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House price monster on the loose again?

Rejoice, rejoice – house prices are rising once again. The market has recovered, confidence, has returned, and there is light at the end of the property tunnel – or so we’re told by the economic cheerleaders who believe house price inflation is wonderful. It isn’t. The rise in house prices is extremely bad news – not just for the millions who are locked out of home ownership, but for the economy as a whole.

It’s incredibly how short peoples’ memories are. We were supposed to have learned a grim lesson last year – that we couldn’t continue to live beyond our means, taking on debts we couldn’t afford. Housing is for nesting not investing, we were told,. Everyone accepted that the UK economy had been deformed by the relentless rise in house prices which underpinned the credit bubble that finally burst in 2007.

The collapse started in the sub-prime property market in the United States, but the same phenomenon existed here also. Bradford and Bingley, Northern Rock and HBOS collapsed because they had lent too much on the basis of inflated property values. Those 125% mortgages, buy to let schemes, micro-loft developments in city centres all pushed property values to excessive multiples of earnings, creating an unstable pyramid of debt.

But now it seems to be happening all over again. It almost defies reason. In the middle of the worst recession since the 1940s, and with unemployment climbing towards 3 million, house prices have just registered their biggest increase in five years. In Edinburgh, which is leading the ‘recovery’ in Scotland August house prices are 6% up on last year. The average cost of a home in the capital – which means a two bedroom flat – is back to nearly £220,000 in a City where average earnings are only around £23,000. House prices at nearly ten times earnings are economic insanity.

How can this be? History tells us that house prices fall when credit is tight, the economy is in recession and unemployment is rising. All the economic forecasters were saying that house prices would continue to fall this year by about 10%. To get down to historic multiples of earnings, UK prices should have another 20% to drop. Yet here we are with house price rising faster than they were at the very top of the market two years ago. Natiowide has even announced the return of the 125% mortgage

What seems to be happening is this. First of all, the collapse of the value of the pound meant that UK property prices for foreign buyers dropped, not by 20% but by nearer 40%. This made big houses in London look cheap to foreign investors. Also, the City of London has been paying itself mega salaries again. This has ignited a mini boom in houses worth over one million pounds, sales of whhich rose by 234% in August.

The freeze on stamp duty hasn’t done a great deal to help first time buyers, but the cuts in interest rates have been an enormous boost to the relatively well off. Anyone owning a large home with a large mortgage has been handed a windfall worth hundreds of pounds a month. This has encouraged a number of people to trade up while prices were down. There’s also been a bounce in the sales of flats to cash buyers as people look to find areas to invest in, now that cash is earning practically nothing if left on deposit. The bank of mum and dad has been helping younger families pay their deposits.

The banks are not repossessing homes in the way they did in previous recessions and are allowing people in arrears to defer paying their mounting debt. The final factor is the chronic housing shortage. We’re building fewer homes than ever, and the number of housing starts in Scotland fell this year by 26%. Scarcity means people bid up the prices of the homes that are available. This doesn’t of course mean that the housing market has recovered to normal volumes. Far from it. Fewer than half as many houses were sold in August compared with two years ago. This is because first time buyers are still locked out of the market if they can’t raise the 25% deposit demanded by the banks which are actually tightening credit right now.

But where is the Bank of England? Surely, if another bubble is brewing, it should be raising interest rates. Where is the FSA?The government has repeatedly said that it wants avoid any return to the property based credit bubble . But the governor of the Bank, Mervyn King, is holding rates at their lowest level in 300 years and continuing to print money through quantitative easing. This cash has to go somewhere, and since there is no incentive to save, a lot of it is finding its way into property.

But if this is allowed to go on, then we are simply preparing the ground for the next bubble and the next bust. We desperately need to create a savings culture in this country, not another round of mega debt – which is what high house prices inevitably lead to. The government appears to believe that a return to house price inflation will please the voters, but a large number of them are young families who can’t afford to buy a house. The average age of the first time buyer is approaching 40.

The government also hopes the high streets will start booming again as people borrow against the rising values of their homes, just as they did in the years until 2007. But housing wealth is an illusion, borne of scarcity. It distorts the economy by diverting investment into speculation instead of into making things and adding value. Worse, high house prices actually depress consumer demand because families are forced to spend their disposable income on rent and mortgages rather than on goods in the shops.

It is desperately worrying that no one seems to be pointing this out. The silence from the politicians and regulators has been deafening. The media coverage is uniformly inflationary, celebrating high house prices when we should be demanding that the regulators do something to prevent another bubble mentality forming. We need a crash building programme, more social housing for rent, a curb on tax incentives to buy-to-let, a reversal of the cut in capital gains tax, restrictions on earnings multiples. The beast must not be let loose again.

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About iain2macwhirter

Writer and journalist.

Discussion

5 thoughts on “House price monster on the loose again?

  1. We all live 'short-term' these days Iain. No one cares about the rainy days to come- certainly not Governments, who live from election to election (or headline to headline in the case of this lot.) Certainly not the establishment classes who hoover up wealth in the 'good' times and who are barely touched by recession. They all reside a long way behind the economic front line – that's how it's meant to work.Establishments need turned over every now and then Iain. Once they are 'dug-in', and the UK one is as entrenched as they come (always open to 'new' money though), they become utterly divorced from the economic, social and cultural context that most of us live in.We need a new country, a new establishment created in the full glare of the 21st century.Let's call it Scotland.

    Posted by voiceofourown | September 5, 2009, 7:00 pm
  2. "Let's call it Scotland."I'm not keen on Scotland…how about Jobbieland?

    Posted by Anonymous | September 5, 2009, 7:12 pm
  3. JobbieLand, SweatySockLand, ChippyLand, DeepFriedMarsBarLand – whatever blows your kilt up!When do we start?

    Posted by voiceofourown | September 5, 2009, 7:52 pm
  4. What a lot of solid common sense you talk, and write, Iain.I'm totally incredulous at people welcoming the return of the house price boom. It's what caused the current problems.Despite what Brown said, the French and Germans are weathering this much better because of their lack of personal debt….fewer mortgages and very small credit card debt.They also seem to have the common sense to see that houses are there to live in. That anyone in their right mind would consider a modern-build house as anything other than a very short term investment is beyond belief.Most of them will be piles of rubble in 60 years.

    Posted by tris | September 5, 2009, 9:24 pm
  5. Yeah I agree. House prices of all real estate markets around the world have reached to their minimum level in last three years. So this is really a matter of concern for real estate experts and agents. But, as far as I know this trend might continue till end of this year.

    Posted by Highest CD Rates | September 28, 2009, 8:52 pm

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