Thursday, 27 November 2008

The house price pushmi-pullyu

Let me take you back, a long way back to before I was born. My parents were ordinary working people earning low to average wages but through a few years of scrimping and saving they were able to buy a small house for cash. It was in a poor state of repair and they spent every spare moment and every spare penny making it habitable prior to their marriage (yes, I knew it would surprise you to learn my parents were married).

In today's money they probably earned around £35,000 a year between them and their little house would sell for around £250,000, call it £125,000 if in the same state of disrepair as when they bought it. It doesn't take a genius to work out that saving £125,000 when you earn £35,000 would take more than three and a half years even if you lived entirely for free. In practical terms it would be virtually impossible for a young couple on such earnings to buy that run down property for cash today. They could save hard to provide a deposit but would need to borrow a substantial sum which, in all likelihood, would be repaid over 25 years. Say they borrowed £100,000 at 6% interest, the interest alone would cost about one fifth of their post-tax income. It goes without saying that if they were not paying a mortgage they would probably be paying rent so whether they buy or not a large chunk of income would go in housing costs. Compare it to my parents' situation - buying a home for cash relieved them of a huge financial burden year after year. They still had to count every penny but they did so knowing that their home was secure. In due course that house was left to me and my siblings and provided us with a little additional security.

When I was old enough to understand a little about these things I was very much affected by my parents' decision. I remember how proud they both were to be home owners when previous generations had rented or lived in agricultural tied cottages. Outright ownership allowed them to plan their family knowing my mother would be able to stay at home with the children. Short periods of unemployment did not put the family home at risk. And, perhaps most importantly, they were not beholden to anyone, their home was theirs and no one had a claim on it.

Today house prices in Britain are falling fast and many people are already finding that their home is worth less than the loan(s) they have secured on it. This is not a practical problem for those who are still in work and able to pay the mortgage unless they have to move. It is, however, a very real practical problem for those who lose their jobs or have to take a cut in income and find themselves unable to keep up the repayments. For them there is no escape, the bank wants its money and the house cannot deliver that money. Bankruptcy or a long-term debt hanging around their necks is a nasty price to pay for the collapse of prices over which they had no control.

In Monday's crisis budget the Chancellor announced that banks will not be able to take court proceedings for possession for a period of three months after default. Like so much coming from the present government it sounds very nice and humane, it sounds as though they are helping people in trouble, but in fact it makes no difference and might even do some harm. The practicalities of litigation mean that a three month delay between default and starting proceedings in the County Court is all but guaranteed. If you start a claim before exploring all other practical ways of resolving the problem the court will stamp on your neck with a heavy boot. A case brought prematurely will either be adjourned for a month or two to allow other avenues of resolution to be explored (and the bank will be disqualified from claiming its legal costs) or it will be dismissed. No sensible bank would risk wasting legal fees or having a case struck-out by launching a claim until it could show the judge that there was no other option.

Where the Chancellor's move could cause harm is in those cases where the householder knows his position is hopeless and wants to keep losses to a minimum. In theory he could just hand over the keys and agree to the bank taking possession and selling the house. The sooner it is sold the more is likely to be achieved at auction because the market is falling and a further month's delay could reduce the attainable price by several thousand pounds. But there is a problem in the homeowner doing that because he would be making himself homeless voluntarily. That would put him way down the pecking order if he needs to seek housing from the council. For years this situation has been catered for by banks taking proceedings quickly and the homeowner not contesting the claim for possession. A Court Order is obtained which allows the bank to sell and proves that the homeowner has been forced to give up possession and has not made himself homeless voluntarily. There is no scope for the Court saying proceedings are premature because they are anything but, they are taken quickly for the benefit of both parties. If the three-month time limit is applied strictly it could cost some householders dear.

Maintaining house prices at their inflated levels will protect those who can no longer afford their mortgages and will allow people to move house without incurring a heavy loss. Some argue that the government should be taking steps to keep prices at 2007 rates for this reason. They suggest that the banks should be forced to lend for house purchase as they have over the last eight or nine years because that will sustain prices and prevent negative equity. To my mind they live in a dangerous fantasy world. I have blathered-on before about how artificially inflated house prices caused by reckless lending are the cause of the whole sorry mess we currently face. America did it through the Community Reinvestment Act which forced banks to lend with little regard to the ability of borrowers to repay and the UK banks did it through voluntarily lending up to 125% of the market value of a property with only the borrower's word that he had the means to repay the loan. This resulted in a huge inflation of property prices above their true value, to seek to keep this bubble in place is to prolong the misery because one day the truth must be faced and the longer it is put off the harsher that truth will be.

As my regular reader will know, I am a simple fellow who is more interested in practicalities than theories. I want everyone to enjoy the security and pride my parents enjoyed from owning their own home and not being burdened by rent or repayments of a massive loan. It allowed them to have more of their limited income available for their own use and gave them peace of mind. To me, it is ridiculous that young couples on modest incomes in 2008 should be excluded from giving themselves security for the future. It was possible seventy, sixty, fifty and forty years ago, then again fifteen years ago after the last massive property crash. Although there will be casualties along the way, the benefit of a whole generation being able to get on the property ladder when they thought it would be impossible or oppressively expensive is of such value to the country as a whole that a continuation of the current downward move of prices should not be stifled.

There is no way to keep everyone happy. Either prices are artificially pushed up to protect those who currently own or they are pulled down to their real underlying value to allow future generations to benefit. To my mind the pullyu end of the antelope must be favoured over the pushmi.


Mark Wadsworth said...

"Either prices are artificially pushed up to protect those who currently own or they are pulled down to their real underlying value to allow future generations to benefit."

Nail. Head.

Once you have changed our lunatic 'house prices can only go up' mentality/hypocrisy, I propose a three-pronged attack.

1. Liberalise planning laws.

2. Impose a tax on the bubble element of property/land prices and reduce other taxes accordingly.

3. Sensible banking supervision, in particular, mortgages will only be registered up to 75% of purchase price. The rest counts as unsecured and will be disclosed as such in banks' accounts.

Coinneach said...
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