29 May 2004


Paul Anderson, Tribune column, May 30 2004

I have a confession to make. Over the past few months, I’ve become an increasingly avid reader of news stories about the housing market. I know it’s a terrible thing to do, and I feel guilty and embarrassed about it. But I just can’t stop. Every day I nervously scour the pages of the newspapers for the latest news on house prices and the latest predictions of what’s going to happen to them in the next 12 months.

The reason my habit started is simple. Like more than two-thirds of households in England and Wales, I am what is known as an owner-occupier. In fact, I don’t own a lot: a couple of years ago I borrowed a large amount of money from a mortgage company to buy a small house, and I still owe the mortgage company most of it. But the boom in house prices since I took out the loan means that if I sold up tomorrow I’d have a tidy sum left over after I paid it off — more than I make in a year from working, as it happens.

If the housing market continues to boom, I’m in clover and the drinks are on me. I’ve got a bit of capital I can borrow against to buy a sports car, a conservatory, some designer consumer electronics or, more likely, a new kitchen for her indoors. Or I could simply cash in the profit — take a couple of years off work, finish the book I’m writing, travel the world (though of course I’d also then have to find somewhere else to live, and I’m not quite sure how the family would survive). But if the market crashes, bang goes the credit and bang go all those dreams of la dolce vita. In fact, I could be completely stuffed, particularly if interest rates go up, with a giant millstone of debt hanging round my neck . . .

OK, I’m exaggerating. In truth, I’m rather cautious. I don’t really believe that my two-up, two-down in Ipswich is worth what the estate agents say, and I’m not gambling on the housing market (not least because I don’t really want to put my nearest and dearest on the streets).

Unless there’s a world economic crisis of some kind, I can’t see interest rates hitting the point at which my mortgage payments become impossible to pay. And I actually think the best thing would be for house prices to fall, because as they are at the moment only the very affluent (or those with well-off and generous parents) have a hope of getting somewhere decent to live in much of Britain.

But there is a serious point to this. The fact that house prices are massively inflated is probably the most important factor in the British economic equation right now. It’s the main reason for the continued buoyancy of consumer spending, which has played a key role in keeping overall demand in the economy at a level that has pushed unemployment to its lowest level in decades. It’s the main reason Britain is generally feeling pretty good about itself, the main reason that Gordon Brown has retained a reputation for being a good manager of the economy, the main reason Labour is still likely to win the next general election even if it gets a kicking in the European and local elections in a fortnight.

It’s also, however, the biggest problem now facing the British economy. The reason house prices have gone through the roof is that demand for housing has consistently exceeded supply at a time when interest rates are low and seem unlikely to rise dramatically because inflation is low elsewhere in the economy. But it is almost inconceivable that we are not experiencing a classic bubble, rather like the one in the late 1980s. Sooner or later, probably sooner, it will come to an end.

The Bank of England wants to achieve a “soft landing” by putting up interest rates just a little every month until house-price inflation fizzles out, but its strategy is by no means guaranteed success. House-price bubbles are notoriously liable to burst. The last one did, pushing countless mortgage-holders in the early 1990s into negative equity and a significant minority into repossession or even bankruptcy.

Hunch says that if this bubble goes the same way, the impact will be worse, for the simple reason that so much more consumer credit is riding on house prices than was 15 years ago. A 30-40 per cent fall in house prices today — unlikely across the board, but it’s what happened in some areas of London and the south-east during the early-1990s property-price slump — would destroy the sense of self-satisfied prosperity that has characterised Britain, or at least that two-thirds of the population who are in on the act, over the past decade and more. Even a 20 per cent fall, much touted by market analysts, would wreck Labour’s chances of re-election as dramatically as the fiasco of sterling dropping out of the exchange rate mechanism of the European Monetary System destroyed the Tories.

All in all, I’m glad I’m not in Brown’s shoes right now. Though maybe I’d be thinking that the best way out is to engineer a little coup d’etat for the big job and install some no-mark klutz — say Jack Straw? — to take the flak as the housing market collapses . . .

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