Britain’s housing market is rotting from within

Has Britain’s housing market turned the corner? Last week, the Council of Mortgage Lenders (CML) seemed quite upbeat.

It pointed to strong increases in property sales in recent months: January’s mortgage approval levels were the highest since late 2009. “The underlying picture for house-purchase activity continues to show some buoyancy”.

Others are more upbeat too. RICS members no longer expect further falls in house prices; throw in the more optimistic price outlooks from housebuilders and you might think that the market has bottomed.

But don’t bet on it. Recent studies of the mortgage market by the Financial Services Authority suggest there is a lot to worry about.

Have a look at the chart below. Property market bulls point out that mortgage arrears and house repossessions have peaked at much lower levels than during the crash of the early 1990s.

Proportion of UK mortgages in arrears of more than six months, plus repossessions

Proportion of UK mortgages in arrears of more than six months, plus repossessions

(Source: FSA Dec 2011 Mortgage Report)

On the face of it, this is true – for now. However, these statistics don’t tell the whole story.

Repossession data doesn’t tell the full story

Ironically, repossessions and arrears have been less pronounced during this crisis because the economic crash was so much worse than the 1990s downturn.

Because British banks have been in such a fragile state, the government and mortgage lenders have gone to huge lengths to stop a tidal wave of repossessions.

So, to get the full picture, the impact of these measures needs to be considered too.

According to the FSA, 5-8% of all mortgages are subject to some form of forbearance. This means that borrowers who are finding it hard to make their monthly mortgage payments are given some help.

This might mean moving to an interest-only mortgage, reducing your monthly payments, taking payment holidays or increasing the term of your mortgage.

These mortgages aren’t included in arrears statistics and so the headline statistics on distressed mortgages need to be taken with a hefty pinch of salt. Particularly as, even when help is given, lots of mortgage-holders are still struggling.

In its recent report on mortgage lending, the FSA looked at the performance of loans in arrears. It showed that the payments received as a percentage of normal payments due were down to 58.3% (eg,  £583 paid when the normal monthly payment should have been £1,000).

The UK is full of ‘mortgage prisoners’

Another worrying statistic from the FSA is the number of so-called ‘mortgage prisoners’. It estimates that nearly half the borrowers who took out a mortgage between 2005 and 2010 cannot remortgage to a better deal. 

This is mainly because they have very high loan-to-value (LTV) mortgages which lenders are now very afraid of – you need deposits of 40% to get the best deals at the moment. These borrowers may face higher mortgage rates when introductory deals come to an end. Can they cope?

On top of this, the FSA estimates that 15% of these borrowers could have mortgages that are greater than the value of their properties – the dreaded negative equity.

All these mortgage prisoners and their lenders have the potential to add extra stress to the housing market when mortgage rates increase.

The interest-only time bomb

Last – but not least – we have the huge problem of interest-only mortgages. Forget about house-price-to-earnings ratios and rental yields as measures of affordability.

If ever anything highlighted the scale of Britain’s house-price bubble and the lack of affordability, it is the market for interest-only mortgages.

There is nothing wrong with an interest-only mortgage – as long as you have the means to repay the mortgage as well. However, as house prices in Britain went higher during the boom, people increasingly took out interest-only mortgages with no real idea of how they would pay back the original capital.

As you can see from the chart below, at the top of the market in 2007, a quite incredible three quarters of interest-only loans taken out had no repayment plan backing them.

Borrowers and lenders alike were foolishly betting on higher house prices to pay off the mortgage. It is not surprising that lenders such as the Nationwide now require a deposit of 50% before granting an interest-only mortgage, and have been tightening their criteria since the start of this year.

Repayment vehicles and interest-only mortgages

Repayment vehicles and interest-only mortgages

These mortgages are a big problem for lenders. They account for 36% of all mortgages outstanding (43% if you include buy-to-let mortgages). During the next ten years, 1.5 million interest-only mortgages with a value of £120bn (10% of all outstanding mortgages) are due to be repaid. How?

Who knows? Some will be backed by sensible repayment plans, but we wouldn’t be surprised if many have to be extended, putting further stress on lenders and borrowers.

What does this mean?

Clearly, the mortgage market – and by extension the housing market – is far from healthy. On top of the problems we’ve highlighted, unemployment is going up, fuel prices are stretching household finances and mortgage rates are rising.

