I wouldn’t put my shirt on house prices

Note: A house price crash hasn't happened yet, a gentler correction is underway, but a fall may still come.

Why have property prices doubled in five years? The government has bought the idea that it is because there are not enough homes to meet demand. This is rubbish and John Prescott's pledge to build one million homes in the south-east of England is a stupid way to try to bring down house prices.


At best, it will only make more sustainable the current unfair division of power, wealth and jobs between Britain’s regions, where London operates like a black hole. At worst, apart from infringing the green belt, when the housing bubble collapses, as it surely will,
the government will be left holding the baby as developers and lenders pull out of projects that are no longer profitable. High house prices are actually sustaining a huge amount of housebuilding, as anyone who ever passes along Leith waterfront can testify.

A study by Europe Economics quoted in the FT recently showed that there was actually more supply in relation to demand across the country than a decade ago. In London, the ratio was the same. The housing market has been pushed out of sync by the sudden entry of a huge speculative element. When stock prices fell in the wake of the deflating IT bubble, a tidal wave of money came out of the stock market and crashed into the housing market.

Buyers-to-let now make up 9% of people buying – up from 2% 10 years ago. They will soon overtake first-time buyers in some areas. Property developing has become the get-rich-quick dream of the masses, the advent of the buy-to-let mortgage in the late 90s meaning even people who didn’t have the stake to get into the poker game could borrow it on the
strength of rising house prices. These people planned to rent to cover their mortgages, but that is proving more difficult with rents rising only 4% last year, less than in the past. Renting is a hassle and some people don’t bother – with house prices going up each year even if the place is left empty for a while they can still make a killing when they sell.

It is these sums, that make it viable for the wealthy to buy flats and leave them empty and still make a fat profit, which have lead to an amendment being debated in Westminster that would see flats empty for more than six months taken over by councils with a pledge to rent them out at an affordable rate.

It is a good idea – although there will no doubt be howls of outrage from middle England where it has become almost de rigueur to buy a little flat somewhere for a nest egg. There are far too many empty flats in Scotland too, with almost 4% of housing stock empty. A Scottish Executive report released last Friday showed 9000 empty in Edinburgh, 10,000 in Glasgow, and 4000 in Highland – not including holiday homes.

However, the law may be superseded by events as it is likely that in about five minutes the market will experience a significant correction with house prices falling between 15% and 45% in two years. Speculators are not known for their loyalty. Unlike householders, they don’t live in their money: they are currently holding it in the form of bricks and mortar but when the market sneezes they will take fright, scarper and take their cash elsewhere, increasing downward price pressure.

At that point the papers will no doubt be full of tragic stories of people putting homes on the market and finding instead of 30 notes of interest, they get none. This will not be because there are suddenly a lot fewer people who need somewhere to live. Mesdames et messieurs, faites vos jeux.

The Scottish Herald
May 12th 2004