Here's Your Housing Bubble…

There’s a number of people who still argue that the housing bubble was caused by supply and demand: too many people, not enough houses. Others have latched on to this to say that the housing bubble was caused by mass immigration (of course, because immigrants coming here to work in minimum wage jobs in bars and hotels tend to have loads of money to buy houses at UK prices…)

The following chart from the Bank of England’s latest statistical release should give you a much clearer picture of why the housing bubble happened. It shows the percentage growth in mortgage lending (“lending secured on dwellings”). Remember that because it shows the percentage growth, and not the absolute amount, everything above zero means that the total amount of mortgage debt is increasing. It’s still increasing right now, albeit very slowly.

The graph should be self-explanatory, but even some of the big housing charities overlook it. If you allow banks to create money when they make loans, and you allow them to pump the bulk of this newly money into a housing market with relatively limited supply, then house prices will go up. If the level of lending to the housing market is going up at above 10% a year, then we shouldn’t be surprised if house prices rise at 10% or more a year.

At the middle of the house price bubble there was an odd phenomenon from the media; they tended to treat house prices as something out of our control, a bit like the weather. A rising house price was treated like an unexpectedly sunny bank holiday; everyone was expected to rush to take advantage of the opportunity before it was over. I don’t recall seeing any decent analysis explaining that overall, constantly rising house prices simply benefit banks and the few individuals who plan to sell up and move into an old folks’ home or a caravan.

Will House Prices Go Up?

Historically house prices have only started to go up in nominal terms (i.e. the actual selling price) when they have fallen in real terms (i.e. relative to real incomes). In practice, because most people prefer to postpone a house move than to sell their houses at a loss, it means that the house price is ‘sticky’ downwards (it won’t fall as much as it really should). That means only way for houses to become more affordable is for incomes to catch up.

But right now, many private and public sector salaries are frozen. Unemployment is at an all time high (depending on who’s figures you believe). Inflation is pushing up the cost of living, making people poorer in real terms. Houses therefore are not getting more affordable; our incomes are taking a slide backwards and consequently houses are becoming even more unaffordable.

I will state upfront that I’m not in any way qualified to give financial advice, and I’ve never been a big believer in speculating on housing bubbles. But right now what I tell friends who are considering buying their first house is that they should forget any hope of house prices rising significantly in the next ten years. For that reason, they should find somewhere they want to live, that they can comfortably afford on their salary, and see it as a (potentially) more cost-effective alternative to renting, rather than seeing it as a financial investment to make money from.

Hopefully our politicians, policy makers and the Bank of England will start to realise that rising house prices are not helpful to the economy or real people (although they are extremely helpful for the big banks).