Sunday, 2 December 2007

Property in the UK 7: The Housing Market Begins to Collapse

I mentioned in the previous posting that this was a bad time to buy a house in the UK and now I am going to outline the reasons behind that. Earlier this year I predicted that house prices in the UK were far outstretching the average income we would soon hit a period when prices would have to fall. Estate agents were unconvinced by this, but I am now being proved correct. In the UK people get nervous when the rate of increase of house prices simply slows so you can imagine how worried they are if they start falling as they have done for the past 3 months. For some reason buying a house is a key status activity that was particularly encouraged during the 1980s to the extent that now some lawyers will not represent you if you are simply a tenant (I have experienced this when trying to employ a solicitor and being turned away not because I could not afford their fees but because I was not an owner-occupier of a house). So everyone tries to buy a house, meaning demand especially in regions where there is work, is very high and house prices just keep rising and rising. This is exacerbated by familes fragmenting, more people living alone and the birth rate of the UK middle class rising for some reason. This year they reached a level that the International Monetary Fund (IMF) felt was 40% over-priced. Of course because so many people invest so much money in their property about 4-5 times more than their counterparts in France, Belgium, Germany, etc., they cannot afford to see the price fall.

Despite all of these factors there is a limit how far house prices can keep rising. People for some reason ignore their pressure on inflation which is wrong as the cost of houses also influences the cost of rents, house insurance and many other house-related factors. To reduce inflationary pressures the Bank of England has used its only economic tool and has repeatedly raised interest rates this year. However, its governor feels inflation is still too high and so rates may have to rise further. For the first time in decades in the UK people have started looking beyond interest rates to manage the economy and there have been murmurs of other credit controls, and though for a couple of months some credit cards were restricted with the retail sector apparently weak, these have been lifted again. The threat of such controls is enough to unsettle consumers. All of this stuff has come far too late. If it had been introduced gradually after the last serious dip in the UK economy in 1993 or even when Labour came to power in 1997 it would all be well-established now, to bring it in now abruptly is just going to be a shock to the system.

So we have a situation of the worst of both worlds. Interest rates are rising making repayment of mortgages harder and yet house prices are dropping which means people cannot rely on selling their house at a hefty profit in order to cover the costs of the money they borrowed on it. You can see why I am personally worried. I have over-paid on my new house, under-sold my old house and have cleared out my savings just at the time when the market is turning to slump. Look forward to a nice blog of a man with negative equity (i.e. owning more on the property than the property is worth in itself). This happened all over the UK in 1990-3 and is clearly going to happen again, I guess in the next 12 months.

The UK's addiction to every rising house prices and the Major, Blair and Brown governments' lack of imagination in terms of economic tools and lack of courage in adopting and applying them is going to condemn the UK to a cycle like this at least every 15 years, maybe more regularly, depending on how far the upcoming slump takes prices down this time. It impinges on the middle class whose wealth and in turn their consumption is based on their property often rather than their incomes (which have been rising far slower) and so a crisis in housing will mean an immediate retail crisis as we may already be seeing as people tighten their belts (even at Christmas when they usually spend the most). It impinges on the working class as well, as those who own property will suffer like their middle class counterparts but also as landlords/ladies either raise rents to cover increased interest payments or sell off unprofitable rental property (as I have experienced) so reducing the availability and raising demand and so rents as well. In addition, those working in the retail and transportation sectors will suffer from retail lay-offs and reduction of business and those in the small-scale building tray, eventually from the decrease of people wanting work on house (though this may be balanced in the short-term by people improving their houses in an attempt to increase prices).

My advice is do not try to buy a house at the moment, wait for prices to fall next year. Pay off as much of your mortgage as you can (most now permit over-payments these days) and tighten up on Christmas gifts, especially those bought on credit. If we batten down now there may be some funds left to benefit from the post-slump recovery when you will be able to snap up reposessed houses (though banks these days tend to sit on them until they can be sold at a set level, often above the prevailing average price in the district - another aspect which has pushed prices upwards, rather than disposing of them cheaply as they did in the 1980s and 1990s). Though I could see the problem on the horizon, because of other human pressures I have been pushed right into the trap and am anticipating that it will be a couple of decades before I return to the level of prosperity I once had; I also anticipate I will not be an owner-occupier for long and that I will lose my house to repossession in about 2 years' time so will be back in an even more cutthroat rental sector very soon.

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