A lot of people are saying that property is in a bubble. Prices are unsustainable. They have to come down. Even if they don't come down, they can't keep growing at their current rate. Is that true? Well, no one can see the future. Maybe it is. But I think there is something really important that these people are missing. And that is what I'm going to explain in this video. So our property price is running so far ahead that they have to come back down to earth. Let's have a look at what happened in the last property crash in the run up to 2008. So if you take the five years leading up to 2008, property prices grew by an average of 9.8% per year, which is a lot that is nearly 50% growth just during those five years. But by some measures, property prices are increasing by more than that right now. Property prices are growing by anything from 8% to more than 10% depending on which data source you look at. So on that basis, is that an unsustainable pace of growth? Well, not necessarily because there is something very different now compared to the run up to 2008. And that is inflation. So in those five years in the run up to 2008, inflation was averaging less than 2% per year. So total inflation over those five years was less than 10%. So that means that the real growth in property prices per year, so that is the total growth in property prices minus inflation was about 8%. 8% a year. Today though, property prices are growing by, say, 8%. And inflation is also somewhere around 8%. So real growth in property prices is zero. This is the mistake that most people make. They're thinking in nominal terms, as in the amount of pounds, rather than real terms after inflation. If property prices are racing ahead in real terms, then yes, that's a limit to how far they can go, because they will rise faster than people's wages and therefore people's ability to get mortgages against these properties and faster than their ability to raise deposits to buy these properties. So if they go too far ahead, they have to fall back. But if they're growing in nominal terms, but they're not growing in real terms, in other words, after adjusting for inflation, they're not really growing at all, then that limit isn't there. In that sense, property prices aren't doing anything that remarkable. They're just going up at the same speed as your grocery shop and pretty much everything else. It's interesting to go back and look at their 1970s and see what happened there, because that's the last time that we had particularly high inflation like we do today. So if you look at property prices in the 70s, between 1971 and 1975, they doubled. That's a growth rate of 20% per year, or just under. And that's crazy, right? That seems like there's no way that can be sustained. They have to crash after rising that fast. Well, they didn't. Why? Because inflation was also particularly high. So they were growing faster than inflation over that period, but only by a little bit. So far from crashing afterwards, they actually almost doubled again in the following five years. The important thing to take into account here is wages, because it's wages that ultimately drive people's ability to pay a certain amount of money for housing. The same also goes for people's ability to pay rents, which is what underpins investment demand. And that's what we're looking at now. If somebody gets a pay rise of £5,000, that doesn't mean that they can afford to pay £5,000 more for a home. It actually means they can afford to pay £20,000 more for a home if they're borrowing a four times multiple of their wages. Now of course, that doesn't take deposits into account. People need to be able to raise it a deposit to go and buy a home. And that'll be increasing as well if property prices are growing. But household cash balances are much higher than they usually are as well, because of COVID. People not having much to spend money on for a couple of years. So is there wage growth now? Well, yes. According to data from the Office for National Statistics, between February and April 2022, real total pay, including bonuses and after taking inflation into account, grew by 0.4%. So wages are rising slightly faster than inflation. That gives them the ability to get a higher mortgage, which supports higher house prices. It also suggests that inflation is going to be more sticky than people think it is. It's not just the case that it's all because of supply chains and COVID and stuff like that, and it'll all sort itself out. Wages are responding. People are noticing that inflation is high. They are demanding higher wages, and also because unemployment is so low at the moment, they're in a very strong position to demand higher wages. That in itself generates further inflation, because companies are forced to put their prices up, because their costs have got higher, because they're paying their employees more, and that you can see how a bit of a cycle develops. So that to me suggests that inflation is going to be sticking around for a lot longer than the media and the bank of England, and most people say it will be. And if inflation remains high, then again, that means that property prices have the ability to keep on growing. That doesn't necessarily mean that they will keep on growing. It doesn't mean that they are going to keep growing at the pace they have. This is not a prediction saying that the rate of growth we've got now is going to persist for X number of years. I'm not saying that. I'm just explaining that it's very easy to look at property prices that are going up by 8% plus per year and go, oh, this is a bubble, this can't continue. Missing the fact that if you look at what they're doing after inflation, property prices aren't actually doing anything special at all. I hope you've enjoyed this video. If you did, give it a like to make it easier for other people to find, and you're sure you'd like the property podcast as well. There's a new episode every week. We talk about subjects just like this one. And you'll find a link to subscribe in the description below.