But the seeds of another crash have their origins in the failure to deal with the fraudulent financial system which led us into the last one. So, as bad as it has been since 2008, our economic day of reckoning has almost certainly been postponed rather than averted. When the next crash happens, it’s likely to be much worse.
Okay, so when it comes to economics, no one really knows for sure what’s going to happen. And, if you’re financially secure and you love your home and are intent on living there for the foreseeable, then falling house prices needn’t concern you.
But, if you are pondering a move, or if your house is as much an investment as it is a place to live, then I’ll get my disclaimer in now and say this article does not constitute financial advice blah de blah de blah, before suggesting that you should consider selling now while the government’s housing bubble inflation exercise is having the desired effect. Speak to your financial advisor, because selling once the bubble has burst could be a very painful exercise, indeed.
For what it’s worth, my own strategy is to sell and rent for a while to protect what equity I have – despite the fact that rents are at historic highs. In fact, I plan on renting for at least two years because I reckon the excess of rent over mortgage payments will be small beer compared with the loss of equity in my crash-devalued house. And, for me at least, the prospect of getting stuck in a negative equity trap simply doesn’t bear thinking about.
So what’s the reasoning behind fearing another crash? Well, here’s some context.
If we take total debt (that’s combined personal/household, non-financial business, financial/banking and government debt) as a proportion of GDP, then Britain is one of the most indebted nations on Earth. Since Margaret Thatcher’s financial sector deregulation during the Eighties – and continued by successive governments – Britons have withdrawn billions of pounds of equity from their properties.
Using property as a cash cow is a self-fuelling process: the mere fact that an asset class is appreciating in value increases demand for that asset, pushing its value up further, thereby creating more equity available for release. Knowing your property’s value is rising by £50,000 or more a year creates a sense of financial security that promotes further spending.
Thirty years later, and we’ve maxed out our mortgages and credit cards on the assumption that house prices will continue to rise beyond our ever-increasing debt. And, for the most part, it has, giving property speculation the shine of a safe bet. But though Britons are still sold on owning their own homes, affordability, or lack of it, is becoming an increasing drag.
Affordability isn’t an issue just because we’ve used debt to maintains sky-high prices. It’s also because our incomes have been falling relative to productivity over the last 15 years, and in real terms since the turn of the century. Labour’s falling share of income is, by definition, accompanied by greater income inequality. This suggests that an increasing number of people will face financial hardship, a squeeze compounded by the rising cost of living.
The result is that many of us are doggedly clinging to our rung on the property ladder, waiting for the good times to return. But even if green shoots started springing up tomorrow, so many households rely on the crash-induced, ultra-low interest rates for their financial survival that a return to growth could be quickly choked off.
The Bank of England base rate has been held at the historically low level of 0.5% for four years, but this will inevitably rise during any recovery, resulting in big hikes in mortgage payments that would push thousands of households over the edge. A flood of repossessions and forced sales would exert downward pressure on property values and, though there would be winners for sure, there would be plenty of losers. The net effect is likely to be depressed spending power and a financial sector with more holes in its balance sheet.
The great property equity release has, for 30 years, sustained the illusion of healthy economic growth. But the property market is ultimately tied to wider economic factors, such as investment, manufacturing, employment, productivity, the distribution of earnings and wealth, the balance of trade with the rest of the world, the strength of our currency … loads of stuff. And not much of that stuff looks particularly great at the moment.
In the 10 years to 2011, house prices rose three times faster than wages, with the average UK house price rising by 94% compared with a 29% increase in the average salary. In 2007, the UK property market was estimated by analysts to have become overvalued by as much as 35%. Quantitative easing (QE) – a policy device introduced in 2009 via which £375bn has been created out of thin air – together with near-zero interest rates, were designed to head off a severe market correction. UK house prices, on average, fell just 15% in what The Economist called the ‘Unfinished bust’.
This policy framework was also designed to recapitalise the banks and stimulate the economy via the ‘trickle-down effect’. But the banks have been unable or unwilling to load us with even more debt, setting in aspic an economy constrained by falling incomes, rising costs and limited availability of additional credit. Consequently, we’re still looking at a potential house price correction of 20%.
Help to Buy debt
So what has been the Coalition government’s solution to this conundrum? Well, more debt!
The first stage of the Help to Buy scheme, launched in the spring, involved providing £12bn in state guarantees to support £130bn of new mortgage lending. Not only does the scheme provide equity loans for the purchase of new homes, but it also allows people with small deposits to obtain a 95% mortgage.
So, in effect, the Coalition government has withdrawn £11bn of state benefits from people who depend on them to live and is effectively using that money to provide state-backed mortgages to people who cannot otherwise afford to help re-stoke the property-speculation frenzy.
And it’s working. In October, gross mortgage lending was up 32% on the same month last year, with the Council of Mortgage Lenders saying that advances had reached pre-crash levels. House price inflation is now running at 7.7%, nearly ten times the pace of average earnings growth. House sale volumes have reached a five-and-a-half year high.
Those in the market seem clear as to what has caused this mini boom. Halifax housing economist Martin Ellis, for instance, was quoted in the Telegraph as saying: “Stronger demand, combined with an insufficient increase in housing supply, has resulted in increases in house prices accompanying higher activity this year.
“Low interest rates, improvements in consumer confidence and official schemes, such as Funding for Lending and Help to Buy (HTB), all appear to have boosted demand.” However, the Halifax has suggested that the squeeze on household finances will restrain further rises.
Doubts that Help to Buy is a responsible policy have been voiced by a wide range of economists from the outset. These include financial counsellor to the IMF, José Viñals, who said the scheme would hike up prices and saddle borrowers with unsustainable debts. Then there’s the Royal Institution of Chartered Surveyors (RICS), which feared that HTB would “create another housing bubble – pushing prices up at the expense of buyers”. Indeed, in September, RICS argued that house price rises should be capped at 5% to avoid a dangerous bubble, and that mortgage lending should be made scarcer and more expensive.
Help to binge
Commentator Jeff Randall said that the scheme may help to buy the Conservative Party votes at the next general election, but is destined to “end in tears”. Even members of the Coalition government – notably business secretary Vince Cable – and organisations with an interest in the property market have warned of a dangerous housing bubble. Among them are Ian Gordon at City analysts Investec Securities, who branded HTB as “Help to Binge”.
But perhaps one of the most damning assessments came from former Bank of England policymaker Adam Posen, who warned last month that the spiralling property market risks causing a Sterling crisis. “I definitely see the potential,” he told Bloomberg Television’s The Pulse.
Posen, now president of the Peterson Institute for International Economics in Washington, went on to tell Bloomberg that the UK’s growth spurt is unsustainable, with economic fundamentals accounting for around just 1 to 1.5%. “The rest of it [is] bubble,” he said.
Help to Sell
Though Bank of England governor Mark Carney has no power to stop Help to Buy, he was able to confirm on November 28 that the Funding for Lending scheme would be refocused away from mortgages towards support for small businesses. There is no such move on Help to Buy, though, which is now in its second phase.
So, if you want to take advantage of our currently-inflated property prices, I’d consider selling now. Though prices are still rising, there are no guarantees how long this will continue. And this is precisely why selling now is, in my humble opinion, the sensible option. Cash in while you still can.
But don’t take my word for it. Speak to your financial advisor first.