To contemplate that now — when the main issues are undersupply and rapid price increases — may seem odd, but even a squirrel puts aside nuts in advance of the winter, not after it arrives.
Property has cycles. I believe we are in the latter half of a property cycle and that the next seven years will be destructive to the housing market generally and individual balance sheets in particular. Thankfully there is still time to blunt the blow but it is unlikely that anybody wants to take the prescribed medicine in advance.
Where we are now is a classic example of the second half of a cycle. In the first half you have a bust and the market is in the doldrums, then it starts to recover. That recovery gains pace as investors see value and the smart money moves in quickly.
That time period ended in 2016 where the ‘half time’ occurred. At half-time you’ll often see prices stall, rise slowly or even drop. When you get to the halfway point it is often due to the smart money exiting early. We already saw evidence of this with several institutional investors selling on assets they had acquired. Then the realisation that undersupply is still an issue kicks in and you get into the second or ‘mania’ phase where prices rise, everybody piles in and the market goes into hyper-supply until it keels over.
That ‘next crash’ is coming. It isn’t here now, it isn’t due soon, but it’s coming.
Property is inherently in disequilibrium, or in plain speak, supply and demand never match up. When the crash comes activity doesn’t slow down, it dies off almost entirely. Then, as the recovery comes about it takes years for the behemoth construction machine to start up again.
When it does it can’t stop easily — multi-year projects take time to deliver and time to complete. Hark back to the early 2000s and you’ll recall that we saw double-digit increases in prices in the late 1990s and, yet, we were undersupplied, then saw similar increases in the noughties but we were oversupplied with housing.
That’s why prices alone don’t explain the underlying currents, they just express the interaction of demand and supply. When supply is slow to create and bring on stream you still have a carried forward demand from previous years that is unmet. This is what drives the ‘piling in’ to the market.
In the hangover phase people will say “I just wanted a home” and you can’t blame them. The same damaging high rents that we have now and which will drive people to buy overpriced property existed the last time around.
What will happen next is that the nation will race to create supply. That is the right choice given the shortages, but there is no set of brakes big enough to stop it once all the cogs start to turn and that’s what will drive hyper-supply in the early 2020s and the crash that will ensue. Politicians say boom-bust is over. That’s true, but only until the next one.
The answer is to tax all land, to use some of this tax to build through good times and bad so that we always have adequate or even ‘oversupply’. This makes housing affordable, keeps us competitive and does more to de-risk the nation than any other policy. Lower income tax and higher asset tax is the answer, but nobody will countenance that, particularly in a country where we are all equal but landowners are more equal.