The Chancellor recently said that house prices had fallen quite considerably during the recession and that house price levels were still significantly below their peak. Is he correct?
Let’s examine that statement more closely.
Firstly, whilst it’s true that house prices did fall quite considerable following the financial crisis, they only actually fell for a few months and then bounced back almost to where they were before the crash. That was most strange. It is suggested that the sudden unprecedentedly low interest rates had a hand in causing that.
Secondly, let’s examine the statement that they are still significantly below their peak. That’s no longer true, certainly not everywhere. In fact, they are now hardly lower at all in many towns and counties. These are serious anomalies that need to be taken up with those stating them.
So, do we know what the most likely effect of these anomalies is?
Well, the effect is likely to be most adverse for those with the lowest proportion of personal wealth. Are these people likely to be voting Conservative any time soon? Does it matter?
People hoping to ‘get onto the first rung of the property ladder’ for example now have to borrow much more, in order to afford their first home, because it is priced beyond the reach of the average earner’s budget. In theory buying at that price level might be worth considering as a strategy in a normal, stable, market but it’s certainly not worth it in a volatile market, where house prices (i.e. house values) are unstable and could drop significantly, especially if interest rates were to rise substantially. We know this because that’s exactly what happened in the 90’s. The so-called yuppie boom (and that happened under a Conservative government - with John Major as PM, if I recall correctly).
The effect of the turnaround back in the 90’s was that sales across the housing market suddenly stalled, as people became too wary to even consider borrowing enough to pay the unrealistic prices being quoted at the time. Simultaneously, those desperate to sell to release themselves from unaffordable mortgage contracts were giving away their homes - handing back the keys in an effort to divest themselves of their unexpectedly onerous obligations.
The very same thing could happen again at some point. I say this if only because no effective ‘brakes’ have been put in place, since those times. There’s nothing to stop such things repeating themselves. What do I mean by no effective brakes? Today, exactly as was the case back then, the only caveat that rules in the housing market is Caveat Emptor, “Let the buyer beware.”
Sellers, including builders and developers, have a completely free rein to ask what they like and expect what they like, irrespective of what ‘the market’ itself may suggest ought to be accepted.
In other words, when the market is due to fall, let the ‘buyers’ be very afraid, because those whom commit to a purchase at such a time (at unrealistic prices) are walking themselves into a fire-storm, having been blind-folded!
Most sellers, house builders and developers will of course generally know when conditions are on the wain and will have already taken a reasonable profit for themselves by then. They’ll be happy to pause their selling and be ready to ride out the storm in the certain knowledge that eventually, the whole roller-coaster cycle will simply begin all over again! Most of them should be able to afford this luxury. First-time buyers (and second-timers) on the other hand, with negative equity around their shoulders, will certainly not be able to.
One other thing is certain in all the chaos and rage of this unrestrained housing market. If the market is left to ‘sort itself out’ (as they tend to say upstairs) when the next crash starts to happen, building more houses will abruptly come to a halt and of course that’s the very thing we don’t need. This is the reason to make changes now because we need to make certain we avoid such a calamity, or even the risk of one from recurring.
Worse, there’s a new ‘Stampede to the Klondike‘, starting to run, so beware of this one.
If private pension pots are deregulated as George Osborne is now arranging, then when retirees start collecting these sums guess where a goodly proportion of the cash will go? No prizes! It’ll go towards buying more houses, or at least in investing in them. This is pretty-well guaranteed to bolster prices further (with a little bit of luck of course). That might be useful for a future Conservative government!
Am I right to be concerned or am I just being a crashist? A fair barometric measure of when things aren’t going right is if the teachers go out on strike. That’s now.
Are these important issues being property addressed? Well, not as far as one can see from where I’m standing.
For more information about what, exactly, needs to be done to resolve such a cyclical house-marketing crisis, please see:
The proposals set out, avoid the need to try and control the amount that people may wish to borrow, leaving them free to decide.
Earlier article on our blog site: Full details of our current proposals.
Posted by: Peter Hendry, Consultant in Housing Valuation at Property Match (UK)