what is already a significant recession in the UK economy.

The International Monetary Fund has finally been called in and has insisted on deep cuts in public expenditure, greatly affecting economic and social policy.

What I am describing here is 1976 although there are remarkable similarities to Britain in 2011 as far as housing market challenges are concerned.

So what happened next? Well, from 1976 onwards, there was a steady recovery in the UK economy and rapid growth in the UK housing market. Those that invested in property at that time built their wealth on the house price inflation that started in the 1970s, ran through the 1980s and 1990s (barring a few dips along the way) and only ran out of steam in 2007. Average house prices rose from £12,000 in Q3 1976 to £184,000 in Q3 2007, before dropping back to £167,000 in Q3 2011.

Back in 2011, we are currently staring at a similar crisis in the UK housing market and yet in reality that market is operating at two speeds. The wealthier ‘movers and shakers’ are adapting their businesses and their income streams to cope with the new economic reality and they are buying property; for many of them it is ‘business as usual’. In many cases at the top of the market agents just cannot find enough good quality property to satisfy demand. The rest of the population are left sitting and waiting even though, if they have a reasonably secure job and a competitively priced mortgage, they are in a pretty strong financial position. Is it just a question of confidence?

Whilst LIBOR has been edging upwards and 2 and 5 year swap rates are at near record lows, fixed rate mortgages are as cheap as they have ever been - below 3.5% for 5 year fixed rates. In inflationary times such as these, investing in real assets using cheap money has proven to be a good move in the long term, even if the short term conditions are causing uncertainty and nervousness.

The 1970s may have been one of the UK economy’s darkest hours until now. But the 1980s were when those that acted confidently - and accepted the long term nature of investment in the UK property market – did not regret it. As the economy grew rapidly, the value of their assets did too. Whilst not pretending that the current situation is a carbon copy of 1976, there are enough parallels to suggest that we can learn from history once again.