Curb Property Addiction To Avoid Another Disaster

[cashinmattress]

Curb property addiction to avoid another disaster

It used to be said that a man's price is just a few pounds short of his mortgage. Though in Westminster that should now be his second mortgage, and women MPs, like Hazel Blears, have been just as bad as the men. It's widely accepted now that our political system will require radical change to restore public confidence. But there's something else that is needing reform: the housing market. Our national obsession with property corrupted parliament by turning many of our politicians into property speculators.

We have seen how MPs have been fiddling and flipping their second homes to gain, in some cases, hundreds of thousands of pounds from properties wholly or largely funded by the state. Some even bought second homes for their ducks. As a result, up to half of all MPs are expected to be retired, deselected or be voted out by outraged constituents. It's like a Stalinist purge. MPs are desperately waiting the four o'clock call from the Daily Telegraph.

They should erect a monument to Kirsty Allsop outside the Commons as a grim reminder of what happens when people become addicted to the drug of property. And a copy should go to the city of London too, because housing madness helped to destroy the banking system. Bankers who believed property prices could only ever go up created an inverted pyramid of debt on the slender basis of dodgy mortgages in American and British inner cities. The losses and write downs from the mortgage-related securities fiasco has so far reached some $4trillion world wide, according to the IMF. In Britain around £1trillion has disappeared from the asset base of the middle classes, who had been maintaining their living standards for years by borrowing against the nominal value of their homes.

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The housing boom begat the debt bubble, which begat the construction boom. The mania for property diverted investment from productive activity into real estate on a colossal scale. From Riga to Dublin, European cities are surrounded by thousands of acres of unfinished developments, many of which face being demolished because there's no money to complete them.

The housing boom has inflicted the devastation of a small war on the national finances of European countries from Spain to the Baltic. Vast sums of public money are being wasted by central banks buying toxic mortgage bonds from insolvent banks.

Amid this devastation, ruined political careers in Westminster might seem the least of our problems, but the scandal of MPs' second homes is important because it was both a symptom and a cause of the crisis. Politicians became infected with housing madness under New Labour and started plundering the public finances to buy and develop second and sometimes third and fourth homes. So it's hardly surprising that MPs didn't ask searching questions about the housing bubble - they were benefiting from it.

And so were their constituents. Between 1997 and 2001, house prices nearly doubled. They nearly doubled again by 2005. It was as if the government had given every homeowner an average of £100,000. No wonder they voted Labour. We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from.

Well the truth is that it was being stolen from the next generation. Houses don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to get a roof over their heads, to the baby boomers who are about to retire and live on the cash they make when they downsize. MPs were the most egregious example of this, but in a sense we were all invested in the housing scam. Well, it's time to call a halt. Our property obsession has been an economic and political disaster.

Now, governments and central bankers talk as if the real estate bubble was nothing to do with them. But in reality house price inflation has been actively encouraged by easy money, low interest rates and regulatory negligence. From mortgage interest tax relief to tax breaks to buy-to-let investors, successive governments have fuelled the housing mania. They subsidised the sale of council houses and then prevented local authorities from using the proceeds to build new social housing, thus creating an artificial shortage.

Housing is the only asset class which is free from capital gains tax, and both Labour and Conservatives intend to exempt up to £1m worth of property per family from inheritance tax. For 30 years, governments made property speculation a no brainer - and even now, in the wake of the crash, the thrust of government policy is to try and reflate house prices.

I spoke to a friend last week who said that his £1500 a month mortgage has now fallen to £600. He feels a bit embarrassed by this, since there are a lot of people who seem rather more deserving of a £900 a month bung. Our addiction to property must be curbed if we are to avoid yet another disastrous bubble. Property must be taxed like any other investment, like shares or savings - there is no rational justification for its exemption.

The mortgage industry must be properly regulated by the Financial Services Authority, with limits put on loan to value ratios to prevent young people taking on unsustainable loans of five or six times salary. 125% "suicide" loans and self-certification "liar loans" should be outlawed along with sub prime.

There should be a minimum deposit of 20% on residential loans as is the case in countries like Canada and Germany which have not experienced property crashes. Buy to let investors should no longer be able to set mortgage interest against tax, a measure which discriminates against ordinary home buyers.

Mortgage loans should be made "non recourse" as in America, so that when a house is repossessed, the mortgagee doesn't bear liability for any losses at auction. That would soon stop predatory lending, above all, governments must ensure that enough houses are built to meet population pressures caused by immigration and family break ups.

It is the most basic function of government to ensure proper residential housing is built. Perhaps now that we have a new generation of MPs coming along who will actually have to buy and equip their houses like the rest of us, they will finally see sense.

[Georgia O'Keeffe]

what amazes me is the general populus still think prices will return to 07 level in real terms over the next few years when it has been shown that 07 level results in the meltdown of the financial system

[1929crash]

They should erect a monument to Kirsty Allsop outside the Commons as a grim reminder of what happens when people become addicted to the drug of property

[pete.hpc]

thats a fantastic article and needs to be on david camerons desk tomorrow

[HAMISH_MCTAVISH]

The mortgage industry must be properly regulated by the Financial Services Authority, with limits put on loan to value ratios to prevent young people taking on unsustainable loans of five or six times salary. 125% "suicide" loans and self-certification "liar loans" should be outlawed along with sub prime.

