Saturday, October 08, 2022

WEEKENDER: The Housing Market, by Wiggia

The news that interest rates are going up has spooked the housing market. In truth it never takes much to do that as much of the property wealth accumulated is built on not-so-firm foundations, but has become over the years the base of much that the ordinary working man has accumulated in capital assets, in effect replacing ever poorer pension returns. 

It suits the powers that be and the building industry to keep kicking the can down the road as long as possible as a collapse will end whatever government is in power and in the case of the Conservatives take away their biggest donors all in one hit. 

So almost since I can remember there have been endless boosters and financial support mechanisms invented to keep the train on the rails, and to a degree very successful it has been, but at a cost. 

The days of thrift have been replaced by ever increasing borrowing. How did we arrive at this? If we go back to the time when we purchased our first house, the procedure was quite simple: you approached a building society, told them what you earned, they told you on that basis what you could borrow, and you would open an account with them and prove you could repay the agreed amount by saving with them for two years. You knew where you stood financially as interest rates were pretty static and even if your wife had a decent job that would only give you a better chance of securing a mortgage, it would not increase the amount you could borrow. The borrowing at that time 1967 was two and a half times earnings; we saved for the two year period and purchased our first house. 

How times have changed; and they started to change in the Seventies with larger multiples of earnings partly to boost the mid seventies housing stagnation, but as with all fixes they became the permanent model. This multiple earnings rate continued to increase with every hiccup that the housing market encountered, up to the disaster of ‘89 when we had the only real slump in house prices along with borrowing rates that meant negative equity became a reality. One would have thought that period would have had a return-to-reality effect on the market, but no, by now we were well into the BMW on the drive period when young couples were not satisfied with just getting a house, they wanted the instant nice car and all the rooms fitted out and no real halt to their lifestyle outside of this. Who can blame them, when schemes such as low deposits and fixed low interest rates for a number of years made it all possible?

Meanwhile the multiple years earnings ratio continued to rise, one’s partners earnings added to the total and today six or seven times annual earnings to borrowing ratio is not unusual. Add to that the low interest rates that have become the norm since 2008 and many would think this is housebuying Nirvana with no end. 

The reality is somewhat different. With the rise in rates now happening the warning signs are out for a correction in prices. What is guaranteed is that the Conservative party in particular, who rely for a large portion of their votes on the house owner sector, will do all they can to stop the collapse happening; what is left that they can salvage from the magic money tree has yet to be announced or provided. 

The overlying problem with the housing market is that years of gifting first time buyers schemes to get them to buy houses has simply pushed up prices, in effect creating a Ponzi scheme. Every time easier money is provided prices go up as sellers know more money is available; the same with the lower deposits that free up more buyer'  money and other similar schemes. It has happened every time these schemes or fixed rates or as now ‘lifetime mortgages’ have been introduced. Surely we have run out of incentives that only push up prices, yet while whoever is in power facilitates all these measures prices will continue to rise. 

No one wants a housing crash. We saw the damage in the late eighties / early nineties when as an aside few could sell their houses because so many were tied down to mortgages they could not or barely afford for properties that had lost a fair chunk of their value. 

Having said that there was no help at that time yet already we hear cries of ‘the government must do something’; not really the government but the taxpayer of course. 

With many mortgage offers being withdrawn and interest rates reaching around 6% one could say the market is returning to something like normal, the sort of level that prevailed for years before 2008. Surely that, with a corresponding drop in house prices, can only be a good thing. 

Many will say this is the free market in action, but that would be being economical with the truth as governments have a vested interest in keeping the housing market going along nicely even at the ridiculous current prices. They take a lot of money from transactions for doing absolutely nothing, display faux concern about getting everyone on the housing ladder and at the same time placate the building industry who donate so much to the Party. 

You will also note the government's efforts to get houses built and sold does not include raising the build quality to a standard enjoyed elsewhere in Europe, or the size of the properties built, or the dire architecture. That I have covered in previous articles, yet it is part of the overall poor picture of where the housing market has ended. Perhaps at the very least price stagnation for a prolonged period would be the easiest way to bring back some common sense to the whole sector. 

The last couple of years have been a fantasy land with the housing market seemingly in another world to everything else. The pent up demand created by Covid ran its course long ago or it should have, but the signs are there. Looking locally, houses are no longer selling as fast as they were put up for sale, in fact many are sticking and 'reduced' signs have reappeared. Maybe, just maybe, this is a sign that some sanity is coming back to the market along with the withdrawal of those fixed low rate mortgages. 

Those who say the housing market has only ever gone up have obviously not lived long enough to remember ‘75 and ‘89 ‘90. Yes it did all recover but many got their fingers burnt big-time then. Governments need to stay out of the game and lenders need to stop being so greedy - but will they?

1 comment:

Bill Sticker said...

"Governments need to stay out of the game and lenders need to stop being so greedy - but will they?"

I for one will be amazed if they do.