People who can are rushing to fix their mortgages, but only 28% of all mortgages are fixed. Banks are likely to have to pay more to fund their mortgage lending (note that rates on individual savings accounts have been rising), and this means higher mortgage rates for lots of people. With so many borrowers having difficulty with mortgage rates at just 4%, any increase in rates is likely to hurt significantly.

Worse still, the weak housing market and distressed mortgage holders remain a drag on the UK economy. America is hardly booming, but its nascent recovery has at least in part been helped by the fact that house prices were allowed to fall, and so its banks have arguably been through the worst.

The problem with the UK is that the housing market and the banks are two sides of the same coin. If the housing market falls to sensible levels of affordability, then the banks will be in trouble.

Because economic policy seems to be targeted at protecting the banks (through quantitative easing, etc), the housing market is taking longer to correct – but it’s likely to be a harsher correction when it does. The housing market has been held up by cheap money, but it’s rotting from within – it’s only a matter of time before it crumbles.

  • Waiting Game

    Thanks for this…puts some real figures to an area over-ripe for some honesty! So what happens next?

  • Gobler

    I’ve given up counting how many times, in the past 10 years, Moneyweek have been telling us House prices are about to crash. I’m surprised you don’t get that other idiot (Jonathan Davis) to write an article? He’s been predicting a Housepricecrash as long as you!

  • Tom Melly

    Gobler, I think you’re missing the point. The article quite nicely covers why house prices haven’t crashed (but should have).

    That governments and banks were willing to cause so much collateral damage in order to prevent a crash is a testament to their idiocy rather than a failing on the part of the various Cassandras.

    These debts cannot be repaid.

  • JREwing

    It may not crumble. The government will destroy the currency but will not let housing fall. This is the bit that the housing bears (including myself) got completely wrong. We were too focused on nominal price falls. The UK Government has seen what happened in America and decided that the UK housing market was an even bigger house of cards. If it fell, the UK economy would go into a tailspin from which it would take a generation to recover (UK consumers are much more leveraged than US consumers). Ergo, seeing what happened in the US starting 2006, the BOE and the Government seem to have decided that they will totally trash the currency if need be but they won’t let borrowers or banks go under (the former not in large numbers anyway). The people who are being taken to the cleaners are the savers. But then the savers have only themselves to blame. It is not as if they have no way out of their idiotic cash deposits.

  • marcus

    good to treed your comments from diffrents side thanks posters

  • PV70

    MW does have a point. In some parts of the UK prices have fallen significantly. The problem is that most articles tend to concentrate in London, which itself is a combination of different markets.

    My former neighbours’ flat’s on the market. They started @ £290k a few months ago. It was obvious that the valuation was rather optimistic. They then reduced it to £284,950 (what’s the point, one may ask), followed by knocking another £20k off the asking price. It’s now on the market @ £249,950. They paid £187k six years ago. Zoopla values the property at below £230k.

    £250k is an awful lot of money in the current climate. Most first time buyers can’t afford to buy at current levels, even in London.

    For too long some pundits have ignored the link between salaries and house prices. This can’t go on forever. Money must come from somewhere. The property is worth exactly what someone is prepared to – or more importantly – able to pay for it!

  • Roberto Birquet

    MW was right. Houses went so over-priced that the taxpayer is bailing out the banks and the housing market, because it has never been so over-priced.

    The great irony is that prices were so over-priced, the banks so over-extended that the entire system has been rigged into pretending it is all ok. Don’t panic! Don’t panic! People pretend the housing market is steady; but the truth is, people cannot sell houses at the 2005-8 perices outside of prime London. But they are not being forced to sell by terrified banks; so people pretend; “oh it’s ok, just flat”.
    Excepting the cash buyers who are buying as before, sales volumes are down from 90 to 30,000 a month. People can’t pay the price, sellers won’t drop it. Result: No sale! That’s not a real market.

  • Roberto Birquet

    And this is the key quote in the article.
    America’s nascent recovery has at least in part been helped by the fact that house prices were allowed to fall, and so its banks have arguably been through the worst.
    Had that happened in Britain; FTBs would now be able to buy, and a real economic recovery could get underway. If prices are allowed to drop 20%, buyers will come back, supply will meet demand, and we can get on with our lives.
    While people continue to pretend that the 2005-8 prices are realistic, we’ll just bump along without sales and say “look, prices aren’t falling”; when the truth is they’re not selling.

    I’d nationalise the banks properly and force the issue – repossess! Give the house to someone who will pay the bloody mortgage. The system is broken.

