It doesn't require rocket science to work out that house prices took a massive hit when the world went into recession in 2008. Six years on we have the benefit of hindsight and bearing in mind the future is easier to predict when armed with historical data, what is the general consensus on how house prices will fare over the next few years and, more importantly, will property become more affordable for the individual in the same time frame?
It is crucial to remember what caused the recession in the first place - lest we forget and wind up in the same situation again further down the line. Without wishing to point the finger but instead making a sweeping gesture towards the other side of the Atlantic, it all started in the US. In 2006 the country was "enjoying" a housing bubble with property prices rocketing and irresponsible lending as the policy of the day. Needless to say when that bubble burst, the liquidity crisis that followed spread like a Mexican wave across the globe.
The American banking community was in the proverbial way deeper than they imagined and it wasn't long before all the sub-prime lending malarkey sent shockwaves throughout the world's economy. Banks were being bailed out by other banks (to add to the confusion) and even worse, banks were being bailed out by the taxpayer and not just in the US. Countries went under during these years – consider Iceland and Greece in particular – and the impact from the US was so massive outside their borders that most of Europe went on to enjoy a 2nd and then a 3rd wave of recession.
So at the heart of what is now referred to ominously as the 'Great Recession' was the US housing bubble, created as a result of the ease with which people were able to purchase beyond their means in the American property market.
Unfortunately, the situation in the UK wasn't much better at the time with high loan to value mortgages allowing the majority to borrow in excess of 95% for their home purchases. These mortgages were widely scrapped in 2009 but the damage had already been done with homeowners finding themselves in negative equity when the recession first started to bite.
There seems to be a common practice amongst governments to equate rising property prices with increasing affluence. Housing prices are used as a benchmark for economic health in most countries but while increasing prices are great when you have growing equity in your property, it's not so great if you've had to max out on lending just to get in on the action.
It's the basic law of supply and demand at work. Prices rise as demand increases and fall when supply outstrips demand. Back in 2006 the demand for property in the US was almost entirely fuelled by easy-access home loans. Because the property market was essentially being stimulated artificially, many new homeowners were simply not able to sustain the repayments and the foreclosure epidemic started signalling the start of the recession.
Returning to the situation in the UK, there are many economists who are of the opinion that the UK is currently heading towards a housing bubble which begs the question – are we on the precipice of another recession?
The Royal Institute of Chartered Surveyors (RICS) forecasts the average UK house price will rise by six per cent a year for the next five years, pushing prices up 35 per cent by 2020. However, there are fears that house prices have been boosted from levels that have already resulted in people overstretching themselves financially and that any further increase will limit the affordability of home ownership even more.
And therein lies the issue – affordability.
If it is not possible for a large enough bunch of people to borrow the funds necessary to buy property, demand is going to diminish rapidly. What will happen when there is less demand? The housing bubble will burst and prices will go into retrograde motion leaving most of those fortunate enough to already be on the property ladder in negative equity. Naturally, as housing is of huge importance to the UK economy, the domino-effect of any market slump would be felt across all sectors and before long, we could find ourselves in our 4th recession – a quadruple dip!
Well, the good news is that wages are increasing. In fact, it is the first time that earnings have increased at the same rate as inflation in six years which is a good indicator that sustainable recovery is still possible in the UK. Mortgage lending criteria has been tightened significantly which reduces the threat of more people being assisted into spiralling debt in the next few years and so it would seem that affordability of property in the UK is indeed improving.
One potential spanner in the works could ironically come from the British Government's 'Help to Buy' scheme which essentially provides 95% finance on property purchases. The scope for irresponsible lending is enormous and the margin for error extremely narrow but the Bank of England are 'keeping an eye' on the situation which will hopefully prevent future catastrophe.
All in all, there is a much more positive outlook for Britain's economy than is perceived by the general public. That being said, it is only really necessary to look at one's own circumstances in relation to the big picture to assess individual financial health rather than hanging everything on the back of government spin.
- Friday 25 April 2014