No chance. 100% possibly, 5 times income possibly, but as always it doesnt address joint incomes.

There should be a minimum deposit of 20% on residential loans as is the case in countries like Canada and Germany which have not experienced property crashes.

No chance. Besides, they have experienced crashes, and will again. They are just at different points in their cycle this time.

Buy to let investors should no longer be able to set mortgage interest against tax, a measure which discriminates against ordinary home buyers.

The Tories are coming. Absolutely no chance.

Mortgage loans should be made "non recourse" as in America, so that when a house is repossessed, the mortgagee doesn't bear liability for any losses at auction. That would soon stop predatory lending,

No chance. Both parties are beholden to big business.

above all, governments must ensure that enough houses are built to meet population pressures caused by immigration and family break ups. It is the most basic function of government to ensure proper residential housing is built.

With planning laws and nimbyism as they are?

Less than no chance.

[three pint princess]

People talked endlessly about how their houses were earning more than they did

I think that was on HPC when things got insane, a house "earning" 38K equivalent salary and the owners taking it out in equity from the banks.

Which is covered by tax payers money now, people seem to forget the Government just nationalised the banks to cover these debts.

[Fairies Wear Boots]

No chance. 100% possibly, 5 times income possibly, but as always it doesnt address joint incomes.

No chance. Besides, they have experienced crashes, and will again. They are just at different points in their cycle this time.

The Tories are coming. Absolutely no chance.

No chance. Both parties are beholden to big business.

With planning laws and nimbyism as they are?

Less than no chance.

The banks are now regulating how much you can borrow.

You might be right about them not stopping another crash.

Which is great for those of us holding cash and can buy at the bottom. Hey, even bag a buy to let or two when you can COMFORTABLY buy one, rent it out at any interest rate the banks may throw at you and make a profit. And in 20 years time it'll be happy days.

And because there is a reasonable shortage of houses, prices

[FrozenOut]

Some of you make it sound like what has happened 1997 - 2009 was some kind of accident. Lets understand this, 100% for sure - it was engineered - every last bit.

Enough of this "how can we avoid it, in the futre" - 1997 - 2009 was MEANT to happen!

[DementedTuna]

Hamish is right about one thing.. it is gonna happen again. His timing's a bit out I think but eventually the day will come when history will repeat, always does.

We'll have the recession, take a breather for 5 years (face it bulls, even if there's small rises we're not going to be back in skyrocket +30%/year territory again for a very long time), then yet another politician will play the HPI card thinking that they can do it without the crash and burn this time.

Gordon Brown probably genuinely believed back in 1997 that he could make houses rise and never fall, as long as the interest rates and inflation were kept low.

Some other pillock will take his place and right now George Osbourne is looking like a prime slimeball to me.

See you in 18 years, I'll keep the same username on the new HPC holo-website in 2027 where the gay bear dating ads take you up the ar5e as you're trying to read.

Edited May 25, 2009 by DementedTuna

[eric pebble]

Curb property addiction to avoid another disaster

ABSOLUTELY SUPERB. BRILLIANT. AT LAST, THE TRUTH IN A NEWSPAPER.

[Frank Hovis]

IAIN MacWHIRTER

What a brilliant article. It just nails it.

There should be a law passed that this article must be read out prior to each and every property ramping show so that people can see them for the fiction they are.

[eric pebble]

what amazes me is the general populus still think prices will return to 07 level in real terms over the next few years when it has been shown that 07 level results in the meltdown of the financial system

You took the words out of my mouth.

It is stunning to hear people talking about "when prices come back up/recover..."[etc.] They just do not get it.

[grizzly bear]

thats a fantastic article and needs to be on david camerons desk tomorrow

+1, I wish i knew how to get it there - perhaps we should all print it out and send to various members of the shadow cabinet?

Edited May 25, 2009 by grizzly bear

[Firefly]

what amazes me is the general populus still think prices will return to 07 level in real terms over the next few years when it has been shown that 07 level results in the meltdown of the financial system

Who wants 07 level ? We want prices back to 97 levels.

[Sybil13]

what amazes me is the general populus still think prices will return to 07 level in real terms over the next few years when it has been shown that 07 level results in the meltdown of the financial system

Last week I posted a Q regarding the Director of Rightmove saying there was a need to "accelerate any further drop" :

The report admits that agent's are being forced to up initial advertising prices to win new instructions, amid the fierce competition for the few quality properties that are currently being put onto the market.

That makes the asking price rise, for me, more like bad news than good news. I understand that agent's are trying to survive in a difficult market, but we need to firm out the price drops that we have had, before we can ascertain if they are enough to bring the market to bottom, and accelerate any further drop that may be necessary In short, by humouring unrealistic vendors over asking prices, agents may be doing nothing more than prolonging their own misery

HPC Link

Whilst I understand it is perhaps advantageous for banks to adjust slowly to property falls etc ., I can't help feeling that the current situation is not helping anyone.

