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Sometime in the past 10 years an Englishman's home moved from castle to cash machine. A house ceased to be a place to live; it became instead a financial bet to end all bets - something to be bought and sold, to be toshed up and traded on, a hole in the wall for when funds ran short and a pension for when we finally stopped work. In the age of the castle, what mattered was that it was a good place to live and if it went up in price that was a bonus. In the age of the cash machine, bragging rights came from how quickly it managed to double in price.
We should have stuck to castles - because now the financial system has got dry rot. Those tens of billions of pounds lost by the global banks in markets on the other side of the world are coming soon to a high street near you. What a global credit crunch means when it hits the local branch is that mortgages will go up in price, money will become much harder to get, and the bank manager would be happier if you went somewhere else with your problem.
The storm has been gathering for the past couple of months. Back in February, Nationwide, the largest building society and an organisation that accounts for about one in 12 house mortgages in the UK, announced that it was going to impose tougher conditions on its mortgages and lend a smaller proportion of the total value of a property. Overnight it meant that to buy a £150,000 home, a buyer had to find £37,500 rather than £15,000 of his or her own funds.
Since then Nationwide has been followed by most of the others. Northern Rock has, for obvious reasons, stopped lending. Elsewhere, Abbey, Alliance & Leicester, First Direct, the Cooperative bank, the Halifax - almost anyone you care to think of, in fact - have been drawing in their horns. The monthly statistics for new mortgage advances have plunged. Money drives the market and the market has run out of money. So the plunge in buyers will in time lead to a plunge in house prices.
The signs are already there. Persimmon, our biggest house builder, said when announcing its profits a month or so back that reservations for new homes were down 19 per cent on a year ago, the number of people visiting its sites was down 13 per cent and cancellations are up 20 per cent. Other builders tell a similar story. It is scarily bleak out there - and people who think we can avoid a drop in house prices have not been paying attention. The question is not if - it is how much, and for how long?
Actually you don't want to know how much. Rolf Elgeti, the former head of research at ABN Amro who now has his own firm, Elgeti Ashdown Advisers, in the City, sought the answer by looking at US house-price data. He found that the willingness of banks to lend was the main thing that drove house prices up - or down. Prices went up much faster if banks lent 100 per cent rather than 90 per cent of the asking price. Specifically, he found that a seven per cent increase in that proportion of mortgage finance which happened in the late 1990s led to an effective doubling of house prices in the following 10 years. Cheap finance, 100 per cent mortgages and a willingness to lend three or four times income have fuelled the market here, too. It follows in logic if not in fact that if the bankers' loan machine has gone into reverse, then house prices could dive.
Unless you have lived through one, it is hard to imagine how brutal house price corrections can be. When prices are falling, people refuse to sell unless they have to. On the other side, people don't buy because they cannot raise the cash - and the few who can, drive hard bargains. Houses which changed hands for £1.3 million in 1988 could be bought for £650,000 in the depths of the housing bust five years later. In the mid market, a £500,000 home bought in 1988 would fetch £300,000 in 1993. Yet that barely shows in the statistics of the time, nor does the correction before that, in the mid 1970s. Then, London riverside flats in new blocks were cut from £40,000 to £25,000 by builders desperate for cash flow. So don't be fooled by official figures which deal only in fuzzy averages. House-price statistics are as unreliable as estate agent's promises.
The way to survive is not to be a forced seller, to cut back on spending and sit it out. In previous recessions that was possible provided you did not lose your job or get divorced. This time it may not be so simple. The new factor is the millions of people in the past couple of years who took out cheap starter mortgages and who will face massive price hikes when these run out - hikes so financially damaging they may feel they might as well have been made redundant.
The great unknown as this crisis unfolds is how many such people may not be able to re-finance on terms they can afford and will be left with no choice but to give up and sell out. On this hangs the difference between a crisis which hurts a few and one which could be agony for all. This could be the first time ever in this country where we have had a serious fall in house prices without an economic recession.
The key factor is how long the squeeze lasts. We can survive a few more months; a few more years would be a different story.
That of course is why Chancellor Alistair Darling is reportedly pressing for some arrangement whereby the Bank of England and the other central banks would buy up the toxic debt that has clogged the arteries of the world banking system. But these things are desperately complicated to set up, raise fundamental questions about the role of the state in bailing out private enterprise - and could easily cost the taxpayer billions. Against this is Darling's understandable hope that it would get the financial blood flowing again by restoring confidence in the banking system, which would then feed through to the high street in time to ease the pain before the next election.