  • JREwing

    @Roberto – if the banks foreclosed, property prices would start falling and could fall more than 50 percent. There would be a glut of unsold properties which the banks would have to recognise on their books as a loss. Those losses would sink British banks because of the level of leverage that was employed during the boom (for e.g., Barclays was leveraged 96:1 prior to the crisis). The collapse of the banks would tighten credit further and the entire economy would collapse. I think the government thinks that by printing money and devaluing the debts, it can avoid this outcome. Personally, I think the economy could collapse from hyperinflation rather than debt deflation – but these things became baked into the cake when our rulers chose to let the entire populace enjoy a binge on credit. The bills are due now and they cannot be paid. As simple as that.

  • NickB

    From a neutral perspective as a home owner billions more money ploughed into over-inflated non-producing assets is a recipe for disaster for this already fragile and weakening economy. The bulk of any borrowed money now should be invested in supporting manufacturing,industry and job creation. This Government is riding a juggernaut without any brakes full into a mountainside.

  • NeutronWarp9

    Is it time to emigrate?
    In league with the banks, this government freezes peoples’ pay, adds to the pains of inflation with duty/tax increases, attacks their pensions, (in time) re-possesses their homes, shackles their kids with student loan debt or no job prospects, stealthily privatises the NHS, clobbers the old and punishers savers.
    Can somebody tell me please, what is the point?

  • Chris

    The BoE and Labour and the Conservatives before them deliberately built a UK economy around perpetually inflating house prices. The tricks they pulled to enable this is only matched by the tricks they now employ to prevent it bursting. They are quite prepared to sacrifice the aspirations and jobs of the younger generation, the savings of the older generation and the national currency in order to avoid economic reality hitting the UK housing market. All members of the MPC and BoE and their political salesmen should be tried for economic terrorism.

  • Boris MacDonut

    House prices are not far off their long term average according to several ratios. They probably need to fall about 2 or 3% more . Even a rise in interest rates to 5% will not significantly dent the trend towards a reasonable rise of between 15 and 30% by 2020. Rates would have to hit well over 15% to cause a 50% fall in values. The UK housing market is fairly sound and well supported by repatriated expat money,foreign rich people and inheritances.

  • Bruno

    There will be no crash – I’ll stake my umbrella on it!

  • Nick

    Yes Boris, ofcourse no crash at all..

    Even though the IR are at 0.5% , people cannot meet their obligations.
    With savers fighting for higher rate for their savings, expect that this will trickle down to the mortgages with the end results house price collapse.

    No matter what the BoE ignores to do, the house price correction will take place..

  • Sibley

    This article is way off beam. House prices are rising again.
    Supply and demand. The banks will start lending 100% mortgages soon. Watch this space. FTB’s need to get on the ladder today or get priced out.

  • Davey

    Being a potential FTB is hell right now. I don’t know who to believe (not that anybody can possibly know with 100% certainty what will happen anyway).

    Do I take the plunge now as house prices have dropped and the mortgage rates are low. Or do I build a bigger deposit and risk losing this opportunity.

    If I buy a house do I buy one I can afford based on today’s interest rates, or perhaps at the historic average of 8%?

    If I do the former I’m relying on the house prices remaining stable/increasing in order to avoid neg/eq or a lower LTV thus enabling me to afford the mortgage long-term.

    If I do the latter I buy a more affordable house which I’ll almost definitely have to move from later on. Begging the question will I be able to afford that?

    There are just so many variables it’s impossible to know what to do. Then there’s job security to take into account too. =(

    I guess I’ll just wait til I win the lottery. Or live in my tent.

  • The Truth

    “This article is way off beam. House prices are rising again.
    Supply and demand. The banks will start lending 100% mortgages soon. Watch this space. FTB’s need to get on the ladder today or get priced out.”…………..Absolute garbage !

  • Ellen

    FTBs need protection from the parasite culture of the BTL landlords and not in the form of the government underwriting their loans. The cost of housing needs to come down for them and, to do this, these BTL landlords of smaller properties should be actively shaken out by taxation policy.

  • Christopher

    Your 2020 prices are’nt going to happen Boris.
    The article is not way off beam, perhaps slightly off expecting a further crash given government policy etc. However, I would start getting to grips with reality if I was you. House prices will not rise outside London for years.
    Nobody has the money and neither do the banks. If the truth be told the money was never there. It was conjured up by utterly crazy lending practices creating the ridiculous mess we are in right now. Start dealing with the fact.

  • Aff

    That way off beam comment is too funny!

