Bricks and Mortar set to crumble as recession bites
Copyright 2001 EXPRESS NEWSPAPERS
July 8 2001
Sunday Express
Sarah O'Grady
IS THE British property market steady and safe - or is it a ticking timebomb ready to explode in the faces of millions of homeowners?
As prices rocket and the value of an average home increases by GBP 146 every week, getting a foot on the housing ladder is a race against time.
After all, investing in bricks and mortar is much more solid and profitable a prospect than stocks and shares or a business deal. Or is it?
What goes up must come down, and industry pundits point to several warning signs which they say should be taken seriously if the UK is to avoid another Eighties-style slump in property values.
The Halifax says that property sales figures are "much less robust" than the actual prices, while Inland Revenue figures confirm that fewer people are buying and selling at the moment than they were recently.
The commercial property market could be the first to suffer: office provider Regus has already seen GBP 510million wiped off the value of its shares, showing that the American recession has started to bite into this sector.
Regus's founding chief executive Mark Dixon makes a grim forecast: "There is a pretty savage recession under way. It's not much written about yet, but its effects will soon become evident.
"The consequences for our sector will be felt in many others.
Things will certainly get worse before they get better."
Leading estate agent Chesterton has issued a profits warning, saying that sales at the top end of the market have fallen, while a study from independent analysts Cambridge Econometrics shows prices in London are already too high - even for the wealthy.
The Government's banking watchdog, the Financial Services Authority, says some banks are allowing people to borrow too much to buy houses they cannot afford. For those, only a slight rise in interest rates would be enough to trigger a wave of repossessions by lenders.
First-time buyers - there were more than 50,000 last year - would also be adversely affected.
Even a modest rise in interest rates and therefore mortgage repayments would spell disaster for them, especially for young families who have been encouraged to over-borrow.
The National Association of Citizens Advice Bureaux (NACAB) says key workers such as nurses and teachers who have borrowed heavily to live in boom locations such as London, Cardiff and Cambridge are most at risk.
That bleak forecast coincided with a report last week from the Nationwide Building Society, confirming that house price growth is continuing to outstrip wage inflation.
Average house prices rose by GBP 20 a day during the past year.
From an average price of GBP 81,452 in June 2000, the typical cost of a new home rocketed last month to almost GBP 90,000.
But the Nationwide warns that, with the economic outlook set to deteriorate, growth will slow in the next six months.
Dennis Thomas, senior economics lecturer at the University of Wales School of Business, says the situation is storing up serious problems for younger homeowners: "The encouragement to be a homeowner is strong and people should be aware of the problems of equity. And I don't think young people are."
Su Edward, NACAB policy officer, linkened the situation to a timebomb, adding:
"Either people borrow up to the hilt to buy a property or they pay very high rent. Just a slight change in circumstances - they may lose their overtime pay - may be enough to prevent them paying off the mortgage.
"It is worrying. In some areas where house prices have risen two or three times in recent years, key workers such as nurses have to borrow heavily to buy and these are the most vulnerable group."
PROPERTY experts remain divided over whether the economy's slowdown could ultimately lead to falling house prices.
Some argue that the lowest mortgage rates for decades, as well as high employment, will continue to drive demand.
Others, however, are concerned that some buyers are being encouraged to borrow up to five times their earnings.
The level of mortgage lending currently stands at a record high and is expected to top GBP 13 billion this month. But Cambridge Econometrics recently warned homeowners to brace themselves for a sharp fall in house prices.
Average house prices nationally are now five times the average household income - worryingly, the same level as just before the collapse of property prices in 1989.
The Land Registry's latest figures show that the average house price in England and Wales has reached GBP 110,570, while average earnings are about GBP 22,000.
Dr Gavin Cameron, of independent think tank Housing Outlook, who is also an economics lecturer at Oxford University, warns that a fall in the strength of the pound could lead to higher interest rates, as could America's economic slowdown.
The average price in London now stands at GBP 160,635, an increase of GBP 16,000 over the same time last year.
Other regions have also recorded significant gains.
But it is also true that in some areas prices have risen by only a small amount over the same period. The North recorded an annual rise of 0.9 per cent and Scotland just 0.2 per cent.
Such poor returns will fuel predictions that the housing boom is coming to an end, with many analysts forecasting that prices will stagnate for the foreseeable future.
Bradford and Bingley, one of Britain's biggest estate agents, has admitted that even an acute shortage of properties is no longer pushing up prices as quickly as before. Houses are already taking a fortnight longer - 11 weeks - to sell than at the same point last year.
Apart from a clutch of hotspots such as London, Plymouth and Warwick, the market shows definite signs of cooling down. It all means there is no rush now to get on that housing ladder.
You can email me at Gavin.Cameron@economics.ox.ac.uk
Last updated: 28 September 2003.
