The extra money in the system may come from capital inflows from abroad, or quantitative easing (whereby the central bank buys back government bonds using newly created currency giving the banks more capital to lend out) or the government may lower interest rates and run a current account deficit to boost the economy. So then we have a property boom.
During the boom house prices rise, land values soar and commercial property values increase. Lots of young people come into the business as estate agents or property developers and their only experience is a world of low interest rates, readily available mortgage finance and rising values. They assume this is the natural order of things.
During a boom some new mortgage lenders appear on the scene. In the 60’s and 70’s they were the secondary banks, in the 80’s and 90’s they were the sub-prime lenders. Now we have the challenger banks.
Some of the riskier lending during a boom will be to property developers, often fairly amateur with little or no track record.
Eventually the booming market comes to a grinding halt. Something unexpected may happen such as a war in the Middle East and quadrupling of the oil price (1970,s) or there may be a sudden substantial increase in interest rates in an attempt (generally futile) to support a particular level of sterling in the international exchanges (i.e. Black Wednesday in September 1992).
Something unexpected has happened in the form of a global pandemic and it remains to be seen how the property market will respond. We may be due for a downturn in the market now. Only time will tell. I have seen five booms and five slumps in my (admittedly long) career. All the indications are that house prices in accessible but rural locations may still do well with lots of people home working. You are less likely to encounter a virus surrounded by open fields. Property values in denser inner city locations may fall and the values of investment properties also as more and more tenants are unable to pay their rent.
For a while it will be difficult to sure precisely what is happening to the housing market. Estate agents are famous for their ability to puff the market and gloss over details of price reductions. The statistics provided by the lenders such as Halifax and Nationwide will relate only on properties where there was a mortgage so the cash sales (possibly as many as a third of transactions) are not reflected. The most reliable statistics are provided by H.M. Land Registry but you will have to wait a few months for these due to the delays in reporting.
The shortage of decent housing of a type people actually want to live in in localities where they actually want to live continues and underpins the market to some extent However the property market responds to current circumstances something needs to be done about the design of the houses and flats we build. Covid 19 has taught us the importance of outside space and families with children need a garden. Grenfell has taught us something about high rise flats. Expect to encounter a mixed bag of property market statistics for a while whilst the market for different property types and in different parts of the country settles down.
Peter Glover is a Chartered Surveyor and author of Building Surveys and Buying a House or Flat
