The roof was bound to fall in on Labour's housing market
Jeff Randall argues that Gordon Brown's record will be different from the Tories' of the early 1990s only in that, for many victims, the pain will be greater
By Jeff Randall
Last Updated: 11:44AM BST 03 Oct 2008
“Homeowners rightly expect their investment to be protected by sensible policies's I am determined that, as a country, we never return to the instability, speculation, and negative equity that characterised the housing market in the 1980s and 1990s.'' Gordon Brown's Budget speech, July 1997
Crash! Another of the Prime Minister's plates has just spun off its stick. British house prices fell for the 11th consecutive month in September. The average home lost 17 per cent of its value last month, according to the Nationwide building society, leaving prices 124 per cent lower than they were one year ago.
After a decade of wild speculation the buy-to-let frenzy was little more than a huge bet on ever-rising values the property market is less stable than a house built on sand. Worse still, many homeowners are being plunged into negative equity, especially first-timers who bought in the past two years.
To say that it's all going horribly wrong understates by the length of Downing Street the extent to which Labour is presiding over chaos. The next phase of Mr Brown's bust will be a fresh spate of defaults, bankruptcies and home repossessions. At this rate, his record will be different from the Conservatives' of the early 1990s only in that, for many victims, the pain will be greater.
Two months after Labour swept to office in 1997, a confident Chancellor told a credulous country: “Volatility is damaging both to the housing market and to the economy's stability will be central to our policy to help homeowners. And we must be prepared to take the action necessary to secure it.”
Little did we know how such an empty promise would reveal his fundamental misunderstanding of market forces. Almost from day one, they contrived to highlight his impotence. The trouble was, while house prices were rising sharply in the early years of the Blair-Brown regime, very few seemed to care.
By 2004, however, even Mr Brown had worked out that there was a potential downside to a property market going up like a hot-air balloon. All that guff about safeguarding stability was in danger of backfiring.
Having unleashed a torrent of cheap debt and a culture of reckless borrowing, something had to be done. There was an opportunity for the then chancellor to appear in control. He looked for a whiz-bang idea and came up with the National Housing and Planning Advice Unit (NHPAU). Crackerjack, eh?
As if we did not have enough quangos and advisory bodies clogging the body politic and draining the taxpayer, the purpose of Mr Brown's exciting new venture would be “to provide independent advice on affordability matters to the Government”.
A reasonable man would have spotted the catch: here was another state-funded think tank whose only goal was to offer the Government evidential fig-leaves to cover conclusions that it had already reached. But so inured had most of the electorate become to Labour's proliferation of politicised consultancies that it was hard to see the dead wood for the sleaze.
Anyway, with house prices defying gravity, a reasonable man was hard to find. Those who warned that a crash was inevitable were dismissed as the commentariat's version of nutty doomsayers with cardboard placards proclaiming “The End is Nigh”. The world, it seemed, was full of experts, eager to explain why this time it would be different. By early 2006, average house prices had reached about 200,000. At the same time, average salaries were roughly 25,000.
It was clear to anyone who could count beyond five without using fingers that this chronic imbalance a ratio of eight to one was unsustainable. It would need only a small increase in the cost of money or unemployment for the roof to fall in. Never mind, most ministers, with their visceral hatred for voters who live beyond Labour's urban heartlands, couldn't wait to have a crack at the “housing crisis”. And we knew what that meant: crashing through pledges to protect the green belt in favour of new estates of “affordable” units.
Skipping over the fact that the Government had encouraged an explosion in immigration, which exacerbated spiralling property prices, Downing Street seemed delighted to learn from its house-trained advisory unit, NHPAU, that a building blitz was required.
Last June, just 15 months ago, NHPAU made an astonishing prediction: United Kingdom house prices could rise to the equivalent of 10 times average salaries by 2026. It's impossible to know where wage levels will be in 18 years, but even if they grew at only 1 per cent a year, that would put the average salary at about 30,000 and therefore, according to NHPAU, the average house price at 300,000.