    In an economy where the central bank is very activley devaluing currency they might manage to hide the crash in house prices but it will be tough explaining why bread costs 10 quid a loaf.

    If you are a saver buy some precious metal, the only way to save in this environment. When the house crash occurs (even if it is hidden nominally) your investment will simultaneously go through the roof.

    ps The mainstream media will tell you anything except the truth. Recovery on the way? Haha I can’t believe they say it with a straight face.

  • RJ

    Having played the waiting game for the last 10+ years I’m getting rather fed up with these MoneyWeek articles telling us “All is not well in the housing market, watch out for a crash!”. I would love to see a market crash to bring prices in line with earnings but feel the government simply has too much political capital invested in the housing market.
    They will do whatever it takes to keep it afloat, including the stupid government (i.e. tax payer funded) 95% mortgage scheme allowing house builders to continue flogging trash. I’m fed up with them telling me (with a straight face) that “You don’t need a garden” for a £300k+ house with (literally) no more than 10ft of garden! & why would I possibly want a garage?
    It’s all rather depressing, having looked after my finances for the last 15 years since graduating and wasted thousands in rent to now accept that I will have to hand it all over in exchange for an over-valued property and knowing my savings simply contributed to the boom!

  • Slug

    @ 20: I’ve come up with a little game I rather enjoy playing. Find a banker, and wait for him to come up with some fatuous statement about how much money he is making (it doesn’t usually take long). Then ask him (or her) gently how much his company is worth. express surprise at his answer and ask exactly where that money is. He’ll tell you, at which point you must again express surprise, and say ‘no, that money doesn’t actually exist, if you haven’t got it in your account or a physical commodity that can be measured, it doesn’t exist.’ Repeat again until Banker is in tears – it can be done and produces a feeling of immense satisfaction. The key is keeping calm and rational, it’s hard not to punch them I know, but you can’t go down that route anymore.

  • henry

    great article

  • Chris

    Ther are not as many variables as you think

    Make it simple.

    House prices will continue top drop against PM’s

    never price things in Fiat money ……..price them in Gold & Silver.

    Buy 500oz of silver and put the rest is gold.

    get any savings out of the banking system now!

    Government selling RBS tells us the bank is getting worse not better….look out below


  • r0011

    Both the present and the previous governments have been reckless when it came to housing.
    I believe the motive of the present government in money printing and keeping interests low is to reduce the true value of debt by devaluing (in real terms) the currency. It has the added advantage, as they see it, that it keeps house prices from falling which is a vote earner.
    The net result is that savers are being robbed. These savers include pensioners who rely on their savings for their retirement income.

  • MarlboroLight

    All valid points… try buying a house in South West London. I sold in mid 2009 and have rented since, now totally priced out of the market. There is only a trickle of supply where I live. The banks “support” has no doubt aided this by allowing people access to artificially cheap money, ie no forced sellers. I hope that when this is withdrawn there will be a “normalisation” of prices due to increased supply, however that could create an even worse scenario for the rest of the UK.
    Demand AND supply are key, price should be irrelevant (once you’ve bought). The UK needs to stop viewing property as an investment class and for those that speculate in housing, there should be significant tax. It is not a productive activity.

  • Phil

    The recent increase in house sales is likely to have been a result of FTBs buying before the end of the stamp duty exemption. With these increased sales, the market has become more optimistic and the house prices have crept up slightly. I think we will see the prices come back down in the next few months as the number of FTBs drops again. Although the govenment will try to stop the bubble burting, the fact remains that the house price to wages ratio is higher than the historical trend and this is simply not sustainable. I believe the house prices will drop in the future, albeit very slowly until the ratio returns to its correct level as wages slowly catch up.

  • saver


    JR…savers have only themselves to blame ..its not as if they have no way out of their idiotic cash deposits..

    Having read various articles I have drawn the conclusion that
    Commercial Property investment increasingly risky due to failing covenants; Residential Property due a correction and fall in values; Equities over inflated; …. Just where exactly does JR think the savers/investors put their money( .. oil?)

  • chris


    forgot only Buy Only royal mint gold Britannia or sovereign’s as there is no CGT!

    And as for silver you can buy bars bonded on line with no vat
    but they cannot leave the warehouse… long as the selling fees are less than 20% Vat it’s a winner!

