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Is your property safe as houses? Maybe not ...

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By Ben Lowry
Thursday Jun 7 2007

You can't go wrong with property - so believes a generation of home owners in Northern Ireland who have only seen gains.

Well, you can go wrong - in deed disastrously.

Consider Tokyo in 1991, where the average cost of a 750-sq ft condominium was 70m yen, about £300,000.

Today, 16 years later, such an apartment will sell for 40m yen (about £170,000), a drop of 45%.

As any recent househunter will know, £300,000 now only buys a fairly modest house in Belfast.

If you purchased such a property today, and then there was a slump of Japanese proportions, you would later have to slash the price to sell it - and not to £260,000 in two years, but to £170,000, even if you waited until 2023. The comparison sounds extreme, given that Japan - unlike Britain and Ireland - has had severe economic problems, but there is a key parallel.

Japanese property prices were around ten times average incomes before they burst, the sort of ratio we are nudging in Northern Ireland (where house prices are now above the UK norm while average incomes remain below).

Consider even the milder house price slump in Britain in the early 1990s. In the final quarter of 1988 an average property in London cost £105,000, according to the Halifax House Price Index. That figure slid relentlessly downwards over the next seven years, bottoming out at £76,500 in late 1995 - a 27% drop.

It was mid 1998 before a buyer who had purchased at the peak in London got back their money - ten long years. If you adjust for inflation, it took even longer – until mid 2001.

Despite such evidence that housing booms often end in bust, many young people scrambling to get on to the property ladder are being told - often by their elders - that the worst that can happen to house prices is a " soft landing", or a period of stagnation.

It is true there has never been a major downturn in prices here, but until now there has never been a major boom.

Now the boom is so spectacular that last year Northern Ireland grew faster than anywhere in Europe. Recent quarterly rises have been the highest seen in the UK since either Halifax or Nationwide began records.

In such exceptional circumstances, it is worth remembering the legal principle of "caveat emptor" - let the buyer beware.

Applied to a buyer who is about to borrow six times their salary, a useful test might be: could you cope if there was a collapse?

Some people will answer yes, because they expect their income to rise.

Others are buying a dream house that they will be happy to live in for many years.

But anyone who could not bear such a prospect should pause before exchanging contracts.

Investors are said to be no longer buying in Northern Ireland, but what about the investors that already own? Many have bought £200,000 apartments that rent out for £400 a month.

Unless they have put down a deposit of 70%, they are running the flat at a month-to-month loss on the assumption of capital gains. If, in the absence of such gains, those investors flood the market with houses, prices will fall.

Also, if interest rates hit 6% in the coming months, that will be a 0.75% rise since April. For a household with a 90% interest-only mortgage on an average Northern Ireland house price of £210,000, that is a £1,400 a year increase. Add in possible water charges in future years, and higher rates bills, and the increase in annual outlay could top £2,000.

Furthermore, housing supply is increasing in Northern Ireland - albeit gradually. Thousands of bungalows that were processed before the PPS 14 ban are yet to be built. Huge apartment complexes, such as those in the Titanic Quarter, are also going to construction.

The Regional Development Strategy is trying to encourage more than 210,000 new homes across the province over the next decade.

These factors lead many pundits to believe that it is only a question of when house prices fall in Northern Ireland, not if.

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