I cannot believe it. Worst crisis since second world war. Banks to “lose” £500
billion. House prices to plummet by a third. Great depression threatened.
Really? I recall from my economics lesson a different and no less potent
phenomenon: mad journalism disease.
Like most people I have found the credit crunch hard to follow. The world
economy, we were told, was tooling along under the guidance, at last, of
competent central bankers rather than hysterical politicians. In Britain,
Europe and America, indeed in Moscow and Shanghai, the experts were in
charge. Gordon Brown boasted the wisdom of his putting the nation’s
financial affairs in the hands of an “independent” Bank of England.
Now we are allegedly up the creek. The selfsame bankers’ indulgence of
personal and institutional greed, their regulatory incompetence and their
blindness to speculative bubbles have shown them to be as fallible as
politicians. It beggars belief that they could see no danger in so-called
collateralised debt obligations, known to the Victorians as “bad paper”.
Abroad the bosses of Citigroup, Merrill Lynch and UBS at least resigned. In
Britain the bankers pick up their bonuses, become government advisers and
tell the newspapers that armageddon is at hand.
What we have had is another house prices bubble, slightly less pronounced than
in the early 1990s. Then it was fuelled by government mortgage subsidies,
this time by low interest rates and rotten banking.
Both brought house purchase within the range of people who could not afford
it. What goes up tends to come down, painfully for those who have
overborrowed, but not for all.
I am thus of the Gordon Brown school of panic aversion.
Certainly the collapse of the American housing market had fed through into a
collapse of inter-bank confidence, sustained in turn by the reckless way
that bonuses are structured in finance houses. To let dealers gamble with
the bank’s cash so they could win millions while the bank took the risk
convinces me that close proximity to large sums of money drives men mad.
That is curable. Propping up inter-bank confidence, like maintaining consumer
demand, is within the power of financial regulators: witness the swift
action of the US Federal Reserve Board. There is no reason for recession -
unless you go looking for one - and no reason confidence should not return
when the housing market has cooled and when Britons learn to treat house
purchase, as in the rest of Europe, as an expensive luxury.
To this end consider the announcement last week from Britain’s biggest bank,
HSBC. Its asset base is sound, not being based on dodgy mortgages. It is
able to continue lending to the housing and commercial sectors in the normal
way. It even offered to pick up any casualties of the mortgage market whose
credit was good. The same must surely apply to other banks as soon as they
can rid their books of bad housing debt. The underlying economy is sound.
Middle Eastern wars may not help, nor does the rise in commodity prices, but
wars and surging demand can be spurs to growth, not recession.
The cause of the trouble is the overselling of one product and one alone:
housing. It is a massive product, but its overselling was largely confined
to America and Britain. Two to three million incautious debtors bought
assets they could not afford because banks offered them free money to “get
on the housing ladder”. Lenders and borrowers alike were consumed by the
madness of housing.
Nowhere is so consumed by this madness as Britain. Buyers impoverish
themselves to acquire an asset whose full value they will probably never
enjoy, but will pass on to their children or the taxman.
Such behaviour is bizarre when affordable, crazy when not.
More than 70% of Britons own their own homes, against 40% in Germany and 50%
in France. Since ownership tends to be inflexible, Britain is probably the
most “overhoused” country for its land area anywhere. In most countries only
the relatively prosperous buy a house and then not until they are settling
down with a family. Most people rent. A flexible economy needs renting
rather than owning to ease job mobility and encourage people to put their
savings in more productive investment.
As a result of the housing hyperbole, the word housing never occurs in British
political discourse except coupled with the word crisis. In an upturn (2006)
there is an “affordability” crisis, in a downturn (2008) there is a
“negative equity” crisis. Neither is a crisis and both involve winners and
losers. In an upturn, rising values can release savings into expenditure. In
a downturn, falling values mean more first-time buyers come into play. It is
called a market and it will always tend to self-correction.
This does not stop politicians perversely seeking to exacerbate the cycle,
usually by trying to make houses cheaper than people could otherwise afford.
At the peak of the boom last July I suggested that politicians stop seeking
ways to cut house prices. They would merely encourage people to buy who
could not afford it, mortgaging themselves for life and pushing prices yet
higher.
Yet Yvette Cooper, then the housing minister, insisted that everyone had “a
right to a decent home”. She went further and claimed to know exactly how
many people had not attained this right: 40,000 a year. They were variously
those who wanted to leave home, get divorced, have a baby or merely start on
the investment ladder. All must have their need satisfied by the state,
meaning, in some vaguely socialist sense, that house prices be somehow
brought within reach of their income bracket.