  • Sean

    Why is so much emphasis placed on current prices, when transaction levels are so low (itself an indication of the state of the market). If someone plays once for England and scores one goal you wouldn’t say “his goal ratio is a goal a game”. To my mind the definition of average house prices needs to be revised, with the price influenced by a mean (ie average) number of transactions (so that the price will be lowered should actual sales fall below the mean) and also the average length of time it takes for a property to be sold. The current definition is superficial and therefore misleading.

  • Yogi Bear

    Wise words all round, except the estate agent who thinks we all need to buy now to benefit from the impending boom. It strikes me that the central plan is to do what the Japanese have done over the last 20ish years. Pin interest rates to the floor, let inflation rise above the cost of money and let inflation erode the debts of the masses. This way, a ‘painless ‘ recovery can be engineered. Real values tumble 75% over the 20 years but nominal values remain static. Of course this is not painless and the erosion of debt is financial fudgery rather than repayment. Deferring payment to our children’s generation will stall any potential recovery in the economy for the foreseeable future. Stagflation anyone?

  • r0011

    The problem with housing is the direct result of cumulative stupidity on the part of the population and irresponsibility by the governing bodies. Let me explain.
    It was not too long ago that the main topic of discussion and pride was how much one’s property appreciated. This crowd pleaser removed any incentive from the government to discourage house price escalation. What made things worse was the absence of genuine effort to increase and improve the nation’s housing supply through building and converting existing buildings. The coalition government is pretending to be doing something about this but what they do amounts to trivial token gestures. There is no reason why people living in this country should not have decent affordable housing and why housing should be used as a means of making money for parasites.

  • YorkMark

    The reason that house prices won’t crash is that, if prices get lower, the people who do have the money to invest in them (i.e. landlords) will step in and buy. More people will just end up renting rather than buying.

  • Paul

    @JREwing – it’s nice to read a comment from someone who sees the plan. The BofE have told us what they intend to do. They want negative real interest rates for 10 years to half the debt. They fully intend to destroy the currency to prop up house prices nominally, to keep people paying their mortgages to save the banks.

    @Davey – you can wait for house prices to collapse which could happen since prices are set on the margin – people who want to move and swap their house for somewhere else will bite the bullet but the decline will mainly be silent. Prices stay flat while values collapse. My advice would be to get out of sterling into something else – gold, silver etc. – start saving now and then be patient. Savings of this types will buy a lot more house down the road.

  • JREwing

    @ 29 Saver,

    There are alternatives. The first obvious one is precious metals. I agree that equities as a “class” are overpriced but there have been occasions when there were bargains to be had in promising sectors such as deep water exploration/drilling (despite the Gulf of Mexico fiasco), tar sands oil producing companies etc – post Lehman was a great buying opportunity.

    I do not disagree that it is not easy to find alternatives. I have struggled with them for the last seven years but have managed to get good returns because I was forced to think about value. However, one cannot expect the average saver to do this because they do not have the sophistication, knowledge or the inclination. Hence they put their money in the bank or buy gilts and get ruined in the long run. The inflationary system ultimately transfers wealth from the cash savers to the speculators. I decided that I didn’t want to be among the former a long time ago.

  • Jammy

    Very good comments everyone (apart from the 100% mortgage one !). For what it’s worth I agree with YorkMark that there will be a permanent shift towards more people renting like in Europe. This could increase the gap between the ‘have’s’ and the ‘have-not’s’ i.e. Landlords and the Tenants.

  • Orchard Gate

    What the FSA actually said was “The proportion of loans in forbearance is small … less than 1% of the total mortgage debt outstanding in the UK”.

  • Rich

    We need to build more homes, bigger homes, nicer homes.

    We need to get away from this idea that green fields and countryside are good, whilst houses, factories and supermarkets are bad. Build on the countryside, I say. Fields of corn and vegetables are over-rated. Have a look at Letchworth Garden City and Welwyn Garden City. Towns and suburbs can be green places and nice places to live.

  • Phil Oakley

    Dear Orchard Gate

    On page 25 of the recent FSA Retail Conduct Risk Outlook 2012 is the following sentence:

    “The FSA forbearance review suggests that between 5% and
    8% of UK mortgages are subject to forbearance”

    Kind regards


  • Boris MacDonut

    #41 Phil .I tend to agree with Orchardgate. I see no evidence of widespread failure to meet debt obligations as we have historically low interest rates.

  • Critic Al Rick

    @ 41.

    But Boris, we’ve also got widespread declining real incomes.

  • Alec

    The housing binge over the last12 year has totally destroyed the UK economy for the foreseeable future and we all know the culprits, the BoE, the Treasury and the FSA. Unfortunately, these cretins are still piling on the debt and the next five generations are going to be paying for it (50 years).

