LOCATION, LOCATION, SPECULATION11

 

Judging by the viewing figures, I am not the only one who enjoys watching property programmes on TV. People like Sarah Beeny, who hosts Property Ladder, and Phil and Kirsty, from Location, Location, Location, have become minor celebrities in their own right. And no wonder! It is compelling viewing seeing ordinary people struggle to find a new home when prices seem to be rising on a daily basis. Will their bid be sufficient to land their dream home, or will it be back to the drawing board and potentially many more months of legwork?

 

What is also fascinating is when they do a "revisited" programme, whereby they return a year or so later and revalue the property that was bought on the original programme, normally declaring to the extremely smug owners that they have already made thousands of pounds on their house. In many cases more than they would have earned in a year's work.

 

Easy money isn't it? All you need are Phil and Kirsty on hand and you can look forward to hosting dinner parties to your hearts content, boasting to, and boring, your friends with details of how you knew this was an up and coming area, blah, blah, blah.

 

With this background, is it any wonder that the Government's announcement that from April next year pension funds will be able to invest in residential property has been greeted with virtual euphoria. Now everyone with a reasonable sized pension arrangement will be able to "get a piece of the action". The Press and, unsurprisingly, estate agents have focussed on this part of the new pensions regime almost to the exclusion of everything else, even though there are parts of the Pensions Bill that could severely restrict the future benefits that existing scheme members could receive if no action is taken by A-day, the 5th of April next year. No, this is far less important than sticking a flat in your pension which, it would appear, will guarantee you a happy and early retirement.

 

But will it?

 

Call me a cynic (and lots of you do!), but I believe that when TV companies start filling their schedules with programmes on a particular subject, it is a pretty good indicator that the chances of profiting in that area in the future are remote. I also think that the statistics back me up.

 

In 1993 the average price in the UK of a two bedroom flat was £34,084. It is now £114,664, an increase of 236%. In the same period average earnings have increased from £12,480 to £24,076 an increase of 92%.(Source Nationwide Building Society, and the UK Government) So what has caused the link between earnings and house prices, which historically have moved in unison, to break?

 

The answer in my opinion is speculation. Market forces work on the basis of supply and demand, and when the demand outstrips the supply the price will rise. In the case of property the demand came traditionally from home buyers, but now we have investors entering the fray which has had the effect of increasing prices way beyond the market norm. This has led to first time buyers finding it virtually impossible to get on the property ladder without either mortgaging themselves up to the hilt, or getting help from their parents or relatives. But it is also starting to affect the herd who have jumped on the buy-to-let bandwagon. Yields in London are now in some cases as low as 3%, but the cost of borrowing is 6%. Madness.

 

Worryingly, it has been reported by the faculty of surveyors that the new pensions legislation alone is likely to push up property prices by 3.5% per annum for the next two years as the demand from pension funds hits the market. Another survey found that 90% of people with pension funds would consider using their fund to purchase a property.

 

Me, well I am definitely in the other 10% and although the short term may prove me wrong, I believe market forces will prevail and that the link between earnings and property prices will return.

 

For those looking for easy money, well a wee wager on Sarah, Phil, Kirsty, et al, not being on our screens in five years time looks a good bet!

 

Steve Forbes

 

Steve
Author
Steve Forbes
Managing Director
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This letter is the personal view of Steve Forbes. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.