I'm a bear when it comes to house prices. I was convinced back in 2003 that they were ripe for a correction, having risen enormously since around 1996, which happened to be when I bought.
So, my wife and I made a very brave (follhardy?) decision. In May 03 we sold our house, shoved the equity into a savings account and have been renting ever since. I'll come clean and say that I regret that decision now because house prices have continued their upward trajectory, all be it at a slower pace.
If I'd invested in a stock market tracker instead of opting for the savings account, I would have doubled my money. I certainly would have no regrets if I'd had the bottle to do that! The other plus side is that we have a bigger house in a better area on which the landlord makes all of 3.5% gross yield and we've been able to save the interest on our savings.
Now, of course, we've reached the stage where we want to buy back into the market but I for one am nervous about buying in at the top of one of the biggest asset price bubbles in history.
So why do I think that it still might all end in tears?
I don't think that interest rates are going to shoot up to 8% or 10% anytime soon. I believe the historical average is about 5% and that's where we're almost certainly going to be in a month's time. I believe that what will precipitate the fall will be the ever-increasing indebtedness that many people have got into and an end to the easy lending that has got us into this position.
A recent blog in the Grauniad blog by Ann Pettifor put some flesh on the bones of this. She quotes research done by Elizabeth Warren of Harvard University that shows that fully 75% of middle class America's family income is earmarked for recurrent monthly expenses; today's family has no margin for error....Their basic situation is far riskier than that of their parents a generation earlier. That phrase about the lack of margin for error echoed many articles I've read recently about the finances of many families.
A few days ago, some research by KDB really caught my eye. It shows that household disposable wealth in the UK has fallen significantly (outside of London) during the first half of the year. In the South-East, for example, it fell 14% and in Scotland it collapsed by 26%.
The Torygraph used this research as the basis for an article which points out that While house prices rose by 5pc from mid 2005 to mid 2006, this was dwarfed by a 15pc rise in mortgage advances ... Home equity extraction is now running at a staggering rate of £50bn a year... equivalent to 4pc of GDP, and all has to be repaid. The KDB findings are ominous, suggesting that household finances are even more stretched than previously thought.
This research confirms that here in the UK we're having to MEW ever deeper into what equity remains in our houses. I'm sure that many families' income is largely eaten up by essentials, just like in the USA.
Meanwhile, more and more people are defaulting on their unsecured loans which has led to the banks tightening their criteria for unsecured lending and having to continually raise their provision for bad debt. The debt spiral has also led to a whole bunch of companies like Debt Free Direct springing up in order to help those who are up to their eyeballs in debt "manage" it by the use of IVRs (Individual Voluntary Arrangements) and bankruptcy. The response has been an outcry from the banks and threats that they will tighten criteria further so as not to get caught out again. Whether these are just idle threats remains to be seen.
This is why I've come to the conclusion that it won't take an interest rate hike to say 8% to precipitate the credit crunch and a consequent house price crash. The fall in disposable wealth shows that many people must be accumulating debt even at current interest rates, ie, they are either carrying on spending or simply can't eat into their debt mountain. Compounding interest even at the current level could well be forcing equity withdrawal and unsecured borrowing.
This ever-increasing indebtedness must surely be what triggers the eventual correction.
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