Tuesday, 29 September 2015

House price bubble?

Okay, this may seem obvious, housing in the UK is way too expensive, but is it entering bubble territory with the potential to deflate in an uncontrolled way.

I don't know if we're about to hit 2007/08 again. As a home owner I hope prices don't collapse and you can draw your conclusions of my ability to forecast on a macro level from the below - I'm an ordinary bloke talking about what I see. In any case the Government has shown a deft hand at re-inflating asset prices - particularly house prices - when it looks like negative equity might hit voters.

As things stand interest rates are rock bottom with no official pressure for them to go up - inflation is low, there are economic concerns abroad / at home, the Government has a massive debt pile to deal with and a little inflation would actually help them quite a lot (but I'm sure that's only a small consideration for the MPC!)

So debt is cheap and the house price Ponzi scheme has been boosted by the Government with help to buy and other bribes. Another factor to consider is lending standards. I personally thought the Bank of England did a good thing 18months or so ago - they tightened the criteria lenders had to follow to approve lending - I've been through it, it's hellish, long and tedious. You get asked how much you spend on clothes and shopping and gas and water, presumably you can stop your water intake to pay the mortgage...

Anyway, instead of using the sledgehammer of interest rates to knock down house price growth, and everything else in the economy, they just focused on telling banks not to lend lots of money to people who can't afford to pay it back. Well done.

Are those standards slipping? Something which would indicate an unseemly bubble. Have the rigorous controls become a tick box exercise more than actual review? This could provide a third leg to the bubble theory.

To conclude my summary of thinking on this I bring in my Kev "Grand Designs" McCloud Housing Index*. Have you seen any of the present series? The houses are monumental which suggests a fair amount of Hubris, but the amount and ease with which people are taking on debt is the issue. The one with tax accountant was great - this poor chap had a brain hemorrhage and having survived it decided to build a massive house without a proper budget. It ended up costing several million, that's million, with an m, pounds. It was "paid" for with over ten different loans including bridging finance at one point.

Ignoring personal decisions about how the house was supposed to make life better for the family involved, though how mountains of debt makes life better I don't know, it's interesting to see the houses built over time against the backdrop of the health of the economy.

A couple of series ago, the projects built between 2009-2012 ish, it was all highly energy efficient, smaller more innovative designs. Now that's all out the window - so far big is back and only the best concrete will do (paraphrased, but the sentiment was used in this show, it's insane.) A few series before that, projects being completed c2006, were mostly very large and paid for with easy loans from the banks...

Clearly this is not scientific and I don't want to be a perma "we're doomed" bear about the housing market, but its interesting to draw the comparisons. Maybe Nemesis is waiting round the corner to bite?

*not a real index

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