Outlook brightens for property

A lot of water has flowed under the bridge since the capital profits made in the property market were the principal topics of dinner party conversations from Canary Wharf to John O'Groats. Bricks and mortar are no longer the best investments millions of aspiring capitalists have ever made. House prices are less volatile than share prices but houses have dropped in value or simply stagnated for six years now.

Since 1983 the FT-SE All Share index has climbed from the low 400s to 1,800, and even the Great Crash of 1987 - when share prices fell by 30 per cent in a matter of days - now looks less alarming in the context of the overall upward trend.

Meanwhile Halifax Building Society's index of UK house prices stood at 198.9 last month, down 15 per cent from the 1989 peak. Overall, prices have no more than doubled since the index was rebased in1983.

To put matters in perspective the retail price index has risen 72 per cent over the same period, which leaves property still out-performing the index since 1983. But it has been an investment disaster on a massive scale over the second half of the period.

Even that is an over-simplification, however, because the fall since 1989 was almost entirely concentrated in the period 1989-92. Since then price trends have been almost entirely flat.

The point has now been emphatically made that there is nothing magical about the property market that allows it to ignore the principles of value - actual and perceived - which underlie all other investments.

It therefore follows that house prices are as much a cyclical phenomenon as any other asset, and property can be under-valued as well as over-valued.

The price of property relative to national earnings has indeed fallen back from a peak of five times to little more than three times, which is right at the bottom end of the historical range.

The incipient recovery in property prices in 1993 was choked off by an upturn in interest rates, an increase in job insecurity and the rises in personal taxation announced in the budgets of 1993 and 1994.

But that setback strengthens the case for a modest recovery in housing turnover and property values in 1996 when the latest mortgage reductions take effect - and the tax cuts announced last month find their way into buyers' pockets.

The balance of supply and demand also favours a recovery in property prices. New house building is still depressed, construction costs have already been squeezed to the bone by recession, and it is visibly cheaper to buy accommodation of the same quality and location than it is to rent.

The experts are cautiously optimistic. Halifax, for example, is forecasting a modest 2 per cent rise in prices and a 10 per cent increase in turnover in the coming year. John Charcol, a leading firm of mortgage advisers, is expecting a 3 per cent rise in prices on an 8 per cent increase in turnover.

Not enough, perhaps, to start a buying boom - or even lift more than a handful out of negative equity. But 1996 could arguably be the best year since 1989 for bricks and mortar.