Last week Mark Carney,
Governor of the Bank of England, said he regarded the booming housing market as the "biggest
risk" to financial stability and the long term recovery of the
British economy.
He expressed concern about the rise of large-value mortgages
which might lead to a debt overhang that could destabilise the
economy, and suggested that the Help to Buy should be overhauled to
reduce the risk of it driving a housing bubble. The fundamental
problem, he said, was that we are not building enough new
homes.
House prices have resumed their historic place as top dinner
party conversation topic, in London at least, and there has been
widespread discussion in the media about what might be done to cool
the housing market and slow the rate of house price increase.
Banks are already taking steps to toughen the rules on mortgage
lending, but there have been suggestions that there should be even
tougher limits including a return to maximum mortgage to income
ratios of 3 to 1 and maximum mortgage terms of 25 years. But, some
commentators have argued, this will be of limited impact since,
currently, a third of house sales are to cash buyers.
And in London, where prices are rising fastest, there is a
popular view that they are being driven up by overseas cash buyers
looking to speculate in property they have no intention of
occupying for more than a few days a year, if at all.
One scenario for the future is that the bubble bursts leaving
thousands of owners in negative equity saddled with mortgages they
will struggle to repay. It has happened before. Between the summer
of 1989 and the first quarter of 1993 average house prices fell by
20 per cent, with the fall in London being even greater, with
nearly a third wiped off house values in the same period. The
pattern since 2008 has been different.
Nationally, house prices fell by around 14 per cent in the 18
months to mid-2009, but London was less affected than other
regions, and prices in London started to rise again sooner and
faster than the rest of the country. Currently, average prices
nationally are rising at around 10 per cent a year, but this is
heavily influenced by the high rate of increase - 18 per cent - in
London, and disguises wide regional variation. For example, London
prices in January 2014 were 20 per cent higher than in January
2010, while in the North East they remain 10 per cent lower.
So, why is London different this time around? A popular theory
is that prices are being driven up by foreign cash buyers. But such
purchases are largely confined to what the estate agents call
London's Prime Central markets, which represent only 7 per cent of
sales.
According to Hamptons International,
60 per cent of buyers in the Prime Central areas in 2013 were
foreign and 60 per cent bought with cash. Cash purchasers - but not
foreign ones - have also played a greater role in other areas,
being responsible, again according to Hamptons, for 70 per cent of
the uplift in sales in 2013, in which year cash purchases accounted
for a third of all sales.
The region with the greatest proportion of cash purchases was
the South West - 39 per cent - compared with only 24 per cent in
London, providing further evidence that London prices rises are not
primarily driven by speculation. Many cash buyers are buy-to-let
investors, but an equally, if not more important group of cash
buyers are downsizing owners looking to move to smaller or cheaper
accommodation, often in the country or by the sea, as sales in the
South West suggest.
This evidence tends to undermine the theory that the housing
market and London in particular would be immune from measures to
rein back mortgage lending. Downsizers need someone to buy their
property, and at the end of each chain of purchases there is likely
to be a first-time buyer dependent on a mortgage for a substantial
part of the price. In a recession it is not just house prices that
fall, so does the volume of sales. Existing owners, including
potential downsizers, sit tight and wait for better times unless
death, divorce or financial catastrophe overtake them and they are
forced to sell.
A more plausible explanation why London prices have been so
buoyant compared with the early 1990s rests on two facts. The first
is that London's population is growing faster now than 20 years
ago, and much faster than the rate at which new homes are being
completed.
The second is that interest rates have been held at a historic
low for the last 5 years. Compare the situation 23 years ago when
Britain's entry to the European Exchange Rate Mechanism - and early
exit - triggered the spike in interest rates that sent prices into
freefall. Which leads to the question whether the long-expected
hike in interest rates - which Mark Carney has said may come before
the General Election next year - will be the pin that pricks
London's bubble.
Some lenders have hinted that they have already adjusted their
lending policies to anticipate the expected increase, and the Nationwide Building
Society claimed that the London market is heading for a
"natural correction" with a slackening in sales already underway.
The Society took pains to say they are not predicting a widespread
slump, but then, they would, wouldn't they. Future housing market
trends are probably more uncertain than for some years. It makes
sense to consider several possible scenarios and their likely
impact, not just on the future of the private market, but the
repercussions for social housing, too.