Sunday, 6 October 2013

Groundhog Day for England

Is there a house price bubble? It's the topic du jour. Well, here's the simplest chart evidence for the view that whatever we want to call the current rise in house prices, it isn't 'a bubble' .

It's certainly fair to say that on official data and across the UK as a whole, the ratio of average house prices to earnings is a long way below the 2007 peak. And since mortgage rates are a lot lower than they were in previous cycles, the ratio of mortgage payments to house prices is even lower. But that tells only part of the story, certainly for London and the South East.

I borrowed three times my 25-year old economist's salary to buy my first flat in North London, in 1987. If a younger me turned up at the age of 25 today having seen economists' salaries merely keep up with national wage trends, he/she would have to borrow nearly seven times his/her salary. Not to mention the fact that the 25% deposit my father produced in his generosity would need to be nearly six times as big now. It's no wonder that while people still want to get on the housing ladder, they are doing so much later and my 24-year old self would have probably gone on flat-sharing for a few more years.

I watched the rise in house prices, then the fall, got married and got a bit older. We moved house in 1994, selling the first flat for almost exactly the same amount as I had paid for it.  But that was OK. 1993 had been a good year for 32-year old economists, so we were able to buy a house, once again with a 25% deposit, in cheaper but trendy Tuffnel Park. And it was there our children were born.

Now I can imagine another slightly younger self, following foolishly in my footsteps, who is 32 today, married and thinking about family. Average wages have nearly doubled since 1994 but unfortunately, Tuffnel Park house prices have risen twice as much again.  So he'll still need to be able to borrow 6 times his salary and find a truly mind-blowing deposit to get onto the North London house ladder. He will doubtless be staying in his flat for a bit longer, weighing up the merits of moving further out of town (but dismayed to find you have to go a long way London before prices fall enough).

My younger self would probably buy a flat later, get married later, have children later and retire older. And that is exactly what is happening. As for the generation following him I don't know what they would do, because my younger self isn't going to be enthusiastic about moving again when he sees how much stamp duty he might have to pay. He'll probably opt to stay in his first family home in London, thank his lucky stars he ever got on the housing ladder at all, and only move when he cashes in his savings and retires. In the meantime, another generation of bright young British and European economists will have moved into flats in London, met each other, fallen in love and started trawling estate agents' windows in search of a place where they can start a family. But the good people of Tuffnel Park can no longer afford to move 'up' to  Hampstead or Primrose Hill, so sellers are reluctant, turnover is low and prices as susceptible to bubble-like characteristics as it's possible to be when you're not in a bubble....

The UK economy is blessed with a rapidly growing labour force that boosts growth potential and provides far better prospects for getting the government's gargantuan debt levels under control than is the case in some other European economies. But failure to diversify the economy through regional and educational policy has left the population growth centred on London, with its antiquated  infrastructure. This economic cycle is rapidly beginning to look just like every other economic cycle of the last 30 years, led by housing and doomed to end with UK interest rates peaking above those elsewhere and the housing market going into reverse in a few years' time. I'll enjoy the positives from stronger demand growth, worry about what happens to the trade balance, hope that higher interest rates deliver a stronger currency which make holidays  and imports cheaper, but I'll bemoan the chronic lack of vision that allows a whole country to wander into its own version of Groundhog Day.

No comments:

Post a Comment