Cooper got Kate Barker, a Treasury trusty, to demand that the government
requisition as much green belt land as it could to meet this “national
need”, as if the notional 40,000 souls could all be put in buses and dumped
somewhere in Bedfordshire. This was likely to make zero impact on prices.
Meanwhile, Cooper increased the cost of purchase by insisting on home
improvement packs. It was classic short-term hysteria-led policy.
Within a year house prices have lost a tenth of their value and some pundits
forecast a 30% fall in a year. Presumably those 40,000 “needs” have been
met, as hundreds of thousands of potential buyers find the house that was
too expensive a year ago is now within their reach, even if the mortgage is
rightly more difficult to get. The only victims are those who were
encouraged by ministers to take on debts they could not afford, so the
government could boast how many people it had “helped onto the housing
ladder”. What about those now falling off it?
This giveaway housing culture goes back to Margaret Thatcher. She increased
housing subsidies through mortgage interest tax relief by 200% in real
terms, to £7 billion in 1990. The impact of this “middle-class bribe” was
wiped out by a commensurate rise in demand and thus in price.
Geoffrey Howe, her enraged chancellor, called it “a glaring anomaly,
distorting the housing market almost as much as had rent control”. Nigel
Lawson, his successor, called it madness.
Journalists are little better, citing over and again the misleading ratio of
earnings to average house prices. The ratio is meaningless if it is not
adjusted to the cost of borrowing, in other words to the actual cost of
purchase to those who need mortgages. This ratio has remained remarkably
stable, as house prices reflect the cost of money. It is worth repeating the
statistics: the median mortgage payment for first-time buyers was 16% of
earnings in 1975, 18.4% in 1980, 27% in 1990 (the last year of madness) and
20% this year. Falling interest rates should reduce this percentage and push
the ratio further down, even if mortgages are harder to come by, as they
should be.
This is another way of saying the best thing the government can do is leave
the housing market well alone. The house price bubble is in large measure
politicians’ doing. To that extent the current shock can be laid at their
door. They should lower the public’s expectation of living space in general
and home-ownership in particular.
Britons cannot sprawl extravagantly over the face of their island. Inducing
them to do so makes no environmental sense and no economic sense either.
simon.jenkins@sunday-times.co.uk
The British public as well as its elected government have been overspending and overconsuming for decades. Housing is never an investment, it's consumption according to the austrian school of economics. While all is well, this appears to escape most, but when the recession arrives it becomes all too clear, but too late, that too much was consumed and too little paid off. Now the family silver has to go. Across the country, assets scrutinised and value affirmed, some will be sold and some will be kept. The process will be slow, full of false turns as people refuse to accept that bad times are here to stay. Politicans and their so called inflation fighters in the central banks will do their utmost to prevent the process from having its due course. More pain will ensue from it. How anyone could ever believe that central bankers were inflation fighters in an economy based on fictitious money is going to be the great question grand children will be asking themselves for generations ...
AustrianBanker, London,
House prices will return to 3.5 x income.
It could be via a long period of gradual decline over a ten year period, where prices drop by around 3 to 4% a year, however given the irrational exuberance and panic that drove the bubble in the first place, it seems increasingly likely that we will see falls like the 2.5% reported last month compounding that decline a lot quicker.
rick, sydney,
"the best thing the government can do is leave the housing market well alone"
This is the best piece of advice stated in the media recently.
Any attempt to stop house prices faling will be like the attempt the keep the pound in the ERM in 1992, very expensive and only causes a small delay to the inevitable.
Tim, City of London,
I pay more rent per month than my friends pay on their mortgages, even after recent rises. It is a right to be housed, you either work to own it or work to pay the person who does - there's not a huge difference.
David Jenkins, Shropshire, UK
Try telling a Russian that having their own home is a luxury, it's not a luxury, it's a right.
Lee Owen, Bucharest, Romania
Contrary to Mark White's view, tenants enjoy a great array of rights. It is very difficult for a landlord to get rid of a tenant, and to be honest "just two months notice" is actually a relatively long time.
LB, London,
You didn't say whether you are a tenant yourself, or are you in the process of selling up to move into a rented place?
If not, do you feel you might be just the teensiest
bit hypocritical in denying to others what you have yourself?
