The Mother Of All Housing Hangovers

The great house price bubble is well and truly over. Negative equity is a reality for millions. Whether we like it or not, we are all paying the price for the world's excesses of the past few years.

The root cause of this global credit crisis is the great house price bubble. Years of easy credit encouraged many ordinary people and ordinary families to borrow huge sums of money in order to own their own home.

It’s an admirable dream, and an entirely natural dream.

We all need somewhere to live. I have rented. It does the trick. It provides a roof over your head. It is affordable, because you can make it affordable, either by living in modest digs, or by living with housemates, or both. I did both, when I was younger, living with far too many people in far too small a place, and living in a well located but terribly small bedsit in the middle of London. But the rent was cheap, so it worked well for me.

Renting can also give you the time and opportunity to save up for a deposit to buy your very own house. You can live below your financial means. You can find quite cheap places to rent. As time goes by, you should progressively be able to save more and more money towards that elusive first home deposit.

Drink Yourself Happy

All this takes time. It can be boring not going out every night of the week and drinking yourself happy. It can be frustrating living in a small abode, sharing with people you don’t necessarily like. I know – I’ve done it.

It’s also frustrating when you can’t tailor the property to how you’d like to live. If it’s furnished, you can’t just replace things like the sofa, unless you are willing to stump up your own money, and have others sit on and spill coffee and red wine on your sofa. You can’t just give the place a new lick of paint, and even if you did, you won’t necessarily get the benefit of it because you could move out sooner than you think.

Forced Eviction

For me, the most frustrating aspect of renting is that you are generally only a few months away from a forced eviction. I’m not talking about the Big Brother type eviction, or the eviction because you’ve trashed the place or had one all night party too many, but the one where the landlord decides they are going to sell.

It’s happened to me – twice. The first time, instead of being evicted, I bought the place and stayed. It was the first property I’d bought, aged 36. The purchase price was about 2 times my salary at the time, plus I had other savings and investments. In short, I bought because I could comfortably afford the flat, because I thought I was buying it at a reasonable price and because I didn’t want to stay on the eviction merry-go-round.

The second forced eviction came after my partner and I sold our London flat and moved back to Australia. We rented down here while we looked for a suitable property to buy. Before we could find something suitable to buy, our landlord decided to sell.

I Bought At The Housing Peak

Luckily for us, before our landlord kicked us out, we found a house to buy. Again, it was affordable.

But it meant that we bought just over a year ago, at probably the peak of global housing markets.

A report in the Sunday Times yesterday said “Collapsing house prices are plunging 60,000 homeowners a month into negative equity… At current trends, 2m households will enter negative equity by 2010.”

We are most likely sitting on a capital loss on the house we live in today. It doesn’t bother us because:

a) the house was affordable for us

b) we’re not planning on, nor do we need to sell it for the foreseeable future

c) if we did suddenly need to sell, we’d be able to buy something else, and that something else would also be cheaper than it was a year ago

d) if I lost my job, we’d have enough savings to cover our day to day living expenses. We don’t have a mortgage.

Are we one of the lucky ones? Not having a mortgage puts us in a very strong financial position. But we’ve saved hard. We lived in a modest flat in a modest London suburb. We worked on paying the mortgage off. We could have afforded a bigger place in a better suburb, if we took a bigger mortgage. We chose not to.

No Mortgage, Yet We Are Losers Too

Yet, in theory, we are losers too. We have almost certainly ‘lost’ some housing capital, but we don’t have negative equity as such, because we don’t have a mortgage. Personally, I don’t see it as a loss, because I see property as something you live in, and not an investment.

I say “So what if 2 million households might be sitting on negative equity 2010?” Remember, your house is a place to live, not an investment. Negative equity is only a problem if you need to move or find you can’t afford your mortgage repayments.

Hold Onto That Job As If Your Mortgage Depended On it

It might be stating the obvious, but the main reason people won’t be able to afford their mortgage repayments today is if one or both of the household breadwinners lost their job. As the economy slows and enters recession, that is a very real threat. As I said in point 5 of my Credit Crisis Survival Guide, make your job indispensible, and stay friendly with your boss. I wasn’t joking.

As some people lose their jobs, some will lose their houses. Not only that, even after losing their house, some will be left with huge debts, because the value of their house is much lower than their outstanding mortgage. It’s a sad but inevitable consequence of the current economic environment.

Some people will lose their house because they’ve been living way beyond their financial means, borrowing five or six times their gross salary. If they’ve taken equity out of their house, leaving them with a mortgage they are now struggling to service, they have been living beyond their financial means, and are now facing the consequences.

The Party Has Ended With The Mother Of All Hangovers

The long credit boom gave many people the opportunity to live beyond their financial means. It was party time, and someone else was paying for it. The music has now stopped, the party is over, and the hangover is starting to get painful.

House prices will keep falling. There is nothing except a massive Government bail-out or hand-out to individual mortgage owners can do to stop it. Whilst house prices are falling, the economy will continue to struggle.

But it will turnaround. Houses will become affordable again. The economy will grow again. Jobs will be created again, and wages will increase again. It might not happen until 2010 or 2011, maybe longer. But I am 100% sure it will happen.

It’s painfully obvious there are no winners from this economic downturn and violent busting of the credit bubble. Our priority now is to get through these few couple of years as financially unscathed as we can. It won’t be easy, there will be casualties, some of their own making, but sadly some that are outside their own control. Life is not meant to be easy.