On Ryecotes Mead, a cul-de-sac in a south London suburb, there is a three-bedroom flat that encapsulates the current condition of the British housing market. Trudi, the estate agent, opens the door with a tight smile. The property is all on one floor: two modest doubles, one with en suite; a small single room; a shower room; a lounge; and a small kitchen. Plus a garage, in which an old chair awaits disposal (“You could rent it out,” says Trudi, extending her arms into the space, “to someone with an expensive car”).
The flat – Trudi attempts “bungalow” – was built at the end of the 1960s and most of it has not been redecorated for decades. The porch has a corrugated plastic roof. It’s a leasehold, so a buyer would never technically own it; charges and permissions are involved. No one has lived here since the previous owner died some time ago. The air in the bedrooms seems to have thickened in the long silences.
We move to the garden, laid out exclusively in concrete slab, and outside we are reminded that the property is less than 90 metres from the South Circular, one of the most congested and polluted roads in the capital. However, it’s just three miles to the nearest Tube station. In 2002, you could buy a place on Ryecotes Mead for £200,000 (£340,000 in today’s money). Now the owners want a cool million. Somehow, just by existing, this flat has spent two decades making more money than the average worker.
A million quid for this! And who’s to say the owners won’t get it? Every year since 2009, new records have been set in house prices, and every year people have asked how long the market could continue to defy gravity. But this year is different. The force that kept prices aloft – the historically cheap borrowing created by low interest rates and quantitative easing (QE) – has abruptly been withdrawn.
Last spring, Halifax offered the cheapest mortgage ever, fixed at 0.83 per cent for two years. But to borrow the same amount today would cost (at the 4.95 per cent Halifax now offers for a two-year fixed) an extra £4,916 a year. This at a time when inflation is eroding people’s disposable income, unemployment is rising, and the Bank of England is forecast to increase its base rate still further (financial markets predict a peak of 4.5 per cent this year, from 3.5 per cent today).
Confidence in the market was severely dented in September 2022, when the Bank of England and the Truss government both announced policies that entailed selling tens of billions of pounds in government debt on the bond markets. Yields – the cost of servicing that debt – shot up, as did the (related) cost of servicing bank debt, which, in turn, pushed up what banks charge people to borrow. Within days a young woman from Manchester – the archetypal first-time buyer, the person on whom the whole edifice of housing wealth depends – told BBC Question Time and the country she was being quoted 10.5 per cent for a mortgage. The audience moaned as if witnessing a physical injury; within three weeks Liz Truss was out.
But while bond markets have calmed since the Truss-Kwarteng debacle, house prices have fallen for four consecutive months, the longest sustained drop since 2008. Every major bank and building society predicts that house prices will fall this year. The UK’s largest mortgage lender, Lloyds, is using a 7.9 per cent drop in prices as the “base case” for its assumptions in 2023; the “severe downside” scenario involves a fall of 17.9 per cent. And these are nominal values – against the price of everything else, with inflation still in double digits, house prices are already plummeting. Almost three quarters of the properties sold in November 2022 went for less than the asking price, while over the same period sales fell by nearly a third and demand almost halved.
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The world’s largest ratings agency, S&P Global Ratings, has warned that property in London and the south-east is overvalued by up to 50 per cent, that a “sticky, gradual decline” will take hold in house prices in the UK, and that the effects of interest rate rises could take almost three years to be fully costed in by the market. The same is happening across the world, as central bankers make borrowing more expensive in an attempt to curb inflation. In Sweden – where the government is much less active in its support of the market than in the UK – house prices have fallen 17 per cent from last year’s peak.
On the one hand, this is a necessary correction. House prices are grossly inflated and almost everyone aged under 40 faces an unprecedented crisis of affordability. But a crash could bring new dangers: an even more expensive rental market, fewer properties for social housing, and the risk of negative equity among new buyers. It could also harm all the other industries that benefit from the housing market, which include not just housebuilding but appliances, furniture, DIY and legal services; a number of solicitors that specialise in property conveyancing have already gone bankrupt, as the waning market makes it impossible to pay for the legal insurance they need. Even apparently unconnected businesses could suffer, as homeowners’ perceived wealth is sharply diminished, and consumer spending tightens.
