The property market might be a pyramid scheme

The UK property market has often been referred to as a Ponzi scheme, where investors rely on continuously rising house prices to generate returns. This model is now facing challenges as affordability becomes a growing concern.

Many property investors and speculators have been promoting schemes that promise “financial freedom within three months” or “thousands or even tens of thousands without even owning a property.” While these may not be outright fraudulent, they have similarities to classic Ponzi schemes, where returns are generated by using new investors’ money to pay off earlier investors.

The UK property market’s reliance on government stimulus, such as Help to Buy schemes and low interest rates, has artificially inflated house prices to unaffordable levels for many. As these supports are withdrawn, house prices are starting to come down in real terms, while wages are slowly rising. This is squeezing the profitability of property investment strategies that depend on continuous price appreciation.

Certain groups have benefited disproportionately from rising house prices. The government, for example, includes an “imputed rent” measure in its GDP calculations, which is based on property values. This has artificially inflated the UK’s economic performance data.

Landlords and property investors are now finding that without strong nominal and real house price growth, their investments no longer make financial sense. Some prominent property “influencers” have been promoting the idea of a new house price boom, encouraging people to invest quickly before they “miss out.” However, as the property price balloon begins to deflate, these claims appear increasingly questionable.

The cooling of the UK property market may actually benefit estate agents in the long run, as more affordable prices enable greater transaction volumes, despite potential challenges with instruction volumes. Industry reports have already revised down their house price growth forecasts since the recent budget.

Overall, the end of the property Ponzi scheme, driven by excessive speculation and government stimulus, could have far-reaching implications for the UK economy and housing market. A gradual, controlled decline in prices may be a healthier outcome than a sudden crash, but it remains to be seen how this transition will unfold.