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Building a position

By my reckoning, you need to be at least 40 years old to have a clear memory of what happened during the last recession, so many people are perhaps in denial about how bad things could get in the housing market. Nothing embodies this better than the TV property programmes, which seem to live in a wonderland of ever rising prices. Many people are going to be shocked.

Falling house prices are a disaster for some people simply because they have treated their house as a risk-free short-term investment or as a cash machine from which they can make constant withdrawals. Those people are going to have a huge reality check over the next couple of years.

Making a forecast is notoriously difficult but surely a market that has risen by an average of 170 per cent over 10 years and in excess of 300 per cent in many areas is ready for some kind of setback. I personally do not like the term “crash” because it is extremely emotive and unhelpful.

If we were talking about a similar rise in the equity markets, then a fall of 25 per cent would seem perfectly reasonable. In fact, we might consider that a good result. Yet until recently, many property commentators had been forecasting a flat market. I am always sceptical when people predict a flat market for any asset class because in my view that never happens. Markets are either rising or falling.

There is a strong correlation between mortgage approvals and house prices. Approvals have been falling at an alarming rate, which points to a clear drop in demand that must feed through to even lower house prices in the coming months. It will be interesting to see what the buy-to-let investors will do. The few who bought wisely many years ago can probably weather the storm but I fear that those who jumped on the bandwagon more recently will not fare so well. Many will say they are in it for the long term (which they should be) but how will they react when they see capital values falling? We will have to wait and see but house prices are likely to fall further if a significant number decide to sell.

The housing market bulls always point to the supply and demand equation. Simply put, the argument is that there is more demand than supply, so prices must go up. However, this only works if we can borrow the money to buy the house in the first place. If we can’t borrow, then we can’t buy. Also, when we see house prices falling, wouldn’t it be sensible to wait a few months to pick up a house more cheaply? These two factors could cause the supply and demand equation to change dramatically.

Perhaps the most dangerous aspect of this century’s property mania is the woolly-headed notion that a property makes the ideal pension. In most cases, trading down will not give you enough money to live on in retirement. I think there is going to be a shock in store for those forsaking a proper pension because they think their property will solve all their problems.

What might this all mean for stockmarkets and investors? Many investors abandoned shares for property, believing it to be a better investment, and those who switched early enough made a smart decision. As always, it is the last ones to get on the bandwagon who suffer.

A falling housing market has clear implications for large sections of the UK equity market. Housebuilders have already halved in value but are they a bargain? Probably not, as it does not appear that we are in sight of the bottom in house prices yet.

Another area that is bound to have a hard time is anything consumer-facing. Portfolios therefore need to be more skewed towards solid companies with secular growth, low debt and strong balance sheets. One fund certainly springs to mind but I will leave you in suspense and review it next week.

Mark Dampier is head of research at Hargreaves Lansdown


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