Back in late 1998, I was trying to buy a flat.  At the time, house prices had been rising for a couple of years as property emerged from the stagnation of the early 1990’s and there was lurid talk of the possibility of a house price crash.  This talk, ridiculous in retrospect, seemed all too reasonable when memories of the recent crash were fresh.  Now seems like a good time to reflect on property prices and their prospects for the future.

The word Crash, itself, is rather dramatic and serves to excite rather than inform but what exactly constitutes a Crash?  Official statistics show that house prices (based upon transactions) fell by about 10% during the last slump and rather more in real terms when the effect of inflation is taken into account.  Of course, at the margin, some people are very severely affected by this size of price drop.  It will hit those divorcing, downsizing or becoming unemployed especially hard but I challenge anyone to value their property within 10% of its true value.  So, if you do not know you have it, how will you miss it?

What it may do is stop us being overly optimistic about the value of our property.  Perfectly rational people seem to believe that property can increase in value by 20% every year.  We also tend to forget that the near tripling in values over the last ten years has not been a smooth rise, at all; I seem to remember 2003 as being a pretty poor year.

The property market was overdue some sort of shakeout and an injection of rational behaviour, although, I am not convinced it will get either of these, and some people will rue the day the bought, unfortunately.

Also, I have long been of the opinion that London had become under valued in relation to the rest of the country, to say nothing of the Spanish Costas.  This may come as a surprise to anyone familiar with the stratospheric prices in the Capital but I am convinced that London will rise relative to the provinces.  It may still fall but may do so by a smaller amount.

I am fascinated by the fact that the pecking order of London property values, as illustrated by the Monopoly board, has remained pretty much the same since the 1930’s, and probably for quite a bit longer than that.  If you had bought in Mayfair then, it would still not have been caught in value by Old Kent Road and its like, despite all the gentrification poorer areas have experienced.  The same goes for Britain as a whole.  Hull, where I am from, has probably always been cheaper than London.

If we believe that the past is indicative of the future then any deviation from trend will be reversed, a process statisticians call reversion to mean.  From time to time, there will be permanent changes in trends, the change in fortunes in the Twentieth Century of once wealthy ports such as Liverpool, for example.  These are so difficult to spot in advance that it hardly serves any practical purpose to try, but they do occur.

If, like me, you look to the past to help you divine the future, you can expect property in London not to drop or slow as much as the rest of the country and pick up more quickly when the recovery happens.

In any case, most of us will not be affected by any drop, we shall just have to get used to a change in our dinner discussions, by no means a bad thing.  If property drops by, say 25%, and inflation rises to 10%, then we would be in for some real pain.  If you believe that is likely, sell now and rent, preferable abroad.