Don't be too sure the property boom has ended

October 31, 2004
Reports of the end of the housing boom could prove premature because of an imminent change in rules governing how the £1,000 billion (or £1 trillion) in our pension funds is invested.

Bank and building society economists agree the house price boom is over and the only question now is whether we are heading for a soft landing or a crash.

But this consensus may prove mistaken because of a massive capital injection which could be triggered by Government proposals in the Pensions Bill.

From April 2006, pensions will be allowed to invest in residential property for the first time. To put that into perspective, if only one ten thousandth part of the money in our pension funds - or about £100 million - is switched into bricks and mortar, it would more than double the current annual investment in residential property.

Iain Oliver, head of pensions at Norwich Union, Britain's biggest insurer, said: "The main demand is likely to be from individuals with personal pensions who are looking for an alternative to share-based investment and who see this new opportunity as an extension of buy-to-let.

"But most of the money in pensions is held in company funds and, at this early stage, it is impossible to say to what extent they will take up the opportunity to invest in residential property."

Steve Bee, head of pensions at Scottish Life, was more forthright: "This will be the biggest change coming out of all the pensions legislation; people are interested in residential property and may even put more into their pensions to buy houses at knock-down prices. For example, after April 2006, higher rate taxpayers will be able to put £120,000 into their pension and use this money to buy a £200,000 property." Recent figures from the property market suggest prices may be falling before pension savers get the chance to switch out of shares and into bricks and mortar. Five quarter-point interest rate rises during the past year are beginning to make themselves felt.