Negative equity. It's not something we have been hearing much about since 2008, when UK property prices started falling. Prompt action by the Bank of England and the government halted the crash in real estate prices. But the underlying problem is as serious now as before: British house prices are just too high. First time buyers are having to save more than year's salary to buy a home, at a time when wages and salaries are falling in real terms and inflation is rising fast. 2011 is the year the roof falls in.
House prices are falling again. Good. Property values are forecast to fall in the UK by 20% over two years. Excellent news. Mortgage lending in Scotland is now half the level of 2007 - not surprising. A record number of people are renting property. About time. No - this is not the kind of article you normally read about house prices. The default position of the UK media is: rising house prices good; falling house prices bad.
When you think about it, though, this is perverse. You don’t see headlines celebrating increases in petrol prices, cars or the cost of garden sheds. At a time of mounting inflation, surely we should be glad that the price of such an essential commodity as a home is falling. It means that there is hope that, soon, the 140,000 people in Scotland who are locked out of the housing market might be able to afford to buy homes without taking on huge debts.
Property is a black hole into which is pouring the economic lifeblood of everyone under the age of 37 - that being the average age of a first time buyer in Scotland. Rents have been rising as houses become increasingly unaffordable. According to to the Scottish Council for Mortgage Lenders, first time buyers in Scotland now have to raise £27,000 to buy their first home. This is clearly unsustainable in a country where average earnings are only around £26,000.
I’ve always had a suspicion that our obsession with property -(Daily Mail: “End of World Nigh - what does it mean for house prices?”) is because many journalists have invested heavily in property over the years and feel uncomfortable when values decline. Well, get ready for media misery because there are signs that the Great Correction that should have happened in 2008 is now upon us. Sales in Scotland are down by half on 2007 and total bank lending is down from £3bn to £1.5bn as banks choke off credit. I know this is tough on people who have recently bought houses - myself included. But really, we have had enough time to get our finances in order. Only a fool could have believed that there would be a return to the price rises of 2005-7.
The Great Correction actually began in 2008, as the banks went bust one by one. This was because irresponsible mortgage lenders like Northern Rock had created un unsustainable property bubble by selling 125% mortgages - which left borrowers in negative equity even before they moved in. The madness could not continue, and Northern Rock was, unsurprisingly, the first to go - but all the banks had overlent massively and all were in trouble. Hence the trillion pound government rescue.
The Bank of England could see what was coming: house prices had started to fall in America in the autumn of 2006 and were plummeting (they are still falling to this day ) so it cut interest rates to the lowest level in the history - 0.5% and kept them there. The government also introduced schemes to help people who lost their jobs remain in their homes by freezing their mortgages for two years, and it took a lot of the dud mortgages off the banks’ books so that they could keep lending - a bit. This more or less halted the crash in 2009.
Then, as the pound fell in 2010, foreign buyers swept into cities like Edinburgh and London snapping up bargains. Bankers with bonuses joined them, and there has actually been a bit of a property boom in London at the top end of the market. Overall, house prices rose slightly in 2010 - though with the volume of sales much reduced. The headlines were the ones the government wanted: home repossessions did not rise as much as expected and millions of people were not plunged into negative equity, with their homes are worth less than their mortgages.
But this couldn’t last. Analysts like Capital Economics believe house prices are still 20% too high. The banks fear they’re correct, which is why they are demanding such large deposits - at least 20% . But as this freezes out buyers, the result can only be pressure on prices. A market that had been kept going by government subsidies, low interest rates, foreign buyers and the bank of mum and dad is not one that could continue without a correction. Interest rates are almost certain go up this year, and this will plunge the housing market into a double dip.
This, as I say, is a good thing for society. We need to abandon our obsession with property and remember that houses are for living in, not speculating on. However, there is one caveat. Another property slump would reveal the extent to which the banks are still sitting on bad debts. Their bonds would become worthless again. And this time, the government can’t come to the rescue because of spending cuts. Wages are falling in real terms across the board in Britain, and the country appears to be slipping back into recession. This could cause a vicious spiral.
But there was never any sound reason why British houses were the most expensive in Europe - or America, where house prices have fallen by 35% since 2006. House prices have been overvalued for years because of easy credit that will never come again. So, hang on to your gables because houses are about to experience the effects of gravity