  • The Watcher

    IMO prices will glide gently down until the next election (or until the LibDems get tired of getting stabbed in the back and find some common ground with a new Labour leader, who will probably Yvette Cooper if my crystal ball is working properly). Either way, the demagogues get back into No.10 and the pound will subsequently drop like a stone and interest rates will be raised as a matter of necessity. This, in turn, will have a profound effect on mortgage-holders and would-be mortgage holders.

  • Le Brit

    Rich; building bigger and nicer homes costs more money which makes them less affordable, check out RJ he paid £300k and has a postage stamp for a garden. Also if you build over all the farmland who will feed the world as the population explosion continues towards 10 billion in the next twenty years. Fields of cabbage and corn are fine, redevelop the old industrial sites in the city centres that are derelict, plus all the empty shops.

  • Roberto Birquet

    Can we ban these ignoramuses who use the words “supply and demand” without knowing what the term means.
    Supply and demand as you employ it is not economics, but fantasy literature.
    In economics, supply and demand is about the supply of money. If there is more money, demand rises; if there is less money – like now – demand falls. Simple.

    It’s how much money they have got available to pay for what they want. Demand for housing (how much money is available to buy houses) has fallen; it’s bloody collapsed.
    Houses are not selling because supply (ie sellers) refuse to accept demand has collapsed, and the banks are bloody terrified so don’t force thru repossession; and the tax-payer guarantees them allowing to act this way.

  • Mr Sigh of Relief

    Phil Oakley, you are the true property prophet of our time. Thank you so much for this beautiful piece of truth 🙂

  • Runningoutofink

    Not much in the comments about the elephant in the room which Phil shone a torch at – all those interest only mortgages with no capital repayment plan, I reckon that’s where your collapse is going to emerge from, compounded by the inevitable creep in base rates as & when the broader economy begins to grow properly.

    To the many people reading this who are surviving on interest only, remember you don’t own your house at all, you just rent it from the bank and the rent is being artificially suppressed by BoE. Whatever deposit you stumped up at the start is gone forever.

    If you bought in 2007 and you have an interest only mortgage, better get out now, buy a tent like Davey and look for a nice cabbage field….

  • 4caster

    Yogi Bear (#32) is barking up the wrong bonsai about (and I quote him) “what the Japanese have done over the last 20ish years. Pin interest rates to the floor, let inflation rise above the cost of money and let inflation erode the debts of the masses. This way, a ‘painless ‘ recovery can be engineered. Real values tumble 75% over the 20 years but nominal values remain static.”
    This is quite untrue. Between January 1992 and January 2012 the Japanese CPI has risen from 97.9 to 99.6, an average annual increase of less than 0.1%. From January 1999 (103.1) to February 2010 (99.3) they actually underwent deflation of 0.3% per year. Deflation increases the real value of debts.

  • 4caster

    I am happy to accept the gist of the article. House values have been sustained quite artificially by various means, and remain about 25% higher than their long term average, using a ratio of mean house prices to mean earnings. That is why first time buyers still feel priced out of the market, despite the fact that lenders are making competitive loans available at low real interest rates
    When the Bank of England base rate rises to some 5%, which it should be when CPI remains above the 1 to 3 % target, then the house price to average incomes ratio will revert to normal (or more likely below, because such ratios always overshoot). Then we shall see distressed selling and auctions of repossessed houses.

  • Roberto Birquet

    When the Bank of England base rate rises to some 5%, then the house price to average incomes ratio will revert to normal (or more likely below, because such ratios always overshoot). Then we shall see distressed selling and auctions of repossessed houses
    Except the real reason selling price indices remain high is that despite a crash in demand (see above), there has also been the same for supply: people refuse to accept the lower prices, and don’t sell. Banks refuse to repossess, so sellers don’t sell.
    Banks know their balance sheets would be destroyed – bye bye bonus and maybe bank too. So govt bails them out with state guarantees, then banks bail out borrowers by not forcing sales. The conclusion is: FTBs pay taxes to keep themselves out of affording a home. A grand conspiracy with our money!

