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A long stagnation could kill off Britain’s obsession with house prices
People in Britain are obsessed with house prices. But with the market now moribund, the question, says John Stepek, is how long can this obsession last?
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People only care so much about house prices because they have to
House prices are a bit of an obsession in Britain.
This is not because the British are born with some sort of property-fetish gene. It's because houses are both economically significant and the cause of a great deal of insecurity.
It's similar to the way that parents with school-age kids in this part of the world obsess over catchment areas and exam results. They didn't care when they were single and childless, and they won't care once their kids have got into school. But try getting them to talk about anything else when they're in the midst of the fraught school-hunting process no chance.
So this obsession with property is simply a result of the fact that houses hang over us. This is made clear by the fact that this "national obsession" is in fact, not really national at all. You only see it in areas where houses are expensive in the 20-odd years of my life I spent in and around Glasgow, I don't think I had a single conversation about house prices (lots about the rain, though).
Since maybe the mid-1990s, the UK property market has been gripped by slow-motion FOMO ("fear of missing out"). You stayed off "the ladder" to your cost.
Say that, as a young person without much money and a desire to maintain geographic flexibility, you didn't fancy taking a huge leveraged punt on an asset of often-questionable quality. Well, that was a mistake. That property you passed up back then has probably "earned" more money each year than you ever got paid.
The old saying "you can't go wrong with bricks and mortar" has been hammered home to the last couple of generations with brutal efficiency. If you are in the core wealth-planning target market (around 40-60 odds) then more than anything else, your present level of household wealth almost certainly depends on how much property you owned and when.
It could make all the difference between whether you are now able to think about jacking it all in for a portfolio career with a heavy dollop of golf and city breaks on the side; or whether you are looking down the barrel of another 25 years of back-breaking mortgage payments that could rocket to unaffordable, lose-your-home-at-age-65, levels on the whim of Mark Carney.
Anyway
What if this is the "new normal" for house prices?
The question for me now is how long will this obsession persist?
A flat or falling market doesn't breed the same level of FOMO. There is still a big psychological hangover from the boom period. Prices in many parts of the UK are still gobsmackingly high. And there's an assumption that prices will, at some point, renew their astonishing ascent.
But what if they don't? On the one hand, I still can't see an obvious trigger to turn the current slow grind lower into a full-blown crash. If interest rates stay roughly where they are for a while and people hang on to their jobs, then they'll be able to pay their mortgages.
That means there won't be a wave of forced selling, which is what you really need to get a full-on crash, as happened in the 1990s. (In 2008, the problem was more about credit drying up buyers were effectively shut out of the market.)
Equally though, if you don't get an epic crash, you don't get an epic buying opportunity. You might just get a slow stagnation, which gradually returns prices to just about affordable levels.
House prices are generally "still very high relative to incomes", as Capital Economics points out. But with prices in the most expensive areas (ie, London) falling hardest, and wages gradually ticking higher, that might be rectified more quickly than you'd think.
So do we end up with a "new normal" for the housing market? Unfortunately, property is still a hideously distorted market. We have the stupid Help-to-Buy scheme, which will be causing problems well down the line from here (it's a profoundly immoral scheme, as my colleague Merryn has just written in an excellent piece, which we'll send to you early next week).
And can "build-to-rent" create a more attractive market for renters in the UK than "buy-to-let"? That remains to be seen.
But if house prices cease to surge every year, then that in itself would make a big difference. While the last few generations learned that "you can't go wrong with bricks and mortar", the next few might learn the precise opposite that a home which fails to rocket in value can actually be an expensive headache relative to other asset classes.
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