Did such an outcome ever seem likely to you? Of course not. And the reason is that it's an economic absurdity. With advisers like these, who needs pin-stickers? Only three months after NHPAU's dire warning, its crystal ball was smashed by the credit crunch. Northern Rock, the mortgage lender that behaved more irresponsibly than most, crumbled.
Since when, a poisonous cocktail of rising taxes, higher fuel and food bills, and a collapse in the availability of mortgages has been addressing the problem that Mr Brown was so keen to solve. The gap between house prices and income is shrivelling. Unfortunately for the Prime Minister, confidence is so low that even those who can secure funding are reluctant to buy.
During the summer, the number of homes on the market for every buyer rose to 15, more than double the ratio in June 2007. Conditions have since deteriorated, leaving many estate agents facing the chop.
In some areas, the market has ground to a halt. This sclerosis will continue until sellers capitulate and slash prices further. It's a return to affordability, but not as we know it.
At the nadir of the 1990s slump, house prices fell 107 per cent in one year. The current “correction” has already zipped past that and there is worse to come. “We are only in the initial stages of what is likely to be a severe economic downturn,” says Capital Economics, a forecasting group.
Along with “no return to boom and bust” and “British jobs for British workers”, let us add to Mr Brown's list of boomerang boasts an outrageous one-liner from his first Budget: “I will not allow house prices to get out of control.” That one has just whacked him on the back of the head.
The property market went completely out of control on the way up, and is about to do the same on the way down. As it shatters on re-entry to economic reality, the debris will bury Labour's hopes for a fourth term. The house that Tony and Gordon built will be crushed by falling prices.
Sorry for the long post but this is painful and showing little signs of being understood. I know this is boring but unless you understand the basic principles, the subject cannot be discussed with any meaningful chance of resolution. Please take the time to read my post. Thank you.
Certainly, debating the financial system in isolation to the problem as a whole is meaningless.
The purpose of a money system is to provide a means for exchange of materials and labour between one person and another. Since the labour and materials are indivisible then 'money' in small denominations allows labour and materials to be traded between two people in fractional amounts. In that sense it is much more flexible than a simple barter system.
Unfortunately that relatively simple requirement has been hijacked by the current, fraudulent system called Fractional Reserve Banking. In a debt-based, fiat, Fractional Reserve Banking system the majority of the 'money' in the system is fictional. It is an illusion of immense proportions. The 'money' is printed on a printing machine on a whim and bears no resemblance to any tangible asset or labour of any worth or value.
To work[sic], the mathematical model behind the system requires a geometric growth in debt, population, energy consumption, raw material consumption, waste production and pollution (and a complementary geometric decrease in our co-inhabitants of this planet !). The word geometric means non-linear. i.e the previously mentioned list doesn't just grow linearly, it grows exponentially, 1, 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024 etc etc. The earth CANNOT sustain geometric growth of any of the above list INDEFINITELY. That is NOT an opinion. That is NOT a political statement. That is NOT the viewpoint of a religious crank. That is NOT pathetic wish of a tree-hugger. It is a physical, mathematical, practical, undeniable FACT.
The model behind the current system is utterly flawed. Any talk of patching it up so that it can continue is unbelievably futile. The only reason it has managed to work at all until now is that a source of (almost) free energy has fuelled the previously described exponential expansion. That free source of energy (oil) is peaking out. Note: I did not say running out. I said PEAKING out. That means that since June 2006 the world's daily oil output has been in decline. i.e every day since June 2006 the worlds daily output has never been higher than in June 2006 and has been falling consistently since. It doesn't matter whether you believe in the Peak Oil theory or if you think anyone who believes in it is a nutter. The figures speak for themselves. The world s daily oil output since June '06 has been decreasing. It is an absolute fact.
In order to satisfy the base requirements of a debt-based, fiat, Fractional Reserve monetary system the consumption of energy must increase to fuel the increase in manufacture of goods and general industrial activity which in turn increases the consumption of those goods by ever increasing numbers of people taking out more and more loans to buy those goods which in turn results in more and more fiat money being printed. If the increase in energy consumption is strangled because of a decrease in the supply (which it has been) then the bedrock of that geometric system is undermined and the financial system collapses with it.