  • Boris MacDonut

    #50 4caster. The fact that the HP to earnings ratio has been so out of kilter for so long and has fluctuated considerably since we left the ERM shows it is no longer a reliable indicator. There are no should be’s in a free market only what is’s. When interest rates were at 12% nobody was saying “but rates should be at 5%, so my house should be double in value”.
    Houses are bought by wealth/income, not just earnings. The latter makes up less than 55% of UK income now.Yes it is a reliable indicator of who can afford a mortgage but not what a house will sell for. That pertains more to the actual cost of buying a house over say 25 years. That is at 7.3 times income, 19% below it’s 2007 peak and just 2% above the long term average since 1992.

  • Kingbingo

    Boris, Sorry mate, but you are on another planet if you think what we have is a Free Market. The government directly controls half the economy (53% of GDP is government spending), and regulates to submission the other half. There is no aspect of our market that is free; everything has the tentacles of the state all over it. What we have is fascism. A powerful state in league big business to rig the market to achieve their outcomes.

  • Boris MacDonut

    #53 Kingbingo. Government spending is at nearly 50% I agree, but the housing market I’m referring to is “free”,other than stamp duty and some planning restrictions. Houses sell for what someone will pay for them. Not 3 or4 or 5 times average PAYE earnings and not some other magic ratio. When someone wants/needs a house, they find a way to buy it, as a cash buyer or using inheritances, family loans, savings, a mortgage whatever. Fact is there are a myriad ways to pay and prices have not budged much since 2009 either up or down. The great crash is still awaited by the doom sayers,nearly 5 years and counting!

  • Rue

    Yes, they, the punters, blithely ignore the falling prices and stamp their feet indignantly at any suggestion of over-valuing. But you haven’t really mentioned the Estate Agents; they are the most mendacious, because they encourage this delusion.
    BTL: Some tenants are paying up to 70% of a salary in rent. That someone you opened the door for, gave up you seat or sat next to on the tube, could be at that very moment ripping his/her fellow man/woman off. Robbing, actually. These nouveau landlords go about seemingly innocent, looking like every one else. You just don’t know who the enemy is.
    A home for everyone. Just the one, will do.

  • Tom O’Neill

    We need a healthy rented sector. But there’s an unfair advantage for the BTL mortgage borrower (they’re not ‘cash buyers’, for you’d need to be a financial idiot not to borrow to the allowed max right now): the lender will count the rents of their existing (also mortgaged) properties as ‘income’, allowing higher LTV. Their risk of default is multiplied – but the banks don’t care, as they’ll be bailed out if there’s another crash.
    Secondly, there is no genuinely ‘private market’ in rents. Particularly in cities, high rent levels are underpinned by the benefits system and the council freehold monopoly on large areas of subsidised inner-city housing – much of which is now also exploited by ex-tenants turned BTL. Most small landlords simply stack their house full of taxpayer-guaranteed housing benefits tenants, which leads to pressure on supply and inflates rents.
    A more rigged market it’d be difficult to imagine.

  • Tom O’Neill

    We need a healthy rented sector. But there’s an unfair advantage for the BTL mortgage borrower (they’re not ‘cash buyers’, for you’d need to be a financial idiot not to borrow to the allowed max right now): the lender will count the rents of their existing (also mortgaged) properties as ‘income’, allowing higher LTV. Their risk of default is multiplied – but the banks don’t care, as they’ll be bailed out if there’s another crash.
    Secondly, there is no genuinely ‘private market’ in rents. Particularly in cities, high rent levels are underpinned by the benefits system and the council freehold monopoly on large areas of subsidised inner-city housing – much of which is now also exploited by ex-tenants turned BTL. Most small landlords simply stack their house full of taxpayer-guaranteed housing benefits tenants, which leads to pressure on supply and inflates rents.
    A more rigged market it’d be difficult to imagine.

  • Rockyroad

    House prices have already crashed relative to Gold, or any strong currency in the world, because of systematic devaluation of the pound by the BoE. This has been a sensible policy (if a bit immoral) because it reduces the relative value of our debt. At the same time it reduces the real value of our assets in the world. Try selling your London flat to buy a place in Sydney and you’ll see how much the value of your property as fallen. Conversely, Australian’s can’t believe how cheap prime London property is and they are buying up most of Notting Hill. If you want to buy and sell within our little island then you just won’t notice that the crash has happened.

  • Mr Sigh of Relief

    If there’s one thing about history, it’s that it repeats itself. Empires come, expand, then crumble. Then they pop up somewhere else. The empire of London’s property bubble has indeed reached that point where history repeats itself and it all crumbles in the forth coming double-dip recession. No need for complex economic analysis. History has a simple and beautiful way of ebbing and flowing naturally. Put your savings back in the bank and watch the show unravel…

  • Ravi

    It appears that articles on property prices attract more comments than any other articles on this site!

