A house price slowdown that could be good for the market

A house price slowdown that could be good for the market

It’s a counter intuitive statement in some regards – why would property owners or investors want house price growth to slow down? Wouldn’t we just want it to grow exponentially in an ideal world?

Well, the answer is no, and for a variety of reasons. Most property investors and landlords have enjoyed a strong and sustained period of growth in asset values, meaning that their wealth has grown.

This ran counter to the expected performance of the market where many had predicted that there would be a sustained and pronounced slow down or even drop in prices and demand.

There was logic behind this prediction; the thinking was that lockdowns and enforced restrictions for public health would reduce demand to such an extent that prices would drop.

However, the evidence now shows that the opposite happened, and despite a short stagnation between March 2020 and May 2020, once the market re-opened with the lifting of restrictions on estate agents, the housing market bounced back stronger than ever and many saw record traffic.

That momentum is unlikely to last, however, and there will almost certainly be a slowing of growth, but is that necessarily a bad thing?

Slow down

Whilst it’s estimated that the market will slow over the coming months and years ahead, it shouldn’t come as any great surprise that house prices across the UK can’t keep growing by more than 10% every single month across the year, it would represent a more than doubling in value over the course of a few years and that’s clearly unsustainable.

Furthermore, if property values start to outstrip rents too quickly then this drives down your property yields (the percentage of the value you earn per year in rent). This means that your passive rental income decreases as a percentage of the value of the property and can cause issues moving forward.

Finally, however, it brings instability to the market and can make price fluctuations volatile. With such a limited supply of property coming to market due to being outstripped by demand, this means that slight slow downs can look more pronounced and this can also affect lending rates and terms as lenders seek to charge you more for a higher value asset.

Long term

As we’ve always said, property investment is a long term endeavour and if you’re looking for fast, short-term price rises then you’re better off in the stock market.

Property investment should be treated as an investment for at least five years, but probably more in the region of 10. An investment that provides you with an income whilst steadily increasing in value.

That trend is very much set to continue, but don’t expect 10% or more increases for much longer now that the government has ended the stamp duty holiday.

As we’ve explained above, don’t treat this as any sort of sign that things are going badly, it’s actually the opposite – it indicates that the market is returning to stability and that’s good for us all in the longer term.

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