If he fails, then it is hard to see Gordon Brown's government getting back for another term. If he succeeds, he has a chance. But for him, and for the nation's home-owners, it will be a close- run thing.
Reader views (8)
A massive fall in house prices can only be good thing. current prices are just made up numbers the result of a very complicated confidence trick that fooled 80% of the population. Cant wait for the arrogant BTL brigade to lose their portfolios and maybe even their own residences.
- Ali, Midddlesex
My wife and I had the fortunate situation where we sold our house Christmas just gone. Sat in rented to look for the "dream home" and had the fortunate opportunity to realise the current state out there and particularly watching the forum on "House price crash"
We are now going to sit tight and pick up the dream home in two years for about 20% less.
Anyone who is looking to buy now or the next two or three years must need there heads reading.
"Suicide buyers" would be an appropriate term I think.
- Steve, Bristol
The "housing market" has not been a "market" at all: For years and years it has been nothing but a pyramid scam - where the only way on/to "buy" a house has meant you have to lie about your income and pretend you earn far more than the average wage: That is the only way you can "afford" current prices. It is a total disgrace. The banks and lenders have been thoroughly unscrupulous and allowed this to happen. Liar loans and silly multiples of salaries have been the norm - and now we are reaping the consequences. We need house prices to come down by a very large margin - and then stay that way so that ordinary people can afford to house themselves in a responsible and honest way. People need to face the facts - prices need to come down mow, and liar loans need to be firmly stopped.
- Patrick, Sherborne, Dorset.
When the last house price crash happened, the banks told us, we have learnt a lesson, it will never happen again. Banks are greedy and people are unintelligent, thinking prices would keep going up forever. I feel sorry for the innocent buyer trying to make ends meet, but as for the previously smug "Buy to Letters", I can't wait for the bloodbath.
- Michael, Rickmansworth, Herts
Why did anybody (especially New Labour) think that a speculative house price bubble would be good for the economic welfare of this country?
It is difficult not to blame the FSA for this mess - encouraging the masses to 'invest' in housing without ever insisting that the mortgage lenders highlight the real risks involved was sheer folly.
- Roger, Tunbridge Wells
"That of course is why Chancellor Alistair Darling is reportedly pressing for some arrangement whereby the Bank of England and the other central banks would buy up the toxic debt that has clogged the arteries of the world banking system".
If this scheme gets the go-ahead it will be without doubt the most heinous betrayal of future generations well-being and prospects for a 'normal' life we've ever witnessed. Housing should now correct downwards so the next generation can afford a house to live in and raise a family. The have-it-all baby-boomers have all the housing wealth, the gold-plated pensions, the fat savings accounts, the holiday villas, the buy-to-let portfolios, the shiny Mercedes, the top jobs and the positions needed to perpetuate their lifestyles. A mass bailout and buy-up of toxic debt products by tax-payers will no doubt be future loaded (like PFIs) onto the next wave of hapless citizens who have nothing and will own nothing. How do these middle aged bankers and politicians sleep at night?
- Rob, Devon
I feel sorry for the people sucked in recently to paying outrageous property prices for family homes. It could be they have committed financial suicide for their families future.
There's one thing worse than not having a family house and that is loosing the one you've got.
If amateur economists found on sites like House Price Crash could see trouble brewing as far back as 2003, how is it that governments and the FSA have sat on their hands firstly watching the Buy to Let speculators pricing out first time buyers and then Banks themselves increasing Loan to Valuation Ratios and Income Multiples (usually marketed with phrases like - to help struggling homeowners).
We now find ourselves in a situation where anyone having got into or moved up a rung of the housing ladder at any time during the last 3 years facing significant financial uncertainty.
We have a government that instead of being prudent as Gordon Brown promised has in actual fact been far more reckless with borrowing than they should have been. The governments ability to support the economy through this situation by increasing spending is now greatly curtailed.
The Bank of England that should have been increasing interest rates to stave off imported inflation by maintaining the strength of the GBP has been cutting rates pandering to the housing market.
I've heard the phrase 'time to batten down the hatches'.
I fear we have no hatches to batten down - never mind the battens and nails with which to secure them.
- Sold To Rent 2007, Marlow, Buckinghamshire
It's all very well government action being taken to avert a house price crash, but then instead of reckless lenders and house buyers suffering the consequences, it will be the taxpayer and savers who are unjustly punished. Now that the credit boom has done it's worst, the bust must happen to restore the economy, unless we want to try and live in a permanent bubble, which will only burst more viciously later on.
- David, Guildford