    People with vested interests such as CML, RICS and Estate Agents will always find a way to put a positive spin!

    It is absurd to expect property prices to go up forever. People always complain when prices increase for almost any other items. But they celebrate when property prices go up!

    Property speculation was the major cause of the financial disaster that has brought the World Economy it its knees.

    What needs to be done is to move away from wasting precious resources on property and speculation and invest in industries.

    What is happening is a slow-motion price crash.

  • Boris MacDonut

    #59.Mr Sigh of Relief. No, History never repeats itself. But it often rhymes .

  • Segedunum

    Once people start defaulting on their mortgages and we start clearing out all the interest only junk, that’s when the real crash will start happening. That’s going to happen whether people like it or not.

    As 46, Roberto, says, sellers are refusing to accept that they are going to have to accept lower prices can get away with it because, for the time-being, they can pay their mortgages. That is not going to continue to be the case for much longer.

  • StinkyMinky

    The UK’s money supply (97%) is issued through commercial banks as debt contracts; the other 3% is issued by the BOE as currency. This money supply is based on 70% of lending as mortgates as it’s (was) a relatively low risk investment (as opposed to a small business 8% which is high risk). The recent inflated lending and securitisation frenzy that burst has left the financial sector, in particular the banks, nursing losses in this asset class that are the product of their blatten greed and narcissistic belief that they run the economy. Therefore the sector should be allowed to fail and house prices retrace to the historic average of % salary increase and turn up the volume on the debate into the way we supply the economy with money. It’s clear to me that the commercial banks should have this privalage taken away…!!

  • David Evans

    What I fear will prop up property prices, preventing the fall in prices that will permit FTB’s back in to the market, will be the preferences of banks to lend to buy-to-let speculators rather than individuals. These companies can claim interest as a cost allowable against tax, most have sufficient equity to put down a large deposit, so will always be able to outbid people who just wish to house themselves and start family life. This lending bias of the banks increases the housing shortage for people who want to buy and drives up rents, so giving landlord companies even more power to buy. It will take legislation to end this, the self sufficient working class, Margaret Thatcher’s people, are being de-housed, the idle are protected by housing benefit. Would anybody call this just?

  • StinkyMinky

    For the reasons detailed above there is an inbuilt bias to creating our money supply through mortgage and loan contracts. Therefore until this is clearly understood by all at large no amount of legislation will really fix the route cause. Which is that private commercial banks create 97% of the money in circulation and therefore have an unhealthy influence on which sectors are invested in or not.

  • Critic Al Rick

    @ 63. & 65. StinkyMinky

    You make good comments; I believe the Banksters ARE running economies; in, intentionally, their own selfish interests. They ‘got drunk’ with power, made a big mistake, and are now socializing their liabilities.

    And, it appears, the majority still consider they are living in a democracy; some democracy!

    It also appears that it is going to take a major major catastrophe before the populous awakens to the reality of the situation; by then it will probably be too late; if it isn’t already!

  • StinkyMinky

    66.Critic Al Rick

    I think you are right, not until the money creation process is clearly understood by the population at large (and that includes finance professional alike) can we have a true democracy for this is one if not the most powerful functions we have….and currently this is in private hands. The following website is has a very good voice on the subject.

  • Segedunum

    StinkyMinky: Yes, you are spot on to point out that the vast majority of ‘money’ is actually created with the wave of a pen or the punching in of a pin number.

    It’s what banks have always wanted since time began – creating their own cash. At least superficially. They in turn get drunk on negative interest loans of printed cash from central banks which they also control to cover their losses. In view of that I’m putting my investments into things which get me out of that insane cycle…….

  • vox populi

    When the Olympic Games ends, the associated property fever in London will be finished, with huge ripple effect throughout the South East and West, which in turn will trigger a bit gentler ripple effect throughout the country. Most plausible scenario, though I cannot quantify.

  • Stewart

    In other words, it’s a ponzi scheme. And it’s run out of fresh investors.

  • youre all wrong

    the crash is not far off now just wait until the canadian takes over from mervyn who has kept rates artificially high, the credit rating, inflation and the euro will all add to it, what goes up must come down.

  • Riche

    Look up “stages of a bubble” on Google images then try to overlay that curve over the repossessions chart above. The 90’s peak is text book – projecting off the page I came to 2018 when we see peak repos of over 4%, with repos rising from now on.. Buckle up!