Boom Bust - UK housing bubble set to burst

Buy a new car and you can be fairly certain that in 5 years time its resale value will be HALF what you paid for it. It's logical really. Wear and tear shortens its useful remaining life. This reduces what it is worth to the next owner.

Turn to houses and all logic seems to go out of the window. If your timing is right, you can buy a new house, live in it for 5 years, then sell it for TWICE what you paid for it!

It doesn't make sense does it... until you work out that during those 5 years the value of the bricks and mortar didn't, in fact, go up at all. The thing that went up was the 'market' value of the patch of dormant soil the house is sitting on.

graph showing steeply climbing property prices but depreciating value of brick and mortar - the gap between being the land value

Graph: all is not what it seems, the rise in house prices is, in fact, all about increasing land values. The true value of the bricks and mortar is reflected in the depreciating value of the house and what an insurer will pay out to cover the cost of rebuilding it should it, for example, be destroyed by fire.

graph showing very steep percentage rise in land values since early 1960s compared to virtually stagnant wages

Graph: the rise in land values (and what can be charged for rents) is on a different planet to the insignificant rise in living wages since the 50s. Perhaps this helps explain how it was possible to support a family on a single male income in the 60s and 70s.

This should beg a lot of questions, like who are the principle beneficiaries of this trend in land values? Like, why, in this green and pleasant land is it fast becoming unaffordable for young adults to set themselves up in a permanent home close to jobs and public services? Like, is it right that you should have to commit half your adult earnings to paying off the perverse interest loaded cost of that 80 square metres of land hidden under your house - a plot otherwise sufficient to keep a sheep or two in grass, in a country where unpopulated land, from the window seat of an aeroplane, does not look to be in short supply.

It is clear that we can not look to government, nor the mainstream media for answers to these questions. Neither are about to take responsibility for the approaching recession.

So why does it happen?

Firstly, people who assume that the value of a home will only ever go up, may not be old enough to have bourne witness to the damage done by the last market crash. If you break history down into periods of 8 or 9 years, such an assumption proves to be highly unreliable.

graph showing 3 significant peaks and troughs in house prices since 1975

Graph: house prices 1975 - 2006 illustrating that what goes up, also comes down. See here for the latest version of this graph.

More reliable is the observation that over the last few hundred years (excluding the war years) roughly every 18 years people have found themselves at the bottom of a deep economic recession and, since so much of the UK's wealth is invested in property, these recessions and the fortunes of our housing market are inextricably intertwined.

It is well understood now that busts follow speculative bubbles - periods of intense buying activity - much of it speculative investment - with the promise of easy profits. Take the Dot.com bubble.

In the case of housing, the bubble is primed by easy-to-arrange bank loans at times of irresistibly low interest rates. At such times property starts to look like a golden investment, offering returns of say 10-20% per annum (and no capital gains tax to pay on selling) compared to a saving account's feeble few percent return (before tax).

It is easy to see how the borrow and spend mentality becomes contagious in times of near zero interest rates and over-zealous lending. When rates are low the conditions are right for the housing market to pick up again. The construction industry re-engages to capitalise on rising prices, and as demand outstrips supply of viable plots (many held off the market in the hope of making even higher profits on sale), the bidding war begins, land prices rocket, and as homeowners see this increase reflected in the increasing market value of their homes, they release equity to buy big ticket items (cars, holidays). Consumption grows, confidence and feel-good abound... then the government (now at hands length through the Bank of England) finally acts to 'cool' this unsustainable growth in indebtedness by pushing up the interest rates.

When interest rates rise, repayments on those loans that seemed such good value just a few years ago, also rise and start to hurt. Affordability becomes an issue. Buyers get cold feet, demand drops, the certainty of an easy and profitable future sale evaporates, building firms shed employees, unemployment rises, repossessions climb and, hey presto, we wake up one morning with a headache at the bottom of a deep pit.

Having a mortgage of 4-6 times your salary and less job security is stressful. But bankers understand that most people prioritise keeping the roof above their heads ... in fact, the banks profit handsomely from the proportionately much higher loans that inflated land prices enable them to make. It becomes a self-perpetuating cycle. The principle losers are those that lose their homes or are stuck with an unnecessarily high burden of debt repayments and a house that may take another 8 years to return to its pre-crash value.

Civil servants and politicians aren't thick. If there was a will to change this pattern which generally hurts the many to the benefit of the few, it might be done by taxing the unearned incomes from land (tax 'money for nothing'). It might be possible for the treasury to collect enough income from this to entirely substitute, if not dramatically reduce, income tax, VAT, and the multitude of further 'stealth' taxes which burden and discourage hard workers and entrepreneurs.

