I predict a very substantial fall in UK house prices in 2012 – and that will be a very good thing.
Average house prices currently stand at over 6 times average earnings. That compares to a long term average since 1945 of under 4, which charts show to be the norm.
People simply cannot afford to buy homes at six times their earnings. People living on average earnings, and paying the high rents such high property prices entail, would take ten years to save one years earnings, which would give them a deposit. They then would need five times earnings (or two and half times joint earnings for a couple) in mortgage. It is with good reason that banks will not lend at that level – it is more than people can pay.
There is a fascinating graph in this BBC report of a National Housing Federation (NHF) study last summer. It shows that the number of households under 30 living in private rented accommodation increased astonishingly, from 30 per cent to 48 per cent, in the bubble years between 1997 and 2009. That is a massive gain to a landlord class apparently very rich in assets -but the value of whose assets is strangely inflated.
This leaves ordinary people stuck in a very unpleasant position. Until last year, I was forced to live in private rented accommodation. My annual rent was about 6% of the nominal property value. I now pay substantially less than that in mortgage interest.
The NHF study predicts that current trends will continue, that the private rented sector will continue to grow, and that house prices will grow 21% over the next five years. But the NHF, who commissioned the study, are providers of rented accommodation and as usual this “academic” study uses assumptions which promote the economic interests of those who funded it.
In fact, I expect the massive decoupling of house prices from average earnings will end in 2012 or 2013 and we will see a major crash in house prices. It may not begin in 2012 – possibly it can be delayed until 2013, but I predict that by 2015 we will see house prices to earnings ratios back to four per cent. And as I see no significant increase in average earnings over that period, that means a fall in nominal house prices of over 40%.
House prices currently bear no relation to the ability of people to buy them to live in. They are like a rock balanced on an apex, requiring only a little push to crash them down. A number of pushes are coming:
– Cuts in housing benefit. The whole rush to the private rented sector has been underpinned by artificially high rents forced up by government payment of housing benefit. I am of course extremely sorry that individuals may be hurt by the implementation of these cuts. I also expect some backtracking as it dawns on MPs that the £2,800 per month does not actually go into the pocket of the Daily Mail’s Sudanese refugee family, it goes into the fat pocket of some Tory landlord. But the housing benefit cuts will reduce returns to landlords and knock house prices.
– Unemployment. The main impact of public spending cuts is yet to feed through in terms of higher unemployment – you ain’t seen nothing yet. Tories like unemployment – it reduces the costs and leverage of labour. 2012 is the year that it will really hit. By the end of 2012, repossessions will be very high. This would always spark a drop in house prices; people have not yet got their heads round what a fall it will be this time.
– Interest Rates. The key factor in balancing that house price boulder has been the lack of any high wind of interest rates. The short term outlook is for base rates to remain real terms negative (which is undeniably true yet strangely almost never said). But that will not last forever either…
The coming crash in house prices is of course going to have a huge effect on the viability of the financial sector, and will join together with sovereign bond defaults in precipitating the fall of the casino capitalists who live on our labour and have the rest of us in their lockhold. Those who saw 2011 as a global year of revolutionary change were only witnessing a tremor before the eruption. I cannot be sure that the crash will come in 2012 rather than 2013 or 2014; but I am looking forward to the new year with genuine hope that a deal of stench will be cleansed.