Stay ahead of the crowd! Sign up to receive the Latest Market Outlook by email
By John Stepek, MoneyWeek
1 July 2008
Britain is enduring its "worst housing slump since the 1970s," reports The Telegraph this morning.
Mortgage approval figures from the Bank of England yesterday were nothing short of appalling. The number of mortgages approved fell to an all-time low of 42,000 in May. That's a 64% drop year-on-year, and down from 58,000 in April.
"Economists warned that the property market was entering a prolonged downturn that would match the slumps experienced during the 1990s and 1970s, the two major corrections since the Second World War", said the paper.
How times change.
If you ever wanted an object lesson in how "experts" go into denial when they're proved wrong by events, then the property market has delivered a pretty good one.
Just over a year ago, the pundits all said that British house prices were going to keep rising at a rate slightly above inflation. After all, there weren't enough houses being built for our steadily expanding population - how could they ever fall? Soaring prices were nothing to do with loose credit. Low interest rates were a permanent feature of the brave new globalised world. And with too few houses to go round, supply and demand meant that you couldn't go wrong with bricks and mortar.
Then the credit crunch hit. Suddenly those permanently low interest rates were no longer a guarantee of permanently low mortgage rates. The experts started to suggest that house price rises might slow down a bit. They'd still go up, of course - supply and demand, remember? - but maybe they'd be flat in real terms.
Then, by the start of this year, people were starting to realise it was serious. House prices might even see low single-digit percentage falls. Though of course, that had to be viewed against the fact that they had risen by around 180% in the past decade. A bit of a correction was hardly a surprise - necessary for the health of the market, even.
Then prices actually started to fall. Now the pundits told us we were in for a real slump - but it wouldn't be as bad as in the 1990s, because after all, unemployment was low and interest rates were "historically" low.
Now we've seen mortgage approvals fall to their lowest level ever. Even the most ardent property bull cannot deny that this is a housing crash of epic proportions. It's as bad as the 1990s and the 1970s, we hear.
So now we get all the hand-wringing about "poor" first-time buyers. The same pundits who've been merrily promoting rising house prices as being a good, economically healthy thing, are now weeping for those little first-timers left abandoned, bereft of a home. How dare these selfish banks and building societies cruelly deny these young innocents their human right to saddle themselves with a dirty great wodge of debt?
Just in case these people hadn't noticed, it's actually been quite difficult for first-time buyers to mount the property ladder for quite some time. Anyone sensible enough to want to buy a home at a reasonable multiple of their income, and who might even have had the audacity to opt for a repayment mortgage, rather than interest-only, would have found it impossible to do so for a number of years now.
As for those few would-be first-time buyers who still wish they could borrow 100% interest-only "to get on the ladder", they should thank their lucky stars. They have been saved from their own stupidity by the credit crunch.
Banks and building societies have stopped lending because they don't have the money to do so. And that's basically because they were too careless with the first load of money they dished out. Now they have to rebuild their balance sheets. They're doing that partly by raising money from overseas investors and existing shareholders. And another way they're doing it is to make sure that any loans they do write, are profitable and safe.
That means they don't want to risk being left holding a loan that's worth more than the house it's secured against. As many bloggers have pointed out, including the BBC's Robert Peston, the fact that banks are asking for 25% or 10% minimum deposits shows just how far they think prices will fall.
Yet even 25% looks pretty optimistic now. As Howard Archer of Global Insight tells The Telegraph, his prediction of a 24% fall from the August 2007 peak might be "a little conservative." The current slump has happened against that much-vaunted backdrop of low unemployment and low-ish interest rates. "If the economy starts to tank and unemployment rises sharply - and it has increased for the last four months - that would have a large knock-on effect on the housing market, as a number of distressed sellers enter the market."
Figures out from Nationwide today don't offer any respite. House prices fell another 0.9% month-on-month in June, and are now down 6.3% year-on-year. From their peak in October (by Nationwide's data anyway) they are now down 7.3%. In fact, if you bought an average property in July 2005, you are sitting on a mere 9% gain, reckons the building society. Take away inflation and you're left with pretty much nothing.
As bad as the 1990s and 1970s? Afraid not - it's going to be worse. Stranded first-time buyers will be fine - by the time banks are willing to loosen lending standards a bit, prices will have fallen to a point where houses are nicely affordable again. It's the ones who bought in the first six months of 2007 with interest-only mortgages that we should feel sorry for.
