Sometimes I wonder if there is an ‘elephant in the room’ when it comes to property values. Everyone seems to want to jump on the bandwagon of continual house price rises being a good thing. No one wants to admit that the continual rise in values, without a matched rise in wages, jobs and a strong economy, will ultimately make the situation worse.
We are already experiencing the fallout of this in many ways. Rising rents and multi-generations staying together in one household to cut costs is becoming more common. After much government tinkering, the initially stagnant housing market along with a lack of real mortgage funding, has grown into a runaway train, especially in southern areas.
Now, landlords may be making hay while the sun shines by cashing in on higher rents, but this cannot go on forever. Rents have now peaked, and are falling in some areas. This situation pushes ordinary overstretched budgets nearer to poverty every day, as they struggle to keep up with rising costs on all fronts.
Winners & Losers In A Property Crash
Now, of course, by allowing the market to crash there will be pain for some folks. There are winners and losers in all situations. However, a readjusted market, would in truth, lead to better prosperity for all in the long run, rather than this drawn out pretense at bettering the market. By allowing long term low interest rates, banks tend not to lend properly and will look for other ways to get the cash in. We also have the new MMR rules ( Mortgage Market Review) which will make it harder to qualify for a mortgage.
The 60% of the property market who are the non cash buyers tend to be at the bottom to middle section, which is also where stagnation occurs. Add to that government tinkering with bits of the housing market with Help to Buy, and all we really do is push the problems further down the line for someone else to deal with later.
Mortgage Mexican Standoff
What we have at the minute is a Mexican Standoff. Banks, government and economy gurus all pointing the gun at each other waiting for someone to have the nuts to fire the first deadly bullet. Surely, someone in government needs to see that a real crash and price correction is what the market needs, to put values back to where people can actually afford them. Alternatively, we need a strong economy with higher paid jobs. Banks would be more confident to lend properly and the economy would start to recover in reality. Many folks are only clinging on to their homes only because interest rates are so low.
When interest rates rise, many will fall off the edge of the mortgage cliff. Repossessions will be an inevitable consequence. Repossessions lead to a flood of property on the market, leading to a deadening of prices.
It is widely taken as a good affordability benchmark by banks etc that three and a half times a wage is a safe place to lend for regular mortgage payback, ( assuming a normal deposit size & interest rates around 5%) this figure has now risen to more than double that. The average home buyer needs over seven times an annual wage for the average mortgage. Clearly, that is unsustainable.
Wages have not risen at the same rate of comparison, creating a huge disparity in affordability, not to mention the rising costs of day to day living which is compounding the effect.
A couple of different governments have not made things any better. Quite simply, they are politically afraid to let the market crash so that we can have a real recovery, they would rather scratch at the surface to try and please everyone. Which, is always going to be an impossible task. Governments are more focused on staying in power than really fixing the problems we have.