BMO Global Asset Management
Global Investment Insights
Of course this whole pack of negatively geared cards relies on one
thing — ongoing house-price inflation. If house prices falter (and,
dare we say it, start to fall) these heavily leveraged “investments”
are going to start looking pretty silly. Group psychology can turn on
a penny and a few forced sales can suddenly turn into a deluge.
Selective amnesia seems to afflict the general public when it
comes to property. They quickly forget that prices can and do fall.
Take a look at what happened in the U.S.
in 2007 - 2009 (and
Spain, Portugal, Ireland, Greece, the UK et al.)
In the UK, where the decline in prices was milder than in many
other countries, it was still sufficient to rattle the teeth of heavily
geared home-owners and give many bankers heart palpitations.
Look at the chart to the right. The pre-recession peak for an
average of all-UK prices was in September 2007 at £190,032 and
the post-recession low was £154,452 in March 2009 — a fall of 19%.
In the prosperous South East (around London) average prices fell by
20% over the same period. In the U.S.
the average peak to trough
fall was around 21% (all-U.S. data) — and that was sufficient to take
the world economy to the edge. Of course, thanks to quantitative
easing and other unorthodox measures, prices then picked up
and passed pre-recession highs — and that is precisely why we
are concerned!
First quarter 2017
Average house prices — all UK
Aggregate data for OECD economies (output per worker)
225,000
215,000
205,000
195,000
£
Note: December 2016 average levels:
UK: £ 219,544
London: £483,803
South West: £242,808
England: £236,423
Wales: £148,177
South East: £316,026
Scotland: £141,553
185,000
175,000
165,000
155,000
145,000
135,000
125,000
Jan
2005
Jan
2006
Jan
2007
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Jan
2012
Jan
2013
Jan
2014
Jan
2015
Jan
2016
Source: UK Office for National Statistics
We have tended to focus on Australia in this diatribe but as the
country’s largest five cities are all featured in Demographia’s Top 20
“median multiple” list we feel it merits special mention.
Don’t think
we are complacent about the many others that are in the “severely
unaffordable” category, because they all induce a troubled sleep.
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