2. uncle tom said...

But even this guy seems to assume that eventually, the inflation adjusted value of property will trump its previous highs.

I beg to differ.

The peak of the market was a product of several factors, but with one key element at its core. On the finance side, the banking industry was playing smoke and mirrors games to dress mutton as lamb; deliberately making investment vehicles too complex to analyse.

Incredibly, the analysts had too much pride to admit that they could not rate these investments, and gave them a golden endorsement. That amazing scenario will be immortalised in future economics curriculums, and is unlikely to recur within our lifetimes.

A consequence of this game was that you could lend money, in any quantity, to anyone, with apparent impunity - and profit from doing so.

This resulted in mortgage lending practice becoming shorn of all semblance of prudence.

With mortgages being offered to anyone, house prices rose, and kept on rising. Fuelled by easy money, the speculators poured in, not, as they liked to pretend, because the rent represented an attractive return, but because they were looking for capital growth.

Now the party is over. The lid has been blown on the SIV's, and the only easy money now is that which the central banks are busy printing.

Lending practice now has to balance risks against returns, and only the most starry-eyed optimists believe there is capital growth potential in property.

During the boom years, the BTL speculators priced out a large percentage of first time buyers. Property has to be affordable to at least 70% of the population to buy, and as renting is intrinsically less efficient than home ownership, that means that property prices have to be compatible with approximately 80% of household incomes, with the remainder having their housing needs subsidised by the state.

Prices will adjust to satisfy that fundamental factor, and because the SIV scam is very unlikely to recur, no future speculative boom could ever propel them (in real terms) to their previous highs.