One of the reasons things are as bad as they are in the US is because for several years after house prices moved to mad levels the banks absolutely refused to accept that they were lending into a bubble. So they kept on lending money against overvalued property and are now getting nastily punished for their failure to remember that cycles involving excess leverage pretty much always come to a sticky end.
However the truly extraordinary thing about the collapse of America’s housing bubble is that so many people still don’t get it. Even now, when prices have been falling for going on two years, US magazines are running stories about how to make money buying properties that no one else wants at auction. The only comfort anyone who acts on this advice will have, as they languish in negative equity next year, will be that they didn’t buy at the top.
It is comfort that anyone who buys in the UK right now won’t have. Give or take a few percent here and there, we are still at the top. The main driver of prices over the last few years has been cheap credit which people borrowed and borrowed to buy houses for no better reason than that the price of houses was going up (this is in itself odd by the way – houses are one of the only consumer goods we ever want to buy more of as they get more expensive).
That driver is gone. There is no more cheap credit – indeed the way the global financial situation is imploding there may soon be no credit at all. And, unnoticed by the bubble blinded bulls, sentiment is changing in much of the market: I was on BBC London the other day talking about all this and for the first time I can remember I was not interrupted by anyone saying “yeah but you can’t go wrong with property can you?” It is gradually dawning that you can.
London poised for a downturn too
And this is just as true in Central London as elsewhere. Anyone who amuses themselves cruising house prices on Primelocation.com (everyone I assume) will know that there is more property on the market than there has been for years, while mothers in Kensington and Chelsea will have noticed a shift in one of the area’s better leading indicators: some of the smart schools you couldn’t get your children into for love nor money a year ago have vacancies. Prices here are very dependent on the current state of the City and on expectations of employment in the City, neither of which look good. When they fall, they fall quite fast.
Anyone who thinks I am wrong about all this and wants to bet on it can now do so. London Central Portfolio Limited (LCP) is about to launch The London Central Portfolio Property Fund II, which is to invest exclusively in central London property. Personally I’d rather put my pension into a highly leveraged mortgage backed securities biased hedge fund.
First published in The Evening Standard 19/3/08