A significant correction could even become a test for banks and other financial institutions, if large numbers of borrowers begin to default on their mortgages. The ratings agency Fitch recently found that the UK’s borrowers and banks are more exposed to the risk from residential property loans than any other developed economy.
The housing market is hard to predict. Ben Bernanke, as economic adviser to George Bush, told Congress in 2005 that there was “no bubble to burst” in the US housing market; in 2008, as chair of the Federal Reserve, he predicted that problems in the sub-prime mortgage sector would be “limited”, and would have no effect on the wider US economy (despite these predictions, he was awarded the Nobel Prize last year).
But Britain’s property boom is different; almost everyone involved knows that it is a mass exercise in self-deception, our economy’s biggest lie. Real wages have hardly risen for more than 20 years – and the pensions of today’s workers are mostly paper-thin – but the dizzying rise of the property market has offered a substitute for economic growth. It was a substitute people accepted, because it seemed permanent: the expensive house that sucked up a lifetime’s wages became the savings account, the pension, the inheritance. That wealth is now beginning to dissolve.
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When Danny Dorling was a student economist at Newcastle University in the late 1980s, a bulky envelope would arrive each month containing ten floppy disks, on which were stored the month’s housing transaction data. One day in the autumn of 1989 he opened the envelope to see a single disk inside. He called the building society to check if there had been a mistake, but that was all there was. The number of people buying houses in the previous month was so small that all the data fitted on to a single floppy.
“And that’s when we knew,” Dorling, now a professor of geography at Oxford University, told me. That October, interest rates reached just under 15 per cent, eliminating demand in a market that Margaret Thatcher’s privatisation of social housing had already over-inflated. In the crash that followed, in some areas of London prices fell by 40 per cent over the next three years. By 1991, 75,000 homes were being repossessed in a single year.
When the next crash arrived in 2008, stronger medicine was administered. Governments introduced a new world of cheap debt, via near-zero interest rates and quantitative easing, and house prices recovered.
We are now starting to pay for that recovery. As interest rates rise again, they appear to be at much lower levels than in the 1980s, but they don’t feel it. This is because real (inflation-adjusted) house prices are almost three times what they were in the Thatcher era. Homeowners today have so much more debt that mortgages at 6 per cent interest take up about as much disposable income as they did in 1989, when they crashed prices and forced thousands of people into negative equity, mortgage arrears and repossession.
Dorling says this creates a self-reinforcing risk: people who should be selling up, such as retirees in big houses, will see prices falling and so won’t move. “The biggest squeeze” on housing supply in this country, he says, is not the first-time buyers who have been the focus of so much government policy but a quiet mass of last-time buyers with empty bedrooms. As prices fall, he says, these owners will restrict supply further by “not accepting a fall in house prices – sticking in their three-bed semi when there’s only one person there, because they think it’s worth £50,000 more than it is. Numerically, that is by far the biggest problem.”
This is not an act of selfishness, but rather the reality of the post-2008 economy, where houses have become financial assets rather than goods. The simple laws of supply and demand have ceased to apply, and people have been incentivised to keep an expensive property because it’s their biggest and most dependable asset. In an era of stagnant real wages, the house has become the bank.
“It is part of your retirement, because your pension won’t be enough… it’s the money you’re going to give to your grown-up kids, that will give them their deposit,” Dorling says. This creates a market that is fundamentally irrational. “It’s such a large amount of money, that people aren’t in a position to accept that drop in their perceived wealth… We’re just not ready for a fall that’s a real fall, where it doesn’t return again. And the more we don’t accept the fall, the sharper we make the fall that actually occurs.”