Without the creation of new loans/debt/credit (call it whatever you will) the rate at which the money pot is being filled with new money is lower than the rate at which the loans are being repaid or written off, which destroys the quantity of money in the money pot (when its repaid or written off as a bad debt the original loan amount is destroyed but so is the leveraged amount – 40x in the case of Northern Rock). Therefore, if the rate of money destruction is greater than the rate of new money creation then the money pot shrinks. When the money pot shrinks it is called a DEPRESSION.
The cretins in Number 10/11 may understand the explanation thus far ( but I have my doubts) and therefore they look around for 'solutions' to the problem. The 'solution' they seek, however, is to find ways of printing even more new money to keep the money pot topped up. That's the limit of the 'fix'. But new money can only be printed as a result of new debt. New debt begins as government debt which is then spent into the economy through the commercial banks or the corrupt PFI schemes or their cronies in the Defense Contractors camp. All of the proposals outlined by those who want to add money to the system are simply advocating ways to print more new money in an effort to prop up the existing, failing system.
If the problem could be solved and everyone made rich by the wholesale printing and distribution of new money then Zimbabwe would be the richest country in the world right now.
Do not lose sight of the fact that the effect of printing every single new pound note devalues, debases and reduces the purchasing power of every pound note already in existence. Compounding that issue, deflation of the money supply does not return that reduction in purchasing power which the previous inflation stole from you. A period of inflation follwed by a contraction in the money supply is HIGHLY destructive and painful.
Inflation of the money supply is the most devious and indiscriminate tax on the populous which has ever been invented. It is silent and unsung and complicitly ignored and unreported by the media. The word inflation is used every day in an obfuscating manner to describe the rise in prices. It is not the rise in prices. Inflation is the printing of new pound notes which has the EFFECT of increasing prices because of the reduction in spending power of the pound notes already in existence RESULTING in the rise in prices.
If you got this far, congratulations and thank you for reading.
Norrie C. on October 04, 2008 at 10:12 PM Report this comment
As the British economy is now in a worse state than it was on the day Gordo became Chancellor, there is no rational reason why house prices should remain above 1997 levels (never mind go back above 2007 levels).
Mass repossessions will lead to a sharp crash in prices, it being far too late to engineer a 'soft landing'. Action and reaction being equal and opposite, I firmly expect the trough in prices to be lower than the last time the market bottomed out in 1995. Average 75% falls peak to trough would not be in the least bit surprising, given that Britain is bankrupt.
Personally I don't really care though, I bought by modest house with my modest salary in 1999, with a 75% mortgage which I paid off in less than 4 years (suffice to say without MEWing). Anyone could do the same if they were willing to endure a few years of frugality. I guess a lot will have to now! Paul on October 04, 2008 at 09:56 PM Report this comment
Let the market sort it all out over time but: 1)make it more difficult from a financing and tax point of view to be in the buy-to-let business: ties up capital, ownership and the housing stock in the wrong greedy little hands of a sleazy few; and 2) increase the amount of land available for building in some of the protected areas as this land “lock” keeps the rich too much in control in the name of preservation but in reality for the cause and result of starving the non-rich out of reasonable housing.
Henry Cave Devine on October 04, 2008 at 01:49 PM Report this comment
I think David Boyd and others that think the housing market needs “kick starting” are woefully wrong.
I earn GBP 64,000 pa and feel that even modest family homes are too expensive for me to be able to afford – there is no way that I am going to borrow more than 2.5 times my salary to buy a house, and there is no way that I am going to take on anything other than a repayment mortgage – people with interest only mortgages must be mad!
The house prices need to come down at least 40% before they become affordable… and I think most people are begining to realise this.
Negative equity is only a problem if you have to sell your home and you don't have cash to cover the remaining balance of your mortgage.
