A measure of the ignorance of economists, and the politicians who rely on them, is the current frenzy over house prices in Britain.
Is the economy locked into a housing bubble that will burst? That’s the question occupying the pundits, who fail to locate current events in their historical context.
True, the sub-prime mortgage has returned to the UK. High loan-to-value lending (defined as loans that exceed 4.5 times a borrower’s income) now accounts for 20% of mortgages. And an increasing number of borrowers are putting down deposits of 15% or less of a property’s value. So when the next price crash occurs, many more people will find themselves saddled with negative equity.
But when will that happen? With London house prices rising at horrendous rates since the trough of the depression, the general assumption is that a price “correction” is just around the corner – somewhere, sometime, no-one actually knows…
Well, according to the 18-year cycle theory, the mid-cycle downturn is still five years away. That means the agonising over bursting bubbles is premature. But it also means that the house price take-off, which began early this time, will be all the more painful next time.
Most of the pain, of course, will not be felt by London property owners. The proportion of high loan-to-value mortgages has reached 25% in the north-east, compared to 7% in London, according to data provided by chartered surveyors e.surv.
The economics of apartheid continue to operate, with a vengeance, thanks to the cash subsidies and indemnities from Cameron’s coalition government.
Interesting stuff, but a small point of order: high loan-to-value (LTV) mortgages are nothing to do with income multiples, but how much deposit (or equity from a house sale) you have.
E.g. you buy a £100,000 house with a £20,000 deposit: that’s an £80,000 loan on a £100,000 house: 80% LTV.
High LTV is 95%+ (I remember when you could borrow more than 100% of the value of the house, as lenders assumed house prices would only go one way).
The affordability index (historically around 3.5 to 4x income) is another matter entirely.
In the end, all the metrics favoured by the Council of Mortgage Lenders, estate agents and the commentariat are so much hot air, camouflaging the underlying reality: because of the structure of property rights and fiscal policy, the overwhelming economic thrust is to constantly jack up the net income of the nation – the rents that people need to pay for locating themselves on land – above what most people can comfortably afford. That’s the one metric that hardly anyone discusses; and nobody analyses, correctly, in public.