House prices always go up, right? Wrong! Here are ten reasons why the next downturn could be the worst yet.
According to the Halifax House Price Index, UK house prices have risen every year since 1996, and 2006 looks like another positive year for property owners.
After eleven years of rising prices, it's no surprise that, to millions of homeowners, the last housing crash seems a lifetime away. However, its effects lasted for more than five years until 1995, when house prices set off on what is almost certainly their longest post-war winning streak.
In the six years between 1983 and 1989, the average UK house price more than doubled from roughly £31,600 to £68,800, an increase of 117%. However, by 1995, this figure had slipped to £61,500, which equates to a fall of 11% -- and that's before taking inflation into account. In the six years from 1999 to 2005, the average house price soared again, increasing from £81,600 to £170,200, which is a rise of 109%.
The rapid increase in house prices since the turn of this century led me to sell my house last year, so I've leapt off the housing ladder and now rent a nice family home. Indeed, I remain surprised at the willingness of buyers to pay ever-higher prices for properties. Still, with a large group of vested interests (mortgage lenders, estate agents, surveyors, buy-to-let investors and so on) talking up the housing market, my dissenting view is very much a voice in the wilderness!
Nevertheless, although I can't say when the next housing downturn will begin, I remain convinced that there is definitely one in the offing. Here are ten reasons why I expect house prices to go into reverse in the years ahead:
1. We overspend without a care
Sensible budgeting can be summed up in this phrase: spend less than you earn. For example, I try to invest half of my take-home pay in order to build a brighter future for my family. However, most people seem to have forgotten this basic rule of budgeting, because, across the UK as a whole, we spend £110 for every £100 of take-home pay. Frankly, this is financial mismanagement on a vast scale, and is nothing short of a recipe for long-term financial ruin!
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2. Our bills are soaring
Although the headline indicators of inflation (rising prices) are reasonably low in historical terms, housing expenses are rising at a much faster rate than the cost of other goods and services. Indeed, the latest report from the Halifax shows housing costs rising at 7% a year. Homeowners have been hit particularly hard by hefty increases in Council Tax and energy prices. Indeed, the cost of domestic gas and electricity has almost doubled in the past three years, which is more bad news for our budgets!
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3. Mortgage debt is massively higher
In mid-1991, UK homeowners owed £308 billion to mortgage lenders. Fifteen years later, this figure has more than tripled to £1,025 billion. Thus, our mortgage debt has increased at almost 8½% a year for a decade and a half, which is some borrowing binge. Indeed, at a typical interest rate of 5½% a year, we now hand over £56 billion a year in interest to mortgage lenders, which is an all-time record. Ouch!
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4. Non-mortgage debt has exploded
Although our mortgage debt has soared in recent years, at least we have £3.6 trillion of housing wealth to support it. Then again, our unsecured debt (also known as 'consumer credit', which includes credit and store cards, personal and student loans, overdrafts, etc.) has risen at an even faster rate.
In July 1993, this debt totalled £52.5 billion; twelve years later, it amounts to £212 billion. Hence, it's more than quadrupled in thirteen years, rising at an average rate of over 11% a year. And what have we got to show for all this spending? Not very much of value, to my mind!
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5. Mortgage equity withdrawal has soared
In the US, the 'wealth effect' created by rising house prices causes homeowners to borrow against their homes in order to fund their lifestyles. This is known as mortgage equity withdrawal. As I warned in Your Home Is Not A Cash Machine, this is rarely a wise move!
6. Wage inflation is modest
Although house prices, mortgages and other debts have been rising rapidly in recent years, the same cannot be said for wages, which have increased at a far more modest clip. Average pre-tax annual earnings have climbed by just 4.2% a year since 1997, which is far slower than the growth in house prices.
Hence, the average house now costs 6.3 times the average wage, compared to the three times salary that I paid for my first home in 1992. Frankly, I'm astonished that people are willing to pay such over-inflated sums for dwellings!
7. The savings ratio has plunged
Naturally, our lengthy borrowing binge has been accompanied by a fall in the proportion of our take-home pay which we set aside as savings. In 1995, we saved more than a tenth of our disposable income (10.2%), but this figure plunged as low as 3.7% in 2004 before creeping up to just over 5% today. Nice work, guys and gals!
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8. Interest rates are low
The one thing which keeps the wolves from the doors of millions of homeowners is low interest rates. Currently, the Bank of England's base rate is just 4.75% a year (although it's likely to rise to 5% by November). In historical terms, this is fairly low: since 1975, the base rate has been as high as 17% in 1979/80, but has only been below 5% since September 2001 (due to the economic impact of the 9/11 attacks). Enjoy these low interest rates while you can, because they won't last forever!
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9. The State safety-net has vanished
As a tenant, you can apply to claim Housing Benefit if you are unable to pay your rent; four million people claimed Housing Benefit in February 2006. On the other hand, State support for homeowners who are sick, injured or unemployed is virtually non-existent.
The big crunch is that the benefit paid to homeowners who are struggling to pay their mortgages (Income Support for Mortgage Interest, or ISMI) was slashed in October 1995. The important point to note is that you get no help whatsoever with your mortgage repayments for 39 weeks (nine months; long enough to have a child!) and you have perhaps a one-in-five chance of getting any help thereafter. So much for the government encouraging home ownership, eh?
10.Private insurance cover is pants
When the government rolled back ISMI in 1995, it expected insurers to step into the breach by offering homeowners competitively priced protection against accident, sickness and unemployment. Alas, financial-services firms responded by doing what they always do: charging sky-high prices for inferior policies.
Mortgage payment protection insurance (MPPI) is hugely overpriced and poorly designed. In total, UK homeowners are being ripped off to the tune of £1 billion a year by the lenders and insurers which sell MPPI. Take my advice: don't buy MPPI from your mortgage lender; instead, shop around for a Best Buy policy from the likes of Ant Insurance, Best Insurance, British Insurance, Burgesses, Helpupay and the Post Office.
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Finally, since the Second World War, the average house price has risen by around 8½% a year. In the past six years, it has risen by an average of 13% a year. Most statistical trends tend to revert to their long-term average (a phenomenon known as regression to the mean), which suggests that house prices have some way to fall. Hence, anyone who believes that the current winning streak will continue without end is living in Cloud Cuckoo Land!
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Disclosure: Cliff owns shares in HBOS, parent company of Halifax.