London’s Mortgage Expo last week showed the industry’s plight, with sponsorship and attendance numbers noticeably down. But the industry’s woes are being overshadowed by more general economic bad news.
Unemployment figures have increased sharply and are set to climb substantially higher, and every leg of the past bull market – whether debt, equities, commodities or property – appears to be broken. Will house prices recover in the foreseeable future and save us all?
My horror story starts as our own Marshall Plan to ease the liquidity crisis is slowly rumbling into effect accompanied by lower interest rates and the promises of more borrowing for tax cuts of one sort or another. But the effect of a decimated mortgage market and slowing economy is being felt in the low volume of house sales.
There seems to be an assumption that the proposed Keynesian remedies will galvanise the economy. Leaving aside the fact that a plummeting sterling will deter global investors from investing in the UK – isn’t that a liquidity crisis? – why should we believe that property prices are so low they could not possibly go any lower?
There is no historic evidence that house prices stop falling at some particular level that appears to be a bargain. Nor do they stop falling because they match some historical low.
The truth is that the end of any decline can only come when there are no new economic drivers forcing them down.
Everything I see tells me that there are more falls in property prices to come. If liquidity vanished because of fears about the quality of lending then other factors are only just getting into their stride.
This Christmas, high mortgage rates and personal borrowings, rising unemployment and recession are taking centre stage and, God help us, the ugly sisters of depression and deflation are waiting in the wings. At least Mervyn King seems to have started to listen to our shouts of “it’s behind you!”
Unlike previous economic catastrophes, when home ownership was far rarer, massive personal debt means the pressure to abandon or sell homes may be far greater. If the UK sinks into a depression, house prices could fall further than any previous experience.
I suppose that my mild panic is based my inability to find any precedent for this particular economic mess. As a truly global crisis, the variables are becoming infinite and the permutations limitless.
Even previous bubbles that share characteristics with this one provide few clues for managing it. From the Dutch tulip mania in the 17th century to the tech boom of 2000, debt has been the fuel of all great speculations.
But in all prior speculative bubbles, investors were required to put up at least some of their own money to buy into the boom, whereas in the frenzy that has been the UK mortgage market, 100% lending has not been uncommon.
In the past, borrowers were required to make payments of interest and capital in full. This time, homeowners have been allowed to pay interest only.
In earlier bubbles, investors speculating with borrowed funds had to prove that they were worthy of the loans with hard evidence of income, proof of assets, or both. Self-cert broke this mould.
In the past, bubbles have been generally confined primarily to one debt sector. But this time burdensome mortgages, huge credit card balances and layoffs from employers equally addicted to debt will force more house price falls.
Housing is key to the success of the UK economy but it has never undertaken so much strain. So much debt, speculation, regulatory incompetence, fraud, corruption and consumer abuse have gone into the mix that it cannot recover quickly.
Our solutions will have some positive influences but with so many variables with so many human beings involved, the law of unintended consequences cannot be far away. Isaac Newton, who lost out in the South Sea company bubble in the 18th Century wrote: “I can calculate the motions of the heavenly bodies but not the madness of people.” He might have added house prices. n
Matt Smith is managing director of WPB Creative