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But the longer this denial persists, the more serious the risk to the people at the other end of the housing chain: those in need of social housing. Someone in another part of London depends on a wealthy pensioner buying the flat on Ryecotes Mead, because for every 70-year-old holding on to their Victorian three-bed there is a family that can’t leave their two-bed flat, a renter who can’t become a first-time buyer, and a cash-strapped housing association placing tenants in flats with potentially lethal mould and flammable cladding.
“We have more space than we’ve ever had before, more empty bedrooms than we’ve ever had”, says Dorling. The empty rooms in the Victorian three-bed are still in use, not as housing but as assets; the financialised housing market has created more space for money than for people. This situation isn’t a natural upshot of unmanned market forces. Decades of government policy have pursued higher prices: Thatcher created the 1980s boom through the Right to Buy scheme, which sold off 2.2 million council houses to private owners but restricted the supply of new social housing. Gordon Brown preserved tax reliefs for landlords, and pushed the Bank to use QE to keep the 2008 crash at bay without planning for its effects on asset prices.
In 2014, the then chancellor George Osborne gave people the option to withdraw money from their pensions at 55, meaning that in a rising market, becoming a landlord was for many still the most obvious investment. Osborne also introduced Help to Buy, a £29bn programme of loans that, according to the House of Lords Built Environment Committee, unnecessarily inflated the market.
By 2016, 40 per cent of the council houses Thatcher and her successors had sold were being rented by private landlords. For a few million people, Britain’s rentier economy was capitalism on easy mode: owning a house guaranteed an appreciating asset (a house that rose in value) and an income stream (rent). The tax system was also rigged in favour of landlords, who pay as little as 10 per cent on their capital gains and no National Insurance. By 2018, around £52bn of Britain’s GDP consisted of people paying each other rent.
When Covid-19 struck, Rishi Sunak pumped the market harder still by removing stamp duty and reviewing borrowing requirements. It was under Sunak’s chancellorship that the first 50-year mortgage – the ultimate admission of a failed market, a house that can never be paid off – was approved.
Jeremy Hunt appears determined to continue that work by supporting first-time buyers who are prepared to take on a mortgage for 95 per cent of the value of their property; anyone who does so at this point is very likely to find themselves in negative equity. Hunt has also announced that he will be moving the next stamp duty change to 2025, which will boost demand before the next general election and cause the market to slump after it.
The result of this great experiment in market intervention was the reimposition of Britain’s class system. The generation born at the end of the Second World War grew up in a world in which social housing was almost the default; many people, at some point in their lives, lived in a council house. But as council housing was privatised and the property boom took hold, homes became once more a barrier to social mobility. By 2021, almost half of young first-time buyers used their parents’ money to buy their home, according to Legal & General; we are returning to an inheritocratic society, in which the normal way to become a property owner is to be born into a family of property owners.
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The big joke, at our expense, is that this was supposed to be a meritocratic shift. Even as it was moved out of reach by the price bubble, the ideal of home ownership saturated our culture: the nation of shopkeepers became a nation of house-hunters. On TV Location, Location, Location has run for more than two decades, alongside thousands more hours of Grand Designs and Property Ladder. HGTV and PropertyTV show nothing but programmes about buying, selling and improving houses.
For a small cadre of large-scale housebuilders, meanwhile, a real boom did occur. In the five years that Help to Buy enabled what was then the UK’s largest housebuilder, Persimmon, to expand its profits, a small number of senior executives at the company paid themselves annual salaries amounting to £444m. Persimmon’s CEO, Jeff Fairburn, left after his 2018 bonus of £75m caused a shareholder revolt. Those same housebuilders are now clamouring for the return of the Help to Buy. With so little competition in housebuilding, and such desperation for new homes, these companies remain free to build homes not where they are needed, but where they are most profitable. Dorling compares them to the companies running Britain’s water systems: “We’ve ended up with a monopoly of extremely greedy businesses, not interested in the long-term future.”
