House prices peaked in 2003 - expect them to return there

The shine is starting to come off the housing market. For me, the only issue this raises is a question: why didn't it happen a long time ago? The idea that house prices could continue rising for ever is an absurd proposition but one that has been palpable in the minds of far too many people for far too long. The question now is: how low can they go?

We can all pontificate and speculate using economic models, historic similes and fancy jargon. But I want to tell you a little story.

In the first few months of the new millennium I was working on a major web launch and we were looking for themes that summed up the state of the nation. News, fashion, sport, celebrity, the usual suspects, but there was something missing. We needed to tap further into the zeitgeist than B-list celebrities and football. Checking the mailbag it became obvious. People were starting to seriously worry about their debts. Brilliant. We'd launch with a big get-out-of-debt campaign. That was in early 2000.

Now, for various reasons the web project was shelved - along with our debt campaign. But that didn't matter any longer because within a year the mood of the country had changed. The Bank Rate (formerly the Base Rate) remained steady in 2000 but by early 2001 it began its steady decline. Money was becoming cheaper and cheaper. Previously rational people were drawn into a crazy borrowing binge, egged on by brokers, banks and other lenders and goaded into taking more and more credit by self-appointed money experts.

Suddenly, it seemed that everyone where I live had gone out and bought a new car or two. Other people were having new kitchens and Roman-style bathrooms installed like they were going out of fashion, which incidentally, they now are. Builders were adding extra rooms to homes, where previously they would have been deemed illegal. It became impossible to get a plumber to visit unless you were looking to install an entire new central heating system.

But pay wasn't rising by anything much above inflation. So where was the money coming from? From house prices, of course.

By now I was development editor of This is Money, working not at head office with the other journalists but in the development hub in 'new media land'. It was exciting and we were creating things that had never been done before with a talented young team, staffed by college leavers and other, well, let's call them first-time buyers.

Being the only person from the money team in the building, conversations often turned to money-related issues. It was great to see people taking an interest in such matters. But increasingly the conversations were not about the stock market and interest rates but about debt. Not about how to get out of it, but how to get more.

The country's collective attitude to debt had completely changed. Never mind that it could take a lifetime to clear a £30,000 credit card debt and that anyone with common sense should try to live within their means, that was irrelevant for people leaving university with up to £15,000 debts to show for their education.

Over the next couple of years, some of these youngsters had not only bought their first flat but within six months of doing it had remortgaged to buy stuff and go on holiday on the back of the rise in its value.

It wasn't just youngsters, of course; everyone seemed to be at it. But what happened next would affect the youngsters most and by 2003 they were in a fix.

The credit boom was over. House prices had peaked. The cost of a one-bedroom flat was now out of reach of the average first-time buyer on the income multiples that sensible lenders were prepared to offer. It was time to settle down and wait for wage inflation to close the gap and breathe life back into the market.

But it didn't happen that way. Word soon spread around the office that someone had secured a loan with Standard Life Bank (it could have been any of the banks but this is how it happened). It was a loan based not on income but perceived affordability. It didn't take long for everyone trying to break into the housing market to contact Standard Life or a mortgage broker to try to get hold of bigger and bigger loans.

By now even the local newsagent was advising his customers on how they could get into the housing market as a first-time buyer and as a buy-to-let investor - a sure sign that the boomtime was over. But it wasn't.

Estate agents were pricing homes on a see-what-we-can-get-away-with basis. And with lenders willing to lend just about anything to just about anyone - even the unemployed and people prepared to lie about their incomes - the boom continued for five years.

And so here we are now, in March 2008, and it's over. The loans made to people without a hope of paying them back were packaged up as investments and sold off by bankers (an even greedier element of the financial system than any estate agent or unscrupulous mortgage broker). And no one knows the extent of the impending damage we're about to face. What we do know is that personal debt is off the scale and it's pay-back time.

How far house prices will fall as a result of this recklessness is anyone's guess. I'd say any gains made since 2003 on a property's 'value' are a bonus that we should expect to lose. And to borrow a phrase much quoted by those people who believed that house prices were going to keep on rising for ever: 'This time it's different.'

Yes, you're right. This time it is different. This time it's carnage.

Richard Browning

Related

Financial crisis puts crunch on home loans

Estate agent reveals dirty tricks

Brokers banned for false mortgage applications

Please note: Yes this is one-sided. It is my opinion. Here's one I wrote two years ago:

Doomwatch: house price storm is brewing

Comments

[J in London]

Richard, although I know you are a pessemistic soul - you are right on this one. The country has been whipped into a house frenzy, 5 years ago when I worked in mortgages one in three were either subprime or self cert.
Then comes the property TV shows, the BTL for dummies seminars, the tax breaks for investors, the government making more than ever from unfair stamp duty levels, pension scheme failures, government approved personal debt levels, estate agents & mortgage brokers greed and bubble the size of the whole UK inflated to bursting point. I just hope it hurrys up, a short sharp correction is needed not a long protracted painful recession - I hope Merv and Gord start smelling the coffee and get on with it rather than trying to hold it back somehow.

