Successive increases in interest rates might have succeeded in taking the heat out of the property market, but Britons’ great love affair with bricks and mortar appears unshakeable. Despite numerous signs that the party might be over, almost two-thirds of the general public believe house prices will continue to rise.
The decade-long housing market boom has created thousands of paper millionaires and spawned a generation of property developers and buy-to-let investors on the quest for a fast buck. Average national house prices have risen threefold since the early 1990s, from about 60,000 pounds to some 200,000 pounds now. That has taken the typical house price to about nine times’ average annual earnings - up from about five in 2001.
The boom might have caused huge problems for some - thwarting the home-owning dreams of would-be first-time buyers and pushing more and more people into the inheritance tax net. But, for those on the property ladder, it’s proved one long party.
It’s little wonder that consumers want the good times to roll. And why shouldn’t they continue?
The good times have certainly been rolling. Those who called the top of the property market in recent times have been forced to eat their words: house prices have seemingly defied gravity. But, like the last few stragglers at the bash of the century savouring the dregs of the last bottle of Bolly long after the sagacious among them have long hailed a cab, are consumers blindly revelling on, clinging to a moment that has passed? House prices unexpectedly fell 0.6 percent in September - the first fall since December last year - according to mortgage lender Halifax.
Just yesterday the world’s leading financial forecasters said Britain is heading for housing market meltdown, with homes overvalued by as much as 40 percent. That prediction, from the International Monetary Fund (IMF), would make the British housing market more inflated than US property before prices there crashed, causing chaos to financial markets around the globe. “The extent of house price overvaluation may be considerably larger in some national markets in Europe than in the US,” the IMF said in its bi-annual report on world economic prospects. The estimates suggest that a number of advanced economies’ housing markets could be vulnerable to a correction.”
British borrowers - like those who triggered the US sub-prime crisis - are now struggling to service their mortgage debt and lenders are tightening their lending criteria: factors that could act as a catalyst to such a correction.
The IMF does qualify its pessimism. It concedes there are “considerable uncertainties” in its model, which does not take into account pertinent factors in Britain: supply shortages, boosts to prices from immigration and greater affordability due to the availability of mortgages.
Differences between the climate today and that of the 1980s, when a British house price crash led to two years of wider recession, gives another reason to be less bearish. Chief among them is inflation. It stands around a target 2 percent and economists largely expect the next move in interest rates (currently 5.75 percent) to be down. Back in the 80s inflation was out of control, almost trebling from 3.4 percent in 1986 to 9.5 percent in 1990, and the base rate doubled to 15 percent within the space of a year.
The Treasury does not foresee a repeat of the late-80s property crash. “We’re certainly not expecting a disorderly correction in the housing market,” a senior official told Reuters. But, whether a sharp correction or soft landing is in the offing, consumers’ apparent unwavering belief in the housing market might come at a cost.
This might be the beginning of the end of a beautiful relationship. Those who fail to recognise that might be left with only one refrain: It’s my party and I’ll cry if I want to.