Will the next financial crash kill my property portfolio?

Will the next financial crash kill my property portfolio?

There's always the fear that some major global financial crash will happen again, and in the minds of many would-be property investors and seasoned investors, are the questions around what might happen in the next financial disaster.

What's interesting here is that the last Global Financial Crash which started in 2007 and culminated in early 2009 has really left a big scar in a lot of people's mindsets. Note that this particular financial crash was one of the worst in a century and it was compounded by the fact the world is a far more interconnected global market place than the previous dot-com crash in 2000.

In order to try to understand the markets impact on house prices, let's look a few graphs which might illustrate a few ideas.

The chart below is the FTSE 100 stock market price against the house price index of average house prices across the UK.

FTSE vs HPI Graph

The graph starts in 1984 and charts 3 significant stock market crashes, but as you can see, their effect on the house price index might not be what you expected.

The first crash was in 1987, known as Black Monday and started in Hong Kong and rippled across the world. Even though it was a significant financial crash for the stock markets, you can see that it didn't affect the UK house price index at all. What's even more interesting is the period of house price growth afterwards up to 1989 and this could be a direct result of people's loss of trust in the stock market and choosing to invest in bricks and mortar instead.

The next crash happened in 1999 through to 2001 and is commonly known as the dot-com bubble. This particular crash happened as a direct result of the over enthusiastic piling in for stocks relating to the internet. It really didn't take long for people to realise that the over inflated valuations were worthless and just as soon as it spiked, it rapidly burst. What makes this crash particularly painful was the fact that as the markets started to recover in 2001, the unfortunate incident of 9/11 at the Twin Towers compounded the crash and sent the crash back into a downwards spiral.

Again when you look at the house price index on this, they were surprisingly unaffected again. Furthermore they actually continued to grow all the way to the 2008 financial crash.

We all know about the 2008 global financial crash, and it's pretty common knowledge that the cause of this was mainly due to various overvaluation of subprime lending plus questionable trading practices relating to the US and global housing bubble. In short, this crash was a direct result of too much cheap and highly geared lending to house buyers who could not afford to borrow the amount leant.

Because this crash was directly linked to the property industry, the knock on effect of this crash on the house price index was dramatic. You can see the house price graph downturn to match the stock market crash.

The latest crash which has primarily been focused in China has been slightly felt in the West, but the effects are yet uncertain. There could be a wider effect over the next 12 months since the crash happened as a result of China's economy slowing down.

Back to the question in hand

So I guess by now you might have guessed that the answer to the blog title is a firm and definite, MAYBE!

You see as far as I can tell researching all these stock market crashes is that if you continue to look back beyond 1984, you'll see that only the crashes which a directly linked to property will affect the house price index.

However, as most of you can see, house prices will still always go back up despite any economic crash. If another major crash did occur and it did impact the house price index, then all you have to do is to sit and wait a bit longer for it to regain its strength.

The reasons for this bullish outlook on the house price index is simple. It's a matter fact that the UK has not managed to keep pace with house building since WWII.

The demand for housing has outstripped supply year on year, and in more recent years, the government's building plans have faltered and they are not even getting close to their targets largely due to overly restrictive planning permission laws.

Simple market forces dictates that when there is much more demand than there is supply, then prices are always going to go up. In the UK we have a unique place in the world as well with London being one of the most desirable cities in the world. People immigrate here from across the planet and that also sends prices up across the UK. To top it all off, the UK is a tiny country land wise and the desire to protect the English countryside has also been a factor in preventing house building.

Overall if you are looking at a 25+ year portfolio, which most people should be, then no financial crash would harm the portfolio over the long run. You might need to refocus and change your strategy according to the financial climate and property cycle at the time, but you should still survive.

This means the game in property is all about understanding that these financial crashes do occur and you have to plan your portfolio and buying strategy accordingly.

2 Responses

  1. Hi Any chance of an update to the graph and article. It's difficult to find much info on the subject. thanks!
    • eddie
      What data are you looking to find?

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