John Osbourne, Lancashire,
Simon Jenkins is wrong. The reason Britons want to own their own houses is not just for security of tenure, but because of the cost of renting. I realised I had to get on the housing ladder in my mid-twenties when I first took out a pension. At the first meeting with my pensions advisor he calculated what I would need to save to give me an income comparable to what I was earning (which was around £24k pa ten years ago). First he subtracted my housing costs. He made the assumption I would own my own property by the time I retired. Even then, and bearing in mind I was buying my pension in my mid-twenties, the amount I needed to save was crippling. I realised that if I got to retirement age and still had to pay rent I would be - to say the least - in serious difficulties.
Helen, London,
Sir Simon you seem to be taking a very " Irish " ( I am sure they will fogive the gentle humour ) approach.
You will have heard the answer given to a tourist's enquiry for directions, " ah well sir,if I was you I wouldn't start from here "
To expect, or even dream that any politician, let alone political party ,would expound the idea that the expectation of home ownership should be reduced ,is fanciful.
We must,all of us,deal with things as they are and as they will politically remain.Do not sell your shares in B & Q just yet for the industry that homership supports will thrive again.The aspirations of homeownership are worthy and will remain long after this "crisis " has corrected itself.
The little people, through their one vote will continue to share your enviroment.
robert everitt, wolverhampton,
M Clark is quite right. At least one reason why the majority in most European countries choose to rent is the much higher standard of property. In Belgium, which is typical, the average tenant will expect high-quality build, with double glazing, central heating, private parking and phone and TV cabling. If an apartment, there will be a lift, entryphone and locked letterbox (and it won’t be in a ‘sink’ area, either). You would be lucky to get any of these in a UK rental. Further, the prices are lower and strictly controlled.
In the UK, unfortunately, the idea had been sold – largely by estate agents and powerful lending institutions – that unless you are on the ‘housing ladder’ you are nobody. A tenant, for example, can’t get any of the better credit cards. For a large rent, you are entitled to a roof over your head, four walls, and that’s about it. For a decent standard of living, most people are forced to buy.
Andrew May, De Panne, Belgium
I believe you're wrong that the cost of servicing a mortgage is lower now than in the late 1980s.
The interest part is lower. But the lifetime debt service burden is higher. People are buying houses 'worth' upto 10 times their income in a world of LOW inflation where wages rise 4-5% per year not double digits. When you work that out, you have a generation of debt slaves who will fail to see the benefits of lower interest rates as it doesnt reduce the amount of debt that has to be paid back.
james, london,
The percentages are misleading when the differences between postcodes where prices have gone up and prices have gone down are taken into account.
Ivan Rendall, Worcester,
The statistic about median mortgage payment is misleading.
Presumably Simon is using the data from the Council of Mortgage Lenders (http://www.cml.org.uk/cml/filegrab/2ML2.xls?ref=4624)
What he fails to realise is that the median mortgage payments shown in this document are only interest payments and do not include the cost of capital repayment on the mortgages.
Given that interest rates were higher in 1990 than they are today the 27% figure was much more of the total mortgage payment that the 20% figure now.
Realising this makes the current level of house prices seem even more ridiculous.
Jon Clare, London, UK
It is not "crazy" for British people to want to own their own homes, whatever the current prices. There is no decent alternative.
Renting in the UK is apalling. Unlike in the rest of Europe, in the UK the average tenant can be evicted for absolutely no reason, with just 2 months notice.
Is it any wonder people want to escape such an insecure existence?
Mark White, London, UK
Excellent Sir Simon.
Time to cool the febrile and irrational atmosphere being created by irresponsible journalism over-egging house price warnings with talk of Apocalyptic gloom and disaster. Reach for the Book of Revelations wrote one journalist this week!
Yes, the ludicrous house price inflation fuelled by a flow of easy money cause by a failure of regulation is being corrected. But there should not now be a contrary error of pessimism to out do the previous irrational exhuberance.
A long period of stagnation in house prices (the biblical 7 years) and not an outright 30% crash, as some commentators are suggesting, is both necessary and welcome. Any other outcome would undermine economic stability, the social order and lead to massive unemployment. In a country like the UK with an unprecedented surplus of migrant labour attracted by a previously booming economy the consequences of the social dislocation caused by massive collapse in house prices would be unthinkable.
John Collins, Bromley, Kent
Whilst many of the points made in the article are true, I would add two:
Firstly, the BoE might in theory have been independent but that did not mean "the experts were in charge". The BoE was required only to target inflation - and CPI inflaction at that - so you really cannot blame the central bank for any of this situation. Further, regulation/supervision of the banking sector was taken from it and given to the FSA.