Lloyd George and Winston Churchill proposed such a plan in 1909 as part of the People's Budget. The budget recommended a 20% tax on the unearned increases in privately owned land's value (to be paid at the point of sale or when passed on following the owner's death), plus a tax on land privately owned but sitting vacant.

Fred Harrison, makes a persuasive argument for government acting to put an end to the boom & bust cycle in 'Boom Bust - House Prices, Banking and The Depression of 2010'

The last time house market crashed in the UK was 1989. 17 years on, the prognosis does not look good.

Ends | 26 Aug 2006 | The Leg

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Related:

reading | graphs | videos | articles | thoughts

Essential Reading:
Boom Bust - House Prices, Banking & ... 2010 - Fred Harrison
Progress and Poverty - Henry George
UK house price crash - quiet before the fall (2007)

Related Graphs:

FT Graph: regions hit by reposessions and unemployment 05-10


US National Home price index at June 2010 suggests US house prices heading down again after a brief stimulus driven recovery




Graph: How recent house price inflation compares by country

 

Graph: mmm... UK land prices looking a bit peaky?

 



Graph: Average UK house price to earnings ratios - 3.5 times earnings is usually considered the maximum for sound lending.

 

Graph showing UK land values and house prices 1985-2006

Graph: It's not about the value of bricks and mortar. Since the '89 crash, UK land values fell, then have risen to alpine heights, with house prices necessarily rising to accomodate this. Residential land values have risen by 764% (x 7) since 1986. For more, visit Section 10 of the very helpful Housing Statistics Briefing May 2006 report from English Partnerships.



Graph showing US house prices 1890-2006

US house prices 1890 - 2006, plotted by Robert J.Shiller
of Yale. Click graph for detail. Then compare with the recent % change in US house prices. Or, an analysis of the Japanese experience.

 

Graph showing US house price growth dropping dramatically at the end of 2006

Graph: % year on year increase/decrease in house prices in the US, clearly indicating that the price bubble has already burst.

Related Videos:


Housing Bubble: Market Crashing? Yes, In Slow Motion.


Above: Fred Harrison on how the UK's tax system allows rich landowners to milk the poor during boom times.

Related Articles:

2014:
1m UK households spend 50%+ take home pay on accommodation
Over 700 mansions worth £5m+ lie empty in London finds report

2013:
June: OECD says UK house prices are 31% too high
May: 30% of all households in England & Wales are one person
Feb: 40% who bought and sold homes after 2007 have lost money

2012:
Nov: Owner occupation is at its lowest level in UK since 1988
Oct: August Home loans in Spain fell to lowest level to date
June: 15,698 UK affordable housing starts in 2011/12

2011:
June: Schiller says a further 10-25% fall in US home prices possible
Mar: House prices have dropped by £45,000 or 18% since Oct '07
Feb: New homes built in 2010 fell to lowest since 1923

2010:
Sep: How high house prices make us into dependants
June: UK House price rebound since June 2009 runs out of steam?
Apr: Ghost estates testify to Irish boom and bust
Apr: UK 1st time buyer numbers drop to lowest level in 2 decades
Mar: Where in the world can a house sell for $5 and its land $95?

2009:
Residential land value not London fell 40% in 16mths to July (p3)

2008:
Residential land value not London fell 16% in 12 mth to July (p.3)

