uk housing prices - anything sound familiar?

Housing boom backlash set as borrowers build on sand

Iain Macwhirter June 16 2004

Watching the current house price boom is like watching a disaster movie. You can see exactly what is going to happen, but no-one seems to be able to do anything about it. The only difference is that this catastrophe is for real. It is a kind of collective delusion. People are behaving as if house prices can only go up, even though they know this is impossible. House prices do and must fall. It is only a matter of when.
The governor of the Bank of England, Mervyn King, told a Scottish CBI dinner that house prices are now, "well above what most people would regard as sustainable in the longer term." For a governor who isn't supposed to comment on markets at all that is tantamount to saying: run for your life!
But why did King choose Scotland to deliver this stark warning? History – or rather the lack of it. Scotland has no folk memory of negative equity. There was no collapse in house prices in Scotland when the last boom burst in 1990.
In those days, Scots behaved with instinctive prudence when it came to questions of debt. It was part of our culture. Scots did not, on the whole, use their homes for speculation. They regarded them as places to live in rather than investments and pension funds.
Moreover, 15 years ago, more than half of Scotland's houses were council- owned, and most people rented. Council housing is now largely a thing of the past, and most Scots now own their homes. Nothing wrong with that, of course – home ownership is here to stay. But it means Scots are peculiarly vulnerable to any serious correction in house prices. We don't know what it's like because we've never experienced it before.
What must worry King is the possibility that SNP or other politicians will try to claim that the impending housing misery in Scotland is the fault of London insensitivity. That the bank's current policy of interest rate increases – two in successive months – is to blame for any collapse. King is trying to get his retaliation in first. He is making it as clear as possible that the market is unstable and that people should stop paying unrealistic prices for Scottish properties. You have been warned.
As it happens, I moved to London from Glasgow in 1990, just as the boom turned to bust in the South-east. It was an extraordinary shock for the entire region. The local media were saturated with the anguish of families trapped with crippling mortgage payments for houses which they could no longer sell.
It became common for people, in desperation, to stuff house keys through the doors of mortgage companies and do a runner. But that was no escape. The mortgage companies simply sold the houses at rock-bottom prices at auction and then pursued the former householders for the balance of their loan. People were stuck for years making mortgage payments for houses they no longer owned.
It seems incredible that we are right back where we started, but memories are short. House prices have been rising now for 10 years. The total value of Britain's housing has tripled in that time, from just over one trillion to more than three trillion pounds. It looks like money for nothing. People think they have found the magic answer to ever-rising wealth – not from hard work, but just from sitting on their sofas.
The entire economy is being kept afloat by this funny money. Families have taken to financing their spending by remortgaging and "equity withdrawal" – borrowing on the inflated value of their homes. Last year equity withdrawal in Britain amounted to £52bn – nearly 10% of all consumer spending. An increasing number have been putting this speculative cash into buy-to-let schemes in the hope of multiplying their capital gains while pocketing the rent of tenants.
As pension funds, endowment policies and unit trusts have turned to dust as a result of mis-selling, high charges and the stock market crash, people have increasingly looked to their houses to provide for their future. But they are building on sand.
So when the fall happens, how much are prices likely to drop? Well, house prices in Scotland are rising on average at around 20% a year. In Edinburgh they have doubled in the past four years alone. According to Nationwide, the average house is rising in value by £24,000 a year – which is not far short of the average wage in Scotland. If that goes into reverse, even for a few years, the effect would be shattering.
In December 2000, the FTSE share price bubble peaked at just under 7000. By 2003 it had slumped by half. The housing downturn could be less than that, or more. But one thing is certain: the longer the boom goes on, the more painful will be the adjustment. Of course, the advice of mortgage brokers, estate agents and banks is not to worry. That people nowadays can sustain higher and higher debts because interest rates are so low. Mind you, they would say that wouldn't they? Most of the reassuring voices on the media on house prices come from interested parties – financial institutions and mortgage brokers who have a vested interest in maintaining the debt/mortgage boom which has driven personal indebtedness in Britain to one trillion pounds. They are often the same people who advised everyone to keep piling cash into the stock market in the 1990s, convinced that the FTSE would go on rising for ever and ever. A "new paradigm" they called it.
The truth is that, if you take inflation into account, interest rates of 5.5% – which is what they are expected to reach this winter – are not that different from the early 1990s. And without inflation eroding the value of mortgage loans, it's going to be very much harder for people to get out from under the burden of the huge debts they are currently taking on to get "on the property ladder".
Except that, increasingly, they aren't. Indeed, the starkest indication of impending crisis is the fact that the first-time buyer – the feed-stock of the housing market – is becoming an endangered species. The percentage of house sales to first-time buyers has dropped below 30% – the lowest ever level. The housing market is like a pyramid selling scheme which has just realised that it has no visible means of support.
So is Gordon Brown worried? Won't people blame the government if their houses collapse in value? Well, possibly. But the chancellor has seen this coming a long way off. He is confident that the crunch will not come until after next year's election. And anyway, didn't he make the Bank of England independent so that interest rate policy would be taken out of political hands? If mortgages become too expensive, he can simply point the finger at the bank. Which might explain why Mr King is sounding a little desperate right now.

Read Iain Macwhirter also in the Sunday Herald.