The first law of bubbles is that they burst. It may take much longer for them to do so than anyone expects, but in the end, they do.
It is a matter of simple arithmetic that house prices cannot continue increasing at the same rate—or anything like it—as in recent years. Since 1992 house prices have more than trebled. That is an average annual increase of 8.1 per cent. Over the same period incomes have not quite doubled.
The average house now costs approximately £200,000. Average earnings are around £25,000. That gives the much quoted statistic that a home costs eight times income, a historically high figure. It would in fact be more realistic to make the comparison with what is left out of those incomes after unavoidable outgoings have been paid: income tax, national insurance and council tax. That reduces net income to around £18,000 and means that average homes cost 11 times average incomes.
Now we are told, in a report by the National Housing Federation published yesterday, that average house prices are likely to reach £300,000 across the country by 2012. If post-tax incomes rise by a perhaps optimistic 3.25 per cent a year they will grow to £21,100 by then. The average house would then cost over 14 times the average net income. An 80 per cent interest-only mortgage at 5.75 per cent would then cost £13,500 a year, leaving only £7,600 for all other household expenditure—down from £8,900 today. In other words, living standards for new householders would show a dramatic decline, a situation hardly likely to prove sustainable.
Bubbles burst and the metaphor is usually applied after the fact.
House prices will not suddenly go down.
There are simply too many people chasing too few houses on an island of too few acres. The rate of price rise may well slow down but it’s already too late for most working CLASS families.
A building programme of new housing to be rented not sold to people at a rent based on cost of land and construction rather than “market price” will take some of the heat off. The houses will have to first go to a special class of vital workers such as the usaual nurses, firemen, coppers, civil servants and poor young families with 3 kids (for example). They could be given an option to buy after 10 years or whenever a government comes along that thinks government owned housing is a threat.
The market won’t like that.
It is tempting to conclude that house prices must continue to rise indefinitely because there is a persisting shortage of home – but the reasoning is defective.
Persistent shortage has not prevented substantial declines in prices in past periods, most recently at the end of the ‘80s and early ‘90s in this country. While the US certainly has more acres than we do, its population is increasing at nearly three times our rate, but recent events show that this does not suffice to underpin prices: a cumulative decline widely expected to reach 15 per cent rather than 10 per cent is now under way.
The explanation is that the housing market is not simply about the provision of a need – shelter. There is also a large, and fluctuating, speculative element in setting prices. When this ebbs, and is combined with tightening interest rates (and, imminently, tougher conditions for obtaining mortgages, prospective buyers are unable to purchase – regardless of their need. Sellers can then dispose of their property by cutting their prices, and this can rapidly become self-reinforcing, particularly if speculative owners (buy-to-rent?) rush to try and take a profit while they can still see one.