We have a fatal flaw in the way our housing market is run at present and it is the very same flaw that was instrumental in bringing down the Spanish housing market last year.
During the boom phase of their housing economy, and following the application of more government stimulus after the 2007 crash, it become clear that the house prices still being obtained were not, if fact, genuine market prices but were ones being orchestrated by the larger chains of estate agents, owned predominantly by the banks themselves.
Since those banks were the same banks that were exposing themselves to too much risk, when making loans and mortgages, the estate agents clearly had a conflict of interest. Why didn’t they do anything about it?
They didn’t do anything about it because on the one hand, the banks wanted to keep making loans and charge interest in return for doing so. And, on the other hand, the banks didn’t want house prices to start falling, as this would affect the distribution of new loans and adversely affect their profits.
Even more fundamentally however, falling house prices would threaten the overall security of the majority of loans the banks had already made, which are secured on the equity of house and flat values, across the country. Understandably, the banks did not want these to fall!
Valuers employed by the said agents were thus placed in an untenable position and this, understandably but inappropriately, coloured they assessments.
As their employers were effectively the banks themselves, the temptation to be over bullish about current market prices won out and taking a more cautious or prudent approach lost the day.
History shows that faced with the threat, and certain fact, of needing to address reducing market ‘values‘ for dwellings right across the nation, the firms involved quite blatantly chose to keep over-valuing. As a result, the housing market over-heated and in the end, it stalled spectacularly. The rest, is Spanish history.
As an aftermath, there is now poverty spread across their country, beyond anything that could have previously been imagined. The economic situation is still out of control now and there is no easy way to restore a reasonable level of prosperity to the ordinary Spanish populace.
Do we want to risk finding ourselves in a similar situation in the UK?
If nothing is done to correct a similar conflict of interest between the banks here in the UK and those estimating current house values in the market on behalf of those banks, we are at serious risk of experiencing the very same fate - and it may happen not of a time of our own choosing!
Sadly, there are no indications that our government is doing anything of significance about this and few if any members of it seem to be raising questions on behalf of ordinary members of the public in regard to this.
The true situation is that without generating more exports and improving our balance of payments, the fate that awaits us can only be a similar one to that of Spain’s, whether we invest in more infrastructure, or not.
We need to steer our economy back to growth as a matter of absolute priority, no holes barred, and George Osbourne does not appear to be concentrating on this hard enough at present.
If anyone has firm views about this, whether for or against, please blog with us.
Posted by: Property Match (UK)/Asking_Prices: Peter Hendry, Consultant in Housing Valuation, Property Match (UK).