Secondly, it is not just house prices that rose. All asset classes did, including shares, and much of this was the result of ultra-cheap money washing around the global financial markets looking for a good return. There was clearly something crazy about having Japanese Yen available to borrowers at 0% interest. For those who were able to get there hands on the stuff, it must have been the ultimate 'money for nothing' while it lasted (i.e. until currency movements wiped out the game).
MarkS, York,
Simon Jenkins sternly claims that Britons should 'learn to treat house purchase, as in the rest of Europe, as an expensive luxury ' without any mention of why so many strive to get on housing ladder.
He makes no mention of just why so many people want to buy rather than rent which is perhaps unsurprising given that he can afford to live in luxury in a super expensive part of London. The crucial factor here is security of tenure. The reason why a much greater proportion of people in France and Germany rent is that a tenant has far greater rights including, crucially, a long notice period as well as much higher quality rental housing. Here in UK you can be booted out of your home with just 2 months notice. Try bringing up young kids and being given notice every year as the landlord decides to sell as has happened to me and to many of my friends. Moving is one of the most stressful experiences there is especially when you have to then find new schools for the kids.
M Clark, Southampton,
Simon, you're absolutely right - and utterly wrong.
Right, in that this mess was predictable and entirely avoidable; wrong because we're in it, we don't have the ability to restart more sensibly. Grossly over-much has been loaned to very many housebuyers. If they can't fund their mortgages the clever move, that some at least will take, is to surrender their properties to the mortagors - who can neither hold on to them nor sell them for even nearly the value of the debt. So, in the absence of government action, banks and building societies will go broke; hence recession if not slump, loss of jobs, ever more people desperately short of money so not consuming, in a truly vicious spiral.
The situation is not irretrieveable, but don't kid yourself the danger is hallucinatory.
Noel Falconer MEcon, Couiza, France
The house price bubble cannot be laid at the door of politicians. The mortgage industry is to blame. With expensive and sophisticated marketing it encouraged the 'unhoused' to gear themselves to impossible levels.
In the same way the buy to let industry preyed on the 'unknowing' with potentially toxic results.
There was a time when the mortgage industry was self regulating. It balanced its lending against saver inflows. When it moved away from a model which worked and started to tap into wholesale funding the eventual outcome was obvious . Applegarth of Northern Rock was not an idiot. He knew that the strategy he was pursuing of 100% financing to all and everyone would one day end in tears.
Any sector analyst who ever recommended Rock a 'buy'
should never be trusted again !
JD, London,
In Ottawa, Canada, the overexpansion of housebuilding and buying has had a serious and sinister consequence for the environment.
The Ottawa Citizen, and TV announcers are warning residents to stop pumping the water from flooded basements into the overloaded sewers to prevent sewage backing up into homes. They are asked to pump the water up onto lawns instead to soak away there.
My sister's house on Kemptville Creek off the Rideau River is surrounded by water for the first time ever.
The massive snowfalls of this winter have crippled eastern Canada and now it is melting. The big old Ottawa River won't crest for another 3 weeks. They are in deep doodoo (literally, now, it seems).
Over the last 20 years Ottawa has built up and out at a very rapid pace. It is a river rich and damp valley. What insanity led to this? Now the water has nowhere to go except into houses when the snow melts.
Property mania and lack of appropriate Govt. controls equal environmental chaos
Tallulah, Hove, UK
You cannot look at the house price bubble in isolation. A large part of the consumer boom has been based on cheap credit. Tightened lending criteria, together with reduced subjective ("felt") wealth based on house prices will hit the High Street and cost jobs. It is going to get ugly...
Herbert, St Andrews, UK
Nice to read such articles, instead of the usual stuff.
Merci.
Samuel Young, Paris, France
Owned or rented, houses are required for the people who want to live in them. That demand has not gone away and rented houses occupy as much space as owned ones.
Also they are home information, not home improvement packs but I agree, a total waste of money.
Peter, Middlewich, UK
This article does not point out that rents have not gone up as fast as house prices. People cannot recklessly borrow to pay rent so rents have to remain linked to wages. In the meantime easy money has pushed the price of houses so high that, with a gross yield of at best 4-5%, they no longer make any sense even as an investment. The only way for house prices now is down
Dean W, Wuhan, China
Excellent article. Thank you.
Andy, London,
Your forgot all about the giant economic sucking sound.
Psst, it's called the war.
Doc Holiday, Florence, Italy