[Christine Richards]

Hooray to Richard Browning at long last someone who has the guts, insight and intelligence to tell it like it is! For so long i have been shaking my head and looking at the "free for all greedfest" which has been sucking people in like a tornado.
The sure sign that the good times are over can be taken from the following observations;
-Travelling through uber trendy "nottinghill" i noticed that the flashy BMW car showroom was now eerily vacant.
-Back in Shepherds Bush the local HSS hire shop has also ceased trading. Make of that what you will folks!!

[L.G, Leicestershire]

Accurate and also an alarming article on the current housing market by Richard Browning. I actually believe a lot of people started living 'beyond their means' in the mid to late nineties, but clearly this over borrowing and over spending culture has now hit its peak.
Unfortunately we live in a buy now, pay for it over the next 250 year environment where the majority of people wouldn't and couldn't have it any other way. It's become the norm.
We definitely need a more sensible approach to all kinds of borrowing. I think it could be a bumpy ride for a lot of people.

[Karl]

Perfectly sensible viewpoint, but my compliments on great use of borrowed words like zeitgeist. Now time for the impending housing weltschmerz.

[Simon L - This is Money]

If you want to test your googling or German look away now...

Weltschmerz translates as world pain - Wikepedia gives it as 'the kind of feeling experienced by someone who understands that the physical reality can never satisfy the demands of the mind'

A 'pessimistic world view was widespread among several romantic authors such as Lord Byron'

So there you have it, Lord Byron predicted the house price crash.

[Gem]

FTB's won't touch the Market at the moment, nor upgraders or BTL, the press rightly or wrongly is squeezing the death out of any possible light at the end of the tunnel so 2003 values are a real prospect. I actually want to upgrade but won't in this climate. I split a 3 years ago from partner and bought a flat, have had good payrises since and saved bonuses, (not expected when I went for flat or would have waited), I would dearly love to upgrade now but am terrified to.
It's frustrating being trapped but when you consider what you buy today will be worth less tomorrow who is prepared to increase their mortgage or risk savings? About 6 Months ago I paid of 5K off my Mortgage as it was money I had above tax free savings.
The Property has probably lost that over the last 6 Months so the 5K has evaporated! (Appreciated mortgage debt is less but would rather have spent it on a Holiday as 5K is only a few quid a Month, have a tracker and have benefited from the rate reductions)

[Ian Russell]

Super article Richard, and from my point of view you are absolutely spot on. I fortunately sold my house in March this year and it looks like I was extremely lucky to get out in time.

I want to find another property but sellers are being absolutely un-realistic - For example, a house recently came back onto the market yesterday (17/04/08) in a nice location on my radar. It is a 4 bed semi detached property which was on the market for a staggering £575,000 in the middle of 2007. The property had offers for £499,995 (under the 5% stamp duty madness rate) and the vendor declined which they now regret. It came back on the market yesterday for 'offers in the region of £500,000' and the estate agent assured me they will agree a sale on £499,995 (13% reduction). It was originally valued last year at £575K simply because a very similar house sold down the same road on 10/07/07 for £560,000 before the crunch really started.

The only other semi detached house sold in the last 5 years was in Sept 2005 for £455,000 and thats still too much.

I have been advised the seller has been at this house for over 20 years which means they would have bought it in the region of about £60,000 to £90,000. Why do they need half a million pounds for it?

Sellers must be realistic, estate agents need to make honest with thier clients and banks need to go back to lending 3 times annual salaries. (I can still get 5 times my income even now!)

Reductions are flowing into my inbox daily and it's going to get worse.....

[tony benton]

reading through the comments I notice that GEM is calling for prices to drop so that he can buy but he did not say if he dropped on his recent sale.
Richard's article was spot on. For the last 10+ years we have lived in the land of dreams. All political parties make mistakes but this decade has been a corker, the gold was sold, industry vanished, interest rates were reduced by a stupid amount when they should have been stabilised, buy to rents were encouraged by Gordon for pensions, because he had messed up the company schemes' people were encouraged by the government to take out extra loans so as to buy white goods to keep the nation going and we were told how we were florishing. Now there is no easy money retail will decline. All this is down to these 5 year plans in case they are not re-elected. The public do not count.
In 1997 when Gordon took over instead of confronting the Public Services pay demands he sat on them and carried on the tory policy and gloated about paying off the National Debt, must have been his upbringing, all countries have debts. The result was 2 years later he caved in and gave out massive pay rises which he has had to pay for ever since. Whilst he was doing all this Tony encouraged the massive expansion of the EU which has resulted in a population explosion that will probably bankrupt us. Then what does he do... clears off.