Politics
Chuck out your property supplements
Published 16 August 1999
The housing market may be in the grip of a 1980s-style boom, but Simon Heffer urges restraint on those who want to avoid the subsequent crash
It was on the day last week that the newspapers were full of stories about the housing shortage and the rocketing price of property that we found ourselves going to view a charming old farmhouse in the eastern counties. It seemed at the time an act of masochism: we already have a charming old farmhouse in the eastern counties, but we have been thinking about moving for the past few months. We want just a bit more land, for my wife's gardening, and a bit more room inside, to help cope with my book problem. It is just as well our reasons for wanting to move are so frivolous, because it really won't matter if we don't: but God help those who have to.
According to an estate agent I spoke to the other day, the reason for the housing shortage is absurd. Estate agents go around telling people, for all I know truthfully, that the property from which they are hoping to move is incredibly saleable in the present market conditions. This is supposed to cheer them up, but instead strikes fear into them. What if the dream house they are looking for isn't out there? What if their present home is snapped up in 20 minutes flat, but they can't find what they want?
So they don't put their existing property on the market until they have found what they want - which, with thousands of people doing just the same, could be some time. An artificial bottleneck is created. This encourages gazumping, which is, after all, only the market's way of raising prices to the point where demand meets supply. Hence the silly prices.
And my God, are they silly. Our house has allegedly more than trebled in value since we bought it at the very bottom of the market in January 1993. It was the almost pornographic thrill of being told this by not one but two firms of agents that made us think that moving might, after all, be an option even in this market. The thrill wore off when we realised just how little you got for the stonking sums of money being asked by other vendors; and, because of the property shortage, some remarkably brave people are paying them.
We have been here before. In the summer of 1988 Nigel Lawson had slashed interest rates in his ill-judged attempt to shadow the Deutschmark, and had into the bargain announced that joint mortgage interest tax relief on properties would be ended at a specified date, several months on. The combined effect of these two policies was that the housing market went potty, especially in the South-east. Prices just about doubled within a year. Then, thanks to the bigger picture of Lawson's economic mismanagement, interest rates went from 7 to 15 per cent, the over-mortgaged masses found themselves screwed, repossessions became the order of the day and the phrase "negative equity" entered the language.
Another estate agent and I talked through this bit of history. After 18 months of steadily rising prices, she said, it was perhaps time to call a halt. Only the market can do this: but it seems a better bet now than at any time in the past three or four years to make the rash assertion that the only way house prices in some parts of the country can now go is down. It is not just that the prices of many properties are now out of the reach of most prospective purchasers. It is that the lessons of the period after 1988 have been learnt all too well.
Nobody is forecasting the sort of rise in interest rates we saw in the late 1980s and which had such a catastrophic effect on the housing market. Our economic policy is now run by the gnomes of Threadneedle Street and not by politicians with an agenda. Therefore, the violent see-saws in the price of borrowed money we saw then are unlikely to be repeated now. However, the surge in the market suggests that an awful lot of cash is floating around, being pushed on borrowers, just as in the late 1980s. The effect of this increased supply of money will have to be checked if it is not to be inflationary.
When the Bank of England convenes its monthly meeting on the interest rate, an outbreak of nerves ripples round the housing market. Even a couple of small monthly rises in our rates could have an interesting effect on house prices, way out of proportion to the real marginal effect of putting up rates by a quarter or half per cent. This is because enough people remember what happened ten years ago, and the first signs of a rate rise could well trigger panic among those who are heavily overborrowed.
There have been other significant changes since the late 1980s that make the business of being overborrowed more alarming than it was. Old mutual-based building societies were often relaxed about customers who could not meet their repayments, only repossessing as a last resort. Many of the biggest lenders - Abbey National, the Halifax and the Woolwich, for example - are now banks with shareholders. No one knows how they would, as institutions, react to a rise in the number of defaults on their loans, but it is a pretty safe bet they would not be so understanding as the building societies used to be.
White-collar job security is also not what it was. The boom in prices of big houses in London and the home counties is said to have been fuelled by huge bonuses in the City. When it is not just bonuses that are not paid, but also the salaries that go with them, the market will contract again. The City's institutions are constantly downsizing in a way they were not a decade ago, in the pursuit of greater competitive advantages over New York and Frankfurt.
All these factors mean that a rise in interest rates or a slight downturn in business profitability could make the market sclerotic again. When you pause to think that the only real casualties of such a contraction are estate agents, this immediately looks like a far less unpleasant thing than you might at first think.
There is no such thing as the right value for a house. It is worth whatever someone will pay for it. At a time when everyone wants to move, and especially when the general economic rosiness means that most of those moving wish to trade up, that makes houses expensive relative to other commodities. The opposite, though, is also true: and as such, the remedy to the present explosion in house prices is in the hands of all consumers.
If you think prices are absurd, if you can only move by taking on the sort of debt that keeps you awake at night and if even the slightest step upwards in interest rates or downwards in your remuneration package would cause you financial ruin because of the size of your mortgage repayments, then clearly you should not even be thinking about it. Yet since dinner-table chat is about inflated house prices - just where it was ten years ago -it seems that all too many people are thinking of it.
The answer is simple. If you want the price of houses to go down to a point where you do not have to risk your sanity in order to afford them, stop trying to buy them. Ask yourselves: is your move really necessary? Ask yourselves, further: even if the market cooled down, and the value of your own property fell, wouldn't the price of the one you wanted to buy fall also? And if you are putting more cash into the property, wouldn't it be better to wait until you can get more for your money?
No one knows when markets are peaking until they have peaked: but those exchanging contracts today ought to look back to 1988 and note the similarities in the housing market compared with then. Anybody buying a house now had better be sure it is a very special place, from which they are unlikely ever to want to move, so that they need not care about what happens to its price over the next ten or 15 years. It is never a good thing to buy at the top of the market: and in what feels like the carefree time before interest rates start a slow march upwards and businesses have to pull in their horns, it is starting to look horribly like that.
That, though, brings us back to the point that if this is about markets, it is within the power of individuals to affect them. Leave the property section of the weekend papers unopened, and if any particulars of properties for sale drop through your letter box, put them straight in the bin. Just think how smug you will be in a year's time when everything is 5 or 10 per cent cheaper, and that man you have never liked very much is going grey with worrying about how he is going keep up his mortgage repayments.
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