Besides, your main residence should not be treated as an investment or your pension plan.
If you buy a second property to make some money good luck to you and I hope it works out; but treating your 1st home as an investment is sheer stupidity.
Peter Baker on October 04, 2008 at 12:04 PM Report this comment
Jeff, I note the line being pedalled by various 'experts' that boom'n'bust is the capitalist norm/ to be expected, etc. Why need it be, if lending is prudent?; worth a thought or two in a future column? Best wishes Raoul on October 04, 2008 at 08:04 AM Report this comment
Pete W on October 03, 2008 at 04:50 PM:
Who said anything about supporting, why blame the government that was a collective responsibility and the framework for the economic distortions was set long before Labour ever got into power, probably from the deregulation in the 80's. You should not be swayed by this kind of slanted reporting. Irrespective of what Gordon Brown said there is a bigger economic backdrop to this mess than a little spin from 1 politcian. I not necessary agree with the government economic policies, but I have lived under Conservative like policies in my country and the net result is a pyramid scheme of immense proportions that could push the world into a serious recession. Alan on October 04, 2008 at 06:33 AM Report this comment
Comments like yours make me despair. Why on earth would you be desperate to “kick-start” one of the most blatant pyramid schemes of the last hundred years? The only possible way of continuing the scheme and restoring 2007's valuations are to try to find ever more ingenious ways of screwing first time buyers over, getting them to commit a much bigger percentage of their future income to buying a house than the previous generation ever had to pay, so that your unearned income can be maintained at the levels that make you happy. Doing so would essentially be an eye-watering tax on the young by the old, the classic kicking away of the ladder. I'm sure it would make you feel great for now. But remember that they aren't making any more of you, while they are making plenty more of them. I honestly hope that today's twentysomethings and early thirtysomethings give their selfish predecessor cohort everything they deserve when they finally take over the baton of power. Better still, they should leave the country, leaving your generation with either a crippling pensions problem, or living in an alienating world of immigrants.
A nation that mistreats its youth despises its future. John Mack on October 04, 2008 at 02:21 AM Report this comment
Where's my carpetbag? Andrew Milner on October 04, 2008 at 12:56 AM Report this comment
I didn't believe it about the NHPAU so looked up their website, wondering what they spent my money on…. its a goldmine…. they even fund (no doubt grateful) academics around the world to do earnest and learned studies into the bleedin' obvious and of no use….lucky winners of the first funding round are :
A Cohort-based Analysis of Home Ownership, Affordability and Market Conditions
Research to be led by research economist Dr Renata Bottazzi and conducted by the Institute for Fiscal Studies and the University of Bologna. Due to complete in September 2009, this study will examine whether and how the affordability problem has resulted in inter-generational inequalities, testing the assumption that older age groups have become housing rich while younger age groups have found it increasingly difficult to access market housing. The work will complement the Unit's current research into the economic and social consequences of worsening affordability.
The Effects of Supply Constraints on Housing Costs: Empirical Evidence for England and Assessment of Policy Implications Research to be led by economic geographer Dr Christian Hilber, London School of Economic and Political Science. Due to complete in February 2010, this project will assess to what extent legal or planning constraints in different parts of the country affect the cost of land, and how this relates to differing housing affordability problems across the regions and sub-regions.
Mortgage Possessions in the UK: A Regional and National Analysis
Research to be led by housing economist Professor John Muellbauer of Nuffield College, Oxford University. Due to complete in March 2009, this study …will aim to understand the causes of recent increases in the rates of mortgage possessions…(!!!)… and attempt to forecast future trends at a national and regional level.
All I can say is I can't imagine what proposals failed to meet the NAHPU's high standards… perhaps “House size and its effect on storage capacity and occupancy levels”… etc. etc.
Quite astounding – and heaven knows how much they are costing us in total, if the amount of guff they produce is anything to go by, quite a lot… they even produce guides in several eastern european languages, e.g.
…to help immigrants who don't want to learn english to mop up all our bountiful and excess housing stock no doubt…