Another week and another raft of house-price data. Everyone now agrees that prices are going up. What they don’t agree on is by exactly how much – and whether it’s a problem.
There is excited talk in some quarters about a boom and risks of overheating. George Osborne was accused by MPs on Thursday of implementing policies which were “inflating another bubble”. Naturally he dismissed such fears. Other, less partisan, commentators agree with him: they say rising prices (which in any case lag well behind inflation) are nothing sinister, just a normal sign of confidence returning in the wider economy.
Trevor Greetham, who is responsible for asset allocation at fund group Fidelity and is a widely-followed commentator, was among those flagging a warning. “You might well ask how a recovery based on pushing house prices even higher is going to create sustainable growth,” he said, adding a “housing-led recovery” was Britain reverting to “pre-bubble form”. Current policies will spell a weak pound, he said, coupled with a wage squeeze for lower earners and “a period of chronic overvaluation in housing.”
That last point is chilling, because it touches keenly on most families’ wealth. If you share Greetham’s view and are already a property owner it is clear what to do to limit risk: pay down associated housing debt and build non-property assets like equities.
But what about your children?
Do you want them mortgaged up to the hilt buying something your gut tells you is already ridiculously overvalued (and the big mortgages enabling them to do this, by the way, are back)? Absolutely not.
But then, my God, consider an alternative scenario: house prices soar on and on, meaning your children won’t be able to own even a shoebox in hell, and instead must spend their lifetime – and a fortune – renting the shoebox from a landlord. Which is worse?
It’s a dilemma, but there are some practical solutions.
One is to delay buying and instead to invest in a vehicle that mirrors house-price growth. Castle Trust, for instance, is a new company offering accounts where returns are promised to exceed average property inflation because they are calculated as multiples of the Halifax House Price Index. For instance, a three-year investment pays 1.25 times the index’s rise; the ten-year deal pays 1.7 times.
These proxy-property investments are not perfect. They pose institutional risk and their terms are inflexible. There is also downside if the index falls, albeit limited. But they do offer protection from house price inflation and, also hugely useful, they allow the buying decision to be deferred, perhaps to a later period when risks clarify or other factors – marriage, children – tip the balance.
Another possible solution is for parents to release equity from their own homes through some form of mortgage.
This might sound extreme and unappealing. In fact it is already a noticeable trend, according to specialist adviser Key Retirement Solutions, and one which is taking hold. KRS, which regularly polls its client base, says it is like an “accelerated form of bequest, made while parents are still living.” In other words, with today’s elderly dying in their 90s instead of their 70s, they part with a chunk of their estate “ahead of time”.
In theory, at least, the notion of older generations borrowing more in order for younger generations to borrow less makes sense. The parents give up some of the capital gains they have made through owning property over the years, and share some of the risk their offspring must now take on as they in turn buy their home.
In practice, however, as with so much in our personal finances, these decisions are difficult and wrapped up in emotion.