Homes By Net

There is a lot of talk in the media about the likelihood of a house price crash in the UK. My own belief is that a crash is a certainty, it is merely a matter of when and how it happens. The thing is, house prices are driven in the short term by sentiment and in the long term by more fundamental factors like demand and affordability.

When sentiment gets out of step with underlying realities you have a boom. When sentiment changes, as it must, then the market corrects. The catch is that it is almost certain that the correction, when it comes will also be driven by sentiment, just as the boom was, and that means that you get over-correction and prices plummet back below the long term trend creating the rollercoaster ride effect of the chart on the left.

So how much will the correction be? The second chart shows the trend since the last boom at the end of the 1980s and I think that it is pretty much certain that the price line will nosedive below the long term trend. That means that the correction is likely to be at the higher end of the range of projections which are being published.

Bear in mind, many of the experts reporting have vested interests, so they are very wary of saying things which will scare people too much. Also, one thing I have noticed is that the optimists tend to be young, and I suspect that because their own experience is that house prices only go up, they find it hard to conceive that anything else could happen. My remarks draw on my own experience. As an estate agent in the 1980s boom, I worked in the English market town which saw the most severe drop of all (38%). In that locality, from 1982 I saw prices rise year on year at rates of 20 – 30%, culminating in a staggering local 100% rise between 1987 and 1988 before falling off the cliff in September 1988.

The mental image I have when I tried to describe the mechanics of the crash is something like Wile E Coyote chasing the roadrunner across a canyon. The ground drops away beneath him, but he keeps on running. It is only when he looks down that he sees that he is running in mid air and crashes to the canyon floor.

So long as you can keep up your mortgage payments through the hard times, then, eventually, you will reach the other side of the canyon and life will go on as if nothing ever happened. For most people, that is how the coming crash will be. An average person only moves about once a decade, so a market slump doesn’t make much difference to them. 

The pain is felt only by those forced to take the hit. These include all those who find they can no longer service their mortage debt, for whatever reason, divorce, illness, redundancy and for landlords, falls in rental returns. Mostly, it will hurt younger people who will be trapped in the rabbit hutch they were so desperate to buy by negative equity and wanting to start familes, they are the ones who are most likely to have taken on excessive debt, least likely to have savings to draw on, most likely to be effected by changes in their circumstances – children, divorces, job relocations,promotions and redundancy and layoffs.

Where this boom differs from the 1980s boom is in its scale. Relatively, prices are more out of step than they were then, and the problem is not localised. This time round the whole country has boomed.

In the end, this is all about sustainability. There is no way that price rises can continue to outstrip earnings forever.

Which brings me on to population. I live in England, and as can be seen in the chart, in the last two centuries England’s population has increased five fold and we are now reading projections of a further increase of 20% over the next half century. I have to say that I lack confidence that the English economy can continue as it has been over the last decade. We have been running the place at a loss, borrowing to keep up appearances, and at some point we will reap a bitter harvest. When that happens, England will not be such an attractive place for migrant workers to come to, and we will probably also lose many of those who have come here over recent years. With the native population in decline, maybe we can avoid more growth. I certainly hope we can, as I really do not believe that we can go on as we have been. Again, it is about sustainability. 

If you think I am wrong, and I know many people think population growth is desirable and even economically vital, then please tell me this – there must be some limit to population and even if you think a billion people living in England would be good, what happens when we get there? I think it is time to stop, I think that our quality of life is deteroriating already and will get worse as the population rises so why not plan for a stable or decreasing population now. I would point out that I am talking about England, the situation in Scotland and Wales is very different, their population densities are nothing like ours, but I don’t think it makes sense to lump all three countries on the island of Great Britain together. Having said that, the Optimum Population Trust suggests that the sustantial population for all three countries is only 29,000,000, and I am sure that in the end we will need to make deals on how resources are shared between the three countries.

Even if you think that the population of England has room to grow, global population trends terrify me. Where will all these people live and how will they live? Recommended reading:- Optimum Population Trust