This blog is currently being featured on an interesting website called House Price Crash. To me, it’s interesting that there even exists such a website, more so that it’s a very popular spot. Do these people want house prices to crash so that they can afford to buy one? Or are they warning existing home owners of nightmare times ahead? I don’t know, and I can’t say, but they have assembled a lot of statistics to show that house prices are very toppy.
I have been bearish on UK house prices for so long that I have almost forgotten to be bearish about them anymore. I was badly affected by the slump at the end of the 80s although in hindsight it changed my life for the better. As a direct result of the slump, I migrated from being a builder to being a writer about building. I started writing a guidebook to building homes, which is what I knew about, because a) there wasn’t any money to make out of building and developing in 1993 and b) because no one else had ever done it before and I sensed a market opening.
As my writing career took off, I put thoughts of getting back into developing on the back burner and by the time I started thinking about it seriously again, in Y2K, I was already convinced that house prices were too high. Since then, they have marched relentlessly upwards and the latest news is that they seem to be on the rise yet again, which may have been instrumental in getting the MPC to raise rates by a quarter of a percent last week.
There are good structural reasons for house prices to rise. The housing stock is increasing but only very slowly. We have the lowest rate of new housebuilding per head of population in the Western World. Incomes are rising. The City has been a phenomenal growth centre for the past twenty years and London has consequently become one of the world’s great honeypots. The population is also rising, with large numbers of immigrants pitching up on our shores. People want to live here, particularly in London and the surrounding counties. And if demand is high and getting higher and supply is restricted, you have a recipe for rising prices. Add to this, relaxed lending from the banks and the relatively low-interest rates we have enjoyed for many years: consequently, we are happier with huge dollops of debt, far more so than at any time in history. These are the bull points.
Against this is the feeling that something has to give. Or, in the immortal words of Jim Morrison, “I’ve been up so Goddam long that it looks like down to me.” What would it actually take to upset the applecart? One thing it won’t be is an increase in the rate of housebuilding. Any increase from our current dismal levels will be far too little, far too late and new housing will, in any event, probably fill up with immigrants long before it has a noticeable effect on prices.
However, a meltdown in the City is a real possibility. The share crash of 1987 was at least a contributory cause of the house price crash of 1989. It could happen again, although share prices are in truth currently not nearly as high as house prices. But if the Middle East gets worse and oil supplies become difficult, then it would cause a global financial meltdown. And that would ripple out to house prices, as jobs are lost, bonuses vanish and top-of-the-range London property stops selling.
Another possibility is a prolonged terrorist assault on London, large enough to dent confidence in London as a financial centre. It’s a distinct and terrifying prospect, although perversely it might just increase demand for properties in quieter neighbourhoods. The IRA tried to do it and managed to get through the steel cordon a few times but not enough to really disable the City. However, the use of suicide bombers is a new kind of threat that is much harder to design out. I guess it all depends on whether the tube bombings last July remain an isolated act of terrorism or just the beginning of a long campaign.
Finally, there is the prospect of the bubble bursting spontaneously. It happens more frequently with shares than it does with housing but happen it does. All bubbles are based on the availability of lots of cheap credit, and the UK mortgage market is certainly guilty of that at the moment. The justification for borrowing is simple: the assets you are borrowing against are rising in price by more than the cost of the money. Everybody knows that this can’t go on forever but it can go on for a hell of a long time and predicting the point where it stops is impossible. Sometimes it’s triggered by higher interest rates, sometimes it isn’t.
By way of example, remember back to the Dot Com boom at the end of the 90s. It was a classic bubble, and many people were saying as much at the time. But why exactly did it end when it did? I have yet to read a convincing answer to that one. The valuations placed on invoice-less companies coming to market was already ridiculous a full two years before the bubble burst, so it was hardly a case of the share sellers peddling over optimistic scenarios.
So it may be with UK house prices. There may just come a point when people say “Enough is enough, I am not paying that ridiculous price for a pile of rubbish anymore.” Some people have been saying this for a while. But not enough to change a market. And whilst I have been expecting the prevailing bullish wind to change for many years, the value of our house has trebled since we moved in 14 years ago. Right now, a house price crash seems a remote possibility.