Grey clouds on the property horizon

Property prices are still on the rise.  According to the latest stats from Rightmove the average asking price has now reached an incredible £300,000. Wow!  The latest ONS  house price index for December shows that house prices continue to rise by 6.7% over the year.

Can house prices keep going up? 

Can prices keep going up?  Well yes and no.  The reason for house prices continuing to increase are that with interest rates at historic lows housing affordability is at an all time high.  There is also no shortage of demand for residential property as high rates of immigration and frustrated renters look to climb the housing ladder.

Boom and bust bubbles

Don't belief the hype though.  You only have to look to a country like Japan which had their own massive property crash to see that house prices don't have to keep on rising. Globally we have witnessed a spate of enormous asset price bubbles in the last 15 years characterised by massive in flows of capital pushing prices in specific markets higher followed by the inevitable crash as the hot money goes elsewhere.  Remember the 'tech boom' in shares, then we had a property boom aided by a credit boom and most recently a commodity boom off the back of the perception of a booming China.  All of these were followed my MASSIVE busts.

Lets not forget that residential property in the UK would and some say should have been added to this list.  It was only saved by the Government taking unprecedented monetary policy steps by reducing interest rates to historic low levels to support lending, affordability and confidence.  Let there be no doubt, without this interference the residential property values would have hit the floor exacerbated by a 1930s type depression.  In essence the government made the decision that the UK housing market was too big to fail because it would have dragged down the entire economy.

The residential property paradox

The apparent resilience of the UK residential property market has only help support the urban myth that your money is always safe in 'bricks and mortar'.  The paradox for politicians and policy makers is that property has an almost mythical status as an asset class.  When we are worried we put money into housing because it's an investment we think we understand.  When we are happy we splash out on a bigger house to celebrate.  As consumers we act like a incurable food addict feasting when happy but then equally gorging during the down times to cheers us up.

Banks are key to property prices

As we found in the credit crunch, without banks being able to lend house prices become vulnerable.  The events in the credit and stock markets with banks under threat last week suggest that to view housing as a risk free investment may not only be naive but dangerous.  Having said that I'm about to purchase my most expensive property yet.  Like everybody I'm caught in that property paradox knowing that property is not undervalued and cheap even if it is currently affordable but values remain susceptible to changes in the health and lending practices of banks.  The one thing in it's favour is the unwavering support of government and the fact that the sector is too important for the Government to allow large scale house price falls.  However, every investor needs to be aware that there are risks so go into property investment with your eyes open.

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