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
13 comments:
easy credit that will never come again...........
yep! Iain knows NOTHING NOTHING about history or people.
There will be another Boom and another bust again and again and again.
abandon our obsession with property
says Iain mind he has got one
Good article - enjoyed reading it on Sunday. Currently involved with housing research and it's true that price to income ratios had reached unsustainable levels - average prices 8 times income across UK - a level never before reached since the advent of mass home ownership in the 1930's.
With significant job losses, public sector spending cuts and shifts in global economic strength there are no grounds for recovery of house prices any time soon and new approaches to developing places where people live as opposed to houses as aspirational products will have to be brought forward.
I'm 28 and currently in a job that pays about £10,000 less than I was making a year ago (I was made redundant as a direct result of the Coalition - job losses were announced at my company two days after the first Osbourne budget). I can barely afford to pay rent, never mind the ridiculous notion of owning a property. 37? How can people pay off their mortgages before they retire if they're not buying their first home until they're 37? Besides, I feel like I'm in a minority amongst people I know as many of them bought their first flat in their mid 20s, so there must be an awful lot of people not buying until much older than 37, which makes the idea of paying off a mortgage even more laughable.
It doesn't help that people go buying up properties as holiday homes, or as "investments". One of my main grievances is people buying flats for their child to stay in at university, and then handing them the flat permanently afterwards. I can't help feeling that if you have enough money to do that, then you have too much money - perhaps in some cases, mortgages aren't high enough! These things are all helping drive the cost of homes up. I feel like more should be getting done to discourage people from becoming multiple home owners, to allow others a chance to get their own place.
Personally, I've given up any notions of owning a home. Why is it so important to buy a home anyway? You spend your life earning a wage just to hand most of it over to the bank, then you either sell your house to pay for nursing home fees, or you die and the house gets sold and the proceeds split between your children, who presumably already own their own houses anyway. The only advantage seems to be slightly more security than renting a home, but one could also say it restricts you, whereas renters can up and move fairly easily.
The problem is that - particularly for the middle classes - nobody even questions the idea of owning a home. It's taken for granted, just like everything else in life: go to university, get the highest paid job you can get (rather than the most fulfilling), buy a flat, get married, have children, sell your two flats and buy a house. How dull and predictable. Or maybe this coalition has just sapped all the life out of me?
I like reading Iain's blogs but on this one he is talking through a hole in the roof of his own (probably) matured house investment!
As sure as night follows day the high prices will return on the next cycle so those not ready for that wave will lose out badly.
It must be 'back to the future'. We didn't have this problem when house purchase and sales was largely the preserve of the Building Societies - ten per-cent deposit and twenty-five years to pay off the balance.
It worked for a hundred years. House price inflation largely mirrored the overall inflation in the economy. And as personal wealth increased more of us were able to enter the market.
That is until Maggie Thatcher put paid to social house building and let the carpet-baggers loose.
Before long the ethos that spawned the formation of the early Building Societies disappeared as one after the other was turned into a bank.
Enter Chancellor Gordon Brown. His light touch regulation allowed the Banks to literally create their own money. The inevitable has happened.
In a letter to the Guardian in 2004 I registered my concern that, between them, the banks and the construction industry had a mutual interest in 'inflating' the price of houses.
It cannot have been coincidental that the share price of the top house builder at the time rose nearly tenfold in the good times still remaining.
The message is quite clear 'housing is too important to be left purely to the market and the banks'.
Anonymous 2 wrote:
""It must be 'back to the future'. We didn't have this problem when house purchase and sales was largely the preserve of the Building Societies - ten per-cent deposit and twenty-five years to pay off the balance.""
Unfortunately not quite true. Throughout the 1970s we had a 'feast and famine' situation where house lending was concerned and we also had house price bubbles.
As to Council housing at least the Scottish Government has made efforts to redress the almost toatl absence of council house building since the 1980s.
Firstly by funding the building of council houses in partneship with local councils throughout Scotland.
Secondly by getting legislation through the Scottish Parliament to ensure that the 'right to buy' does not apply to new build council houses thus making sure that they are available for subsequent tenants.
This is a great story about living I would be totally intimidated trying to bargain like that. I had say you did quite well and what a fabulous old rug you have purchased.
if you have lots money to can do that, then you have too much money - perhaps in some cases, mortgages aren't high enough! These things are all helping drive the cost of homes up.
One of my main grievances is people buying flats for their child to stay in at university, and then handing them the flat permanently afterwards. I can't help feeling that if you have enough money to do that, then you have too much money - perhaps in some cases, mortgages aren't high enough!
Hi;
I read you blog and i conclude that
""If you insist on delaying the sale of your current home until you put a contract on a new one, then you’ll face the very real possibility of carrying house payments on two mortgaged properties at the same time. This is a situation that should be avoided at all costs in this market"".
Think we have heard an awful lot about negative equity in the last few years as more and more people find their houses are worth less and less.
new homes in Scotland for sale.
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Thanks, I'll certainly follow your advice. Buying a house is a serious decision. This is a very nice writing piece. Well... I have many other tasks to complete, so time is of the essence. The language editing services - edit-ing.services will be of use:)
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