THE INSIDE TRACK

Lower House Prices Won’t Make The Market Fairer




Our first guest to make an appearance on Insights, Jeremy McGivern of Mercury Homesearch, shares his thoughts about the current UK Property market with us and explores why lowering house prices won’t make property any more affordable for the majority.
 
THE INSIDE TRACK: LOWER HOUSE PRICES WON’T MAKE THE MARKET FAIRER
 
I have been reading more and more articles bemoaning the fact that property prices in London are still too high and that the falls in price seen over the last four years have done little to make them more affordable.
 
But the writers of these articles and the people who regurgitate them at dinner parties miss the point entirely. Even in 2009/10 at the bottom of one of the worst financial crises ever seen the market didn’t equalise. The same was also true of the 1990 crash and all the other previous crashes.


Yes, corrections (like we have seen over the last few years) and crashes like 2008 do lower prices but they do not become more affordable for the majority because increases in earnings have never kept up with the increases in house prices, especially in the U.K. and U.S.  This is not a new phenomenon. It has been happening for centuries and was best explained by David Ricardo in his works from 1810-1817 which showed why wages remained low while profits and land prices rose.

Unfortunately, very few commentators in the press have ever heard of David Ricardo, let alone have studied his works which is why the constant hype about house price to earnings’ ratios and affordability is so misleading. They have no understanding of the “economic rent” (as opposed to the rent someone pays for renting a home which is something entirely different).
 
So even when the market crashes most people cannot and will not benefit from the price falls. Why?
 
      1. They don’t have the money. The big land crashes lead to massive recessions like 1990 and 2008 which mean that unemployment rises and job security falls. Money is scarce.
      2. Even if they want to buy, it becomes impossible to get a mortgage.
      3. Everyone is telling them not to buy as the consensus belief is that the market must fall further.

Now this is a massive simplification of what happens, but it gives you a basic overview. In fact, most people with money don’t take advantage of the price falls because of point 3. Popular opinion tells them that prices are still too high.


How many people bought in 2010? Likewise, in the previous crash, very few people bought in 1993/4 which is when prices were at their lowest. Indeed in 2001, when I founded Mercury Homesearch everyone said I was mad as the market was due to crash as prices were “too high” for people to afford. Prices surged higher for another six years.

Earnings have never kept up with land prices.  This is why areas of London and the way housing is used have changed dramatically over the years. Here are some basic examples you may or may not know:

- The western end of the King’s Road in Chelsea was regarded as a “no go zone” in the 60s and early 70s. A friend of mine’s uncle bought a house in Tregunter Road in the sixties for £18,000. He was told he was making a massive mistake as the area was run down and would never be fashionable. He still owns it and it is worth c. £10m.
 
- Taxis did not go south of the river until c. 1994
 
- Notting Hill had piggeries and potteries and a racecourse – it was also one of the most crime ridden areas of London.

Probably my favourite story comes from “Careers’ Week” when I was at school: a gentleman visited to give a talk about the company he had founded. However, he started by saying that he had been rather disappointed to learn that his great, great, great grandfather had lost 200 acres of grazing fields in a game of cards. The fields are now called Wimbledon… i.e. he could have inherited one of the great estates except at the time they were regarded as near worthless fields.

Obviously these stories span different eras but the theme is the same.

Housing also used to be more spread out and there were more square feet per family. For example, Eaton Place in Belgravia originally consisted entirely of houses. Now 90+% of the buildings have been converted into apartments.

The same has happened in Battersea. Houses that would have once been rented by maids and labourer’s in the 1940’s are now owned by stockbrokers or have been divided into flats and are rented by multiple sharers.

In other words, as land has got more expensive people have moved further out or shared properties to stay in the area. This is nothing new and you can expect to see this continue unless the UK property system undergoes a massive overhaul.

There is no sign of this happening and this cycle is repeating as expected. Indeed, as David Ricardo proved, prices will continue to surge higher than popular opinion thinks is possible. This will result in a final “crack up boom” in prices and then another bust.

The UK property system dictates the cycle of boom and bust. The good news is that the major part of the boom is still to come and the bust is several years away, which is why I bought another property in London last year.
 
Weatherbys Private Bank specialises in arranging short to medium-term mortgages and loans secured against residential property, spanning owner-occupied property, buy-to-let property and bridging finance. Rather than relying on the rigidity of credit scoring, we look at the bigger picture, using our personal knowledge of your financial situation to make a pragmatic, informed decision.
 
We give equal consideration to all mortgage and loan applicants over 18 years old regardless of your residency status or whether you hold investments with us. Unlike many lenders, Weatherbys will consider applications from borrowers over 70 years of age and can take assets in to account such as investments, guarantees or land.
 
For further information please contact Patrick Peake, either by calling 020 7292 9029 or by sending an email to privatebank@weatherbys.co.uk
 
The information and views set out in this article are those of the author and do not necessarily reflect the official opinion of Weatherbys Bank Limited.

 

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