I think a huge % of people believe that 2007 lending levels will be back next year, and you can't blame them when every paper gives this impression. "PRICES ARE GOING UP" says the headlinees even though the article confirms they are actually going to fall at least 30%.

IF property was selling I could understand this need for prices to fall slowly, BUT I can't have chosen the only 50 properties in Hampshire and Dorset that are not selling can I? AND NOTHING in my list of properties is SELLING.

Buyers are expecting 25 - 30% falls sellers are expecting 2007 prices because they are going to go up soon the EA tells them.

I have a friend who has put in half a dozen offers at 25 - 26% from peak and I am not even sure the EA has passed them on!

What I can't understand is why ANYONE is expecting less than 50% falls when in previous booms there has been 64% rises followed by 30% falls , then 47% increase followed by 37% falls :

These figures make it seem as though booms are always bigger than busts. But this is a trick of the maths: an increase from, say, £50,000 to £100,000 is a rise of 100 per cent; a slump back to £50,000 is a fall of 50 per cent. Taking the Nationwide’s figures, the 1997 to 2007 boom saw prices rise by 147 per cent in real terms.

So why are we not EXPECTING 137% falls?

I honestly cannot see that it would not benefit everyone for people to be TOLD in no uncertain terms that there will not be a return to 2007 lendning levels or anything like it and that property must now fall in line with ACTUAL average wages and lending levels dependent on very much reduced deposits.

The market can then adjust to what it is going to have to adjust to eventually and the DENIAL phase will be over for us all. If the lenders have done the figures for 50 - 60% falls and the recesssion lasting another 2 years would it not be better to just get on with getting the market back to where it is going to have to go and get people moving? Currently nothing is moving and that is having a HUGE knock on effect on the economy.

[Fromage Frais]

There should be a minimum deposit of 20% on residential loans as is the case in countries like Canada and Germany which have not experienced property crashes.

This is the case here in Tunisia and you will be lucky to get a loan of more than 150,000 dinars

Houses are still well over 200,000 dinars, In tunis it common to find over 500,000 and there are loads over 1 million

The average wage is under 5000£ per year.

I cannot afford a house on 30,000£+ in a half decent area

All thats needed is the thought prices only go up and the mania will not stop until all funds are used

[flapjack]

Bump - one of the best articles yet.

Perhaps we should get it pinned or awarded the HPC gold medal!

Hey, that's an idea - perhaps we should have our own awards - like Oscars etc!

We could call them the - Crashies or similar

Any ideas?

[juvenal]

You can email Iain McWhirter and give him support. I have.

[red]

The market can then adjust to what it is going to have to adjust to eventually and the DENIAL phase will be over for us all. If the lenders have done the figures for 50 - 60% falls and the recesssion lasting another 2 years would it not be better to just get on with getting the market back to where it is going to have to go and get people moving? Currently nothing is moving and that is having a HUGE knock on effect on the economy.

Relax. The market is headed in the right direction. You can't expect some kind of convention whereby EAs and vendors all agree to slash prices by 50% to get things moving again...it's a natural, cyclical process that takes time.

Unfortunately, that means being patient. Those who aren't will be wading in now thinking they've 'snapped up' a 'BMV' bargain, whereas all they're doing is setting the new market price which will only keep falling till the cycle reaches its bottom.

Great article by the OP, btw...

[mattyfc]

A good article which sums up the problem of house price inflation pretty well. People need to wake up and realize HPI is not a good thing. A grim financial future awaits the British "lost generation" who purchased near the height of the bubble and will now be either underwater or have had their equity destroyed.

The government and democracy in general has a lot to answer for. The bubble was seen by the economist in 2005 and others before that yet nothing was done and there was not even any real debate on the subject. I can't seriously imagine that the explicitly populist Blair government would have done anything to curb the bubble and to prevent the property crash we now face. The government were incapable of doing anything unpopular (iraq war aside) no matter how sensible.

A couple of interesting points are made about limiting loan values, minimum deposits, and the removal of 125%, self certified and sub prime loans. I agree that self certified, 100% + and no income / bad credit sub prime loans should be outlawed.

The real issue is transparency in the market place and educating the buyers / general population about HPI and what financial commitment they are making when purchasing property and what the likely / possible long term financial implications. Also encouraging the population to see HPI like any other kind of inflation and not as a one way street to wealth and fulfillment.

Estate agents also have a lot to answer for are virtually unregulated and contributed to the problem. A central property database should be created based on the land registry on which every property is listed along with historical values / transactions and if the property is currently on the market, the historical and current asking price or rent. Currently all the information is fragmented and hard to find. The more transparent the market is the better it will function.

[juvenal]

I'm bumping this because it's quality, and should be read by all as a great overview.

[eric pebble]

You can email Iain McWhirter and give him support. I have.

Me too. Truly excellent article. 100% common sense. And, by god, we need more of that in this world.