How much do prices have to fall before banks begin to panic? Residential mortgages make up more than half the value of all loans in the UK financial system. At some high-street banks, this proportion is higher: 85 per cent of Santander’s loan book comprises mortgages. Lloyds has more than £300bn in mortgages outstanding, around £50bn of which is loaned on buy-to-let properties.
The answer depends on the bank. The major high-street banks have a strong institutional memory of 2008, and are regulated more tightly than they were then. The capital buffers they now hold would cover the Bank of England’s most severe stress test scenario, in which prices fall by just over 30 per cent. As a general rule, because the average loan-to-value ratio on a British property is circa 50 per cent, prices would need to fall by around that much before banks weren’t able to recoup what they had lent through foreclosure.
Fortunately, no one in the industry that I’ve spoken to expects prices to fall by that much, and even were that to happen, banks would probably allow people to stay in their homes because mass repossessions would force more homes onto the market, which would depress prices further and cause greater losses.
But the fallout from Kwasi Kwarteng’s mini-Budget was a reminder that in times of stress, esoteric financial constructs can cause chaos. In September, a specific type of investing strategy based on derivatives (liability-driven investing, or LDI) suddenly began to cost pension funds hundreds of millions in margin calls needed to cover potential losses.
Two people in the financial services industry (neither of whom wished to be identified) said that specialised lenders – offering riskier loans, or with borrowers concentrated in one industry or area – might be tested as more borrowers are unable to meet their payments. Or we may begin to hear more about real estate investment trusts (REITs), which investors such as pension funds use to invest in large bundles of property assets. Several REITs have recently stopped investor withdrawals.
For regular homebuyers, new defences are being prepared against the coming storm. In December, Hunt met mortgage lenders and the Financial Conduct Authority to discuss measures such as switching borrowers from repayment to interest-only mortgages, in order to lower their monthly payments and keep homeowners solvent during the recession.
But such measures assume that the house-price crash will be a temporary issue. This is by no means guaranteed: in Japan, residential property prices have still not recovered back to their 1991 peak. The big question for the UK financial sector is not how much prices will fall but how long it will take them to recover.
Countries can be defined as much by their failed markets as their successes. The US economy, for example, is buoyed because two thirds of the country’s population depend on their employer for health insurance; the fiercely competitive US workplace, in which workers accept no paid holiday, no parental leave and long hours, is partly a fight for affordable medication and hospital beds.
Britain has the opposite problem. I once asked the founder of a British technology start-up what advice he would give readers who wanted to go into business. “Don’t buy a house,” he replied. His reasoning was that had he been a homeowner, he would have spent all his money paying a mortgage rather than following his entrepreneurial dream.
It was terrible advice (I never regretted buying a flat; his business went under) but overpriced housing does hold people back. The economic problems that define modern Britain – low growth, low investment in business, over-dependence on services, an imbalance between London and elsewhere – stem partly from so much of Britain’s capital being either tied up in unproductive assets, the largest of which is a £9.2tn pile of bricks and mortar, or spent servicing the debt on those assets.
At a recent New Statesman event, I interviewed the financial crime specialist Oliver Bullough, who spoke about the dirty money – much of it from Russia – that washes through the UK housing market. A reader asked us if he should feel guilty for benefiting from the value that corruption has added to his house. The answer is no: you should feel enraged. The apparent wealth may feel like a win, but it isn’t: it is money taken from your children and grandchildren. Rising house prices are not a benefit; they are a tax on the future.
In this sense the coming housing crash may, if there is political will, be made into an opportunity. Jeremy Hunt and Michael Gove could use the inevitable market correction to return sanity to house prices and rents, to end the speculation that has served as a proxy for real economic growth and the deep inequality that this has created between people who own property and people who don’t.
A bold programme of housing reform could allow the Conservatives to steal ground from Labour in a policy area that will only become more emotive. Attempts to prolong the fiction will only make it worse.
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This article appears in the 01 Feb 2023 issue of the New Statesman, The Great Housing Con