2007:
A quarter of UK first time buyers can no longer afford to buy
Fall in UK house prices now may hit harder than crash of 1990s
Halifax says UK house prices fell by 0.6% in September
Buy to let flats in UK being auctioned for 60% of original price
Landlords find rental returns falling below mortgage repayments
Confidence in UK financial sector drops to lowest since 1990
Hedge funds bet on fall in UK house prices
US housing market frozen - recession likely says Freddie Mac
US: 2.5m households' mortgages likely to reset at around 10%
Banks tighten lending as their own borrowing costs rise
Bank of England not so independent of government after all
Assurances fail to halt run on UK mortgage lending bank
UK property crash possible says RICS's chief economist
Greenspan: Double digit interest rates on the way
Greenspan: UK mortgage holders will experience 'difficulties'
16 Sep: UK housing market's bull run comes to an end
The average asking price for a UK home fell in September
Ninth consecutive monthly drop in new house buyer inquiries
Fear of retail bloodbath as rising interest rates hit home
Average standard variable UK mortgage rate rises to 7.69%
Rising mortgage costs encourage London landlords to sell
Britons seeking debt advice hits a record
Unemployment rises in US - 12,000 home lender jobs to go
UK house prices 1997-06 rose 4 times faster than average pay
UK mortgage rates will rise as bank borrowing costs rise
UK media provides late advice on surviving a housing crash
Mortgage eats 51% of young London couples' post-tax income
Major Landlord says UK buy-to-let figures no longer add up
"Release cash in your home while you've still got time"
A nation (re)possessed? [The vultures close in...]
Higher UK mortgage rates hit lower income earners
Young homebuyers contend with £20k additional debt
Filings for repossessions in US up 93% vs a year ago
'slow down in [UK] house price inflation could turn into a slump'
New house buyer enquiries down and unsold stock up (July)
Near 1m UK buy-to-let mortgages now, up x 33 from 28k in '98
10 Aug: The parties over - City hit by biggest crisis in 10 years
10 Aug: stock markets tumble as sub-prime contagion spreads
BNP freezes funds in sub-prime shock
UK property fund outflows surge
Bank of England signals interest rates rise to 6% and beyond
Repossessions up 30% on 12 mths ago as squeeze continues
City millionaires are sending UK farmland prices soaring
UK's house prices are second most overvalued
US housing suffering its worst recession since 1992
Houses now account for 60% of UK's 'wealth' - a record high
Of 179 properties at Covent Garden auction, 52 reposessed
Oversupply of houses for sale creates buyers market in UK
UK mortgage lenders call for interest rate freeze
Americans could default to the tune of $100bn
2 European Insurers face $8bn of sub-prime mortage exposure
UK commercial property funds start to nosedive
How US borrowers were caught out
720,000 expected to have home repossessed this year in USA
Twice as many Brits missing mortgage payments as in 2006
UK housebuilders hit by stagnating house market
US sub-prime mortgage ills infect UK markets
First time buyers spend up to 48% of income on debt repayment
200 businesses launched to capitalize on UK mortgage arrears
FSA sounds alarm on UK sub-prime lending
London house price rises mask falls elsewhere
UK household disposable income dips below last 1990 low
UK housing market sentiment 'may' be turning, survey warns
UK's personal savings rate hits 47 year low
US mortgage defaults already at highest level in 37 years
Are the planners really to blame for lack of affordable housing?
Bubbling under...unsold homes lead to unlet homes lead to...
Housebuilding market 'may not' be working well for consumers
US average mortgage interest rate hits 6.74% in June 07
Cheap fixed-rate mortgage will end for 2m Brits later this year
£1,300,000,000,000 in debt
Housebuilders own enough unused land to build 225,000 homes
ABN fears world housing crash
First-time buyers in UK face highest mortgage costs in 15 years
Bonds sell-off suggests rising interest rates are here to stay
The return of negative equity?
The C-word that remains taboo
Repayment shock ahead as 2-3yr fixed mortgage periods expire
Buy-to-let landlords start sell-off as demand dries up
May 07 - house prices freeze or fall in 2/3 of UK districts
Do we need a housing market crash in the UK?
How developers maintain profitability as land prices inflate
UK buy-to-let has grown by factor of 26 since 1998 (c.section 6)
UK homebuyers now at full stretch
2020 Vision to end the boom & bust cycle
How soon will UK repossessions hit their 1991 peak of 75,540?
Spanish property firm shares plunge 60% in 6 days
Loan standards for buy-to-let slide
Up to our eyes in debt we can't see
Fixed mortgage deals vanish as UK inflation rises
'Buy to leave' investors keep thousands of homes empty
Property prices 15 times earnings in London
UK Faces £459BN Housing Crash
French housing bubble set to burst
US housing slump may set off full-scale global crisis
World stocks tumble on US fears
US repossessions hit their highest in 37 years
US mortgage crisis goes into meltdown

2006
Too much money (UK 2006)
When will UK house prices finally crash?
Dramatic slowdown in house prices predicted for 2007/8
We all pay a high price for the houses of the super-rich
Banks told to be ready for 40% drop in house prices
US housing crash explained
Average UK house price breaks £200,000 barrier
Home repossessions at highest since 1992
Abbey critised over five-times-salary mortgages
18% rise in city bonuses drives London house price inflation
300,000 UK homes empty for 6 months
250,000 second homes in England & Wales
House prices far too high, warns IMF
Property prices 8.9 times earnings in South East
Landlords are the stars of new UK economy
First-time buyers borrow record amounts
Mortgage loans at new record
Two million families struggle to pay council tax
Homebuyers 'face growing worries'