There’s a phrase that is often used to justify prices reaching unprecedented levels: “It’s a new paradigm now.” It was a phrase that was used in the late’ 90s to justify extraordinary pe ratios, and it’s a phrase that gets carted out of the dusty clich cupboard every time any market seems to embark on gravity defying growth; and time and time again, it’s a phrase that is eventually proven false. Here’s another clich: “When the bulls say it’s a new paradigm, beware.” But only time will tell if the UK housing market proves the exception to the rule and can carry on growing, or whether gravity will ultimately exert its pressure. The last few days have seen more evidence emerge to suggest the market will soon wilt under pressure of overextended borrowing, but conversely an interesting theory has been articulated to suggest that it’s perhaps all rather sustainable.
While house prices start to soar again, our level of debt is building. We all know that for would be First Time Buyers, jumping on the property market is becoming a mission impossible. To an extent though, Buy to Let investors are stepping into their place, and the frustrated would be buyers are renting off landlords who are using the growth they have seen in other properties in their portfolio to meet the lending criteria of the mortgage companies.
And as long as supply is lower than demand, prices will be kept up. And the Abbey move to offer mortgages of five times joint income can only lead to a short term rise in demand. But supposing property owners are forced to sell, supposing they can no longer meet their mortgage payments? To a large extent this is what happened in the late ’80s, with repossessions, perhaps, the main catalyst for the crash that followed.
And the latest array of statistics adds ammunition to the theory that history could be about to repeat itself.
First of all, Friday saw the release of the latest data on insolvency. And once again, the number of individual insolvencies are up. In total there were 27,644 individual insolvencies in England and Wales in the third quarter of 2006 on a seasonally adjusted basis. This was 5.7% up on the previous quarter and a massive 55.4% on the same period a year ago. And now the UK seems to be on an inevitable course for 100,000 insolvencies in a year.
Of the total number of individual insolvencies, 15,416 were bankruptcies (26.6 percent up on a year ago) and 12,228 were Individual Voluntary Arrangements, an extraordinary 117.9 percent increase on the corresponding quarter of the previous year.
Some argue that the rise in insolvencies has got more to do with changes in the rules concerning bankruptcy making it a softer option, and the marketing push devoted to IVAs, with our radio listening ears seemingly bombarded with ads from debt managements firms.
Even so, it seems hard to believe the rise is just down to this, and common sense would suggest that that the main factor behind the soaring insolvency levels is quite simply that as a nation we have over extended ourselves.
And then, Friday also saw a piece of data, which to our way of thinking is even more serious. In the quarter just gone, the number of possession actions taken by lenders hit its highest level since the second quarter of 1992. In total there were 34,626 possession actions in 2006 and the number of court orders awarding possession of properties to lenders also rose in 2006 to 24,017, the highest figure since 1993 .
It’s not as bad as the early ’90s yet. In the last cycle, the quarterly number of possession actions peaked at over 50,000. But even so, the figures are creeping up at an alarming rate of knots, and have almost doubled in two years. If that trend continues, we will be matching the levels seen at the beginning of the last decade within 18 months.
The third report out of the bag was from the Alliance and Leicester and revealed data to tell us more about the unhappy plight of our prospective First Time Buyers. Apparently, of parents who do not own their own homes, four in ten (42%) hope to buy, but can’t afford it, and just three per cent are actively looking to buy their first home, compared to over half (55%) who are not even thinking about trying to get on the property ladder at the moment.
But the Alliance and Leicester reckons the problem is overstated, saying “With reports showing that the cost of raising a child to the age of 21 is approximately £164,000, compared to the average first time buyer property of £143,748, the perception of the expense of getting on the property ladder could be overestimated.”
Perhaps it’s all inevitable,that as house prices rise, thanks to the relaxation of lending criteria, the likelihood of a rate of interest increase grows, which will lead to an immediate rise in mortgage possessions, which will bring us closer to a crash in prices.
But finally comes a theory from Capital Economics which could mean the UK could continue to see rising property prices, without a corresponding rise in inflation, meaning that the natural check to a surging property market, the rate of interest, may not apply.
According to Capital Economics gurus, Roger Bootle and Jonathan Loynes, the “further loosening of mortgage lending criteria will no doubt help to sustain the strong level of activity,” and that on the one hand, this could help to push house price inflation higher, supporting consumer spending. But, the duo said: “On the other hand, it suggests that households are choosing to devote more of their income to
housing, leaving less left over to spend on other things.” If this is right, then actually higher lending criteria, promoting bigger mortgages opening the housing market to people who otherwise could not afford to jump on, will have the effect of squeezing incomes leading to lower inflation.
© Investment & Business News 2013