I have been writing here for years now about all the horrors that are finally coming to light – the end of the credit bubble, recession in America and so on.
But the thing that I have focused on probably the most has been the housing bubble. I called its end rather too early (March, 2004!) but I can’t imagine that there are many people left who would still insist – as they have for the past five years – that the sharp rise in prices across Britain has not actually represented a bubble.
Until recently I was constantly told that the fundamentals of the housing market were strong thanks to the fact that supply for property was low and demand was strong, which made it nigh on impossible for prices to fall.
Economic demand
My endlessly repeated reply was to say that demand is not economic demand unless it is backed up by having the money to pay for the thing you demand. We all want houses, of course we do, but if we can’t afford to pay for them, our wants can’t support a market.
I want a detached villa on the edge of Regent’s Park, (really badly, as it happens) but there’s no point factoring that into an analysis of the future price of detached villas on the edge of Regent’s Park. For one simple reason – I don’t have £25m to buy one with.
Now if I could get someone to lend me £25m (and if I was fool enough to take it) that would be a different matter.
The price of houses is driven by credit
My point? That the price of houses is not about the supply of houses and the demand for them in general, but about the supply of and demand for credit. You can only push the price of something up if you can – and if you want to – get the money together to do so.
So why are house prices falling now? Not because all of a sudden the average Englishman has decided he’d rather live in a caravan than in a four-bedroom executive home, but because house prices are well beyond the reach of prudent lending levels and the banks, paralysed by their new-found recognition of risk, will no longer lend at anything beyond cautious levels.
Got a 20% deposit and want to borrow three times your salary? Then you’re probably alright – albeit at a higher rate than you might have paid 12 months ago.
Got no deposit and want to borrow five times your income? Back to your caravan you go. According to mform.co.uk, a mortgage calculator, six months ago 22 lenders offered 100% mortgages. Today, just a handful do – and they charge typical fees of more than £5,000, suggesting they aren’t all that crazy about people taking them out!
Easy money
House prices got to their current levels – more than five times average earnings, according to Halifax – because lenders were prepared to provide the cash for it to happen. Now they won’t.
The result? Fewer and fewer buyers – and a rising climate of fear. New loans for homebuyers fell to 50,300 in January, the lowest level for nine years. And that is how property bubbles come to an end. Well, actually it is how all bubbles come to an end.
Easy money encourages borrowing which in turn pushes up the price of whichever asset the financial world has decreed to be a dead cert. Then some change in the environment calls a halt to the lending and the whole thing comes tumbling down.
The pain of house price falls
You can already see the pain out there. In February, 64% more chartered surveyors reported price falls than rises in their areas, making the state of the property market on this measure nearly as horrible as it was in June 1990.
Repossessions are rising. Property investment clubs are shutting down – one of the biggest and once most persuasive, Inside Track, said it will be doing no more of its overhyped educational seminars after the end of this month.
And I am getting letters from people who have lost their shirts on the property market and have no idea what to do. I have had one from a small businessman who tells me he is down £200,000 thanks to his involvement with one club and consequent “investments” in the US and the UK property markets. And the really bad news is that things are likely to get worse before they get any better.
Rising mortgage rates
For starters, the credit crunch means mortgage rates are going to have to go up. James Ferguson of Pali International, a broker, points out it costs some of the big UK banks something up to two percentage points more than the risk-free rate (the rate on long-term government bonds) to borrow money on their own account for five years – so 6% plus.
Add their margins into that and it suggests they should be charging about 8% to lend it to you in the form of a five-year fixed-rate mortgage. Right now they aren’t doing that. At some point, though, they’ll all have to put up their rates if they want to make any money at all – reality can’t be ignored forever.
And as rates go up, buy-to-let investors who might just be breaking even will find it is costing them more and more to hold on to their depreciating investments every month. So they will sell. So will many of the people who have been on very low fixes for the past few years and find they can’t afford a re-mortgage.
And so will many other people who find that with house prices flat or falling, the effort of making monthly repayments just no longer feels worth it. How far will prices fall before all this plays out? I have no idea, but I do know I won’t be in the market for a house for a few years yet.
Don’t buy any houses!
This is my last column for The Sunday Times. I’ve really enjoyed writing here, but I have decided to spend more time with my family. I am very grateful to all of those who have read my endless predictions of the end of the financial world, and particularly to those who have written in to me with their own thoughts on the markets. My final advice? Hang on to your gold for a bit longer and, for heaven’s sake, don’t buy any houses.
Merryn Somerset Webb is a former stockbroker and now editor of Money Week. This article was first published in The Sunday Times 30/03/08