It’s time to hang on to your home
Published on 27 Feb 2011
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.
Yet 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, we should be glad that the price of such an essential commodity as a home is falling. It means 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 37 years old – the average age of a first-time buyer in Scotland. Rents have been rising as houses become increasingly unaffordable. According to the Council for Mortgage Lenders, first-time buyers in Scotland now have to raise £27,000 to buy a 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 is because many journalists have invested heavily in bricks and mortar 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 upon us.
Sales in Scotland are down by half on 2007 and total bank lending is down from £3 billion to £1.5bn as banks choke off credit. 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 2005-07.
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 an 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 over-lent 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 today), 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 such as 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 worth less than their mortgages.
But this couldn’t last. Analysts such as 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%. 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 to 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 so high in America, where house prices have fallen by 35% since 2006. Homes have been over-valued 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.