“An Englishman’s home is his castle” is an old saying that reflects ancient liberties, but in the last forty years there has been a deep cultural change in the UK that you might imagine that it refers to some deep seated love of property investment. Let us begin with a brief history lesson.
The early 1970s saw the Heath government preside over a credit driven property boom, the so called “Barber Boom”, which came to a swift and painful end. This end involved the “Secondary Banking Crisis” of 1973-75 when many smaller banks collapsed as the impact of a bursting property bubble, currency crisis and rising oil prices following war in the Middle East (sound familiar?) fed through to the wider economy. The lessons of this crisis were swiftly forgotten as governments and the media swiftly moved on to what were seen as the greater issues of inflations, industrial decline and union militancy.
December 1977 saw a seminal moment in the housing sector, but one that receives very little mention. Local authorities were for the first time required by law to house the homeless; slowly but surely council housing became something you moved into as a last resort, whereas previously it was something you were rewarded with.
Much better known were Margaret Thatcher’s reforms of the 1980s that saw the housing sector turned on its head. Council housing stock was sold to tenants at discounted prices, substantially reducing the availability of council houses and generally leaving the poorer quality properties behind, while the private rented sector was deregulated. At the same time the historic controls on the financial sector were substantially removed; banks were allowed to compete freely in the mortgage sector, building societies were allowed to enter new markets and macro controls on lending were removed. This period ended in 1990 with another sharp recession, the Gulf War, record numbers of mortgage repossessions accompanying falling house prices, and ultimately in September 1992 with “Black Wednesday”, when the Pound was forced out of the European Monetary System. Again, the lessons of this crisis were lost, governments and the media this time focussing on matters of European integration and problems with public services.
The cycle from 1973-75 to 1990-1992 appeared to be repeated 17 years later when Northern Rock collapsed, but this time there were two big differences: after two years there were no “green shoots of recovery” and real house prices had not seen a significant fall. So what had changed?
The first of these is the easiest to explain, and although economists and politicians will argue until the cows come home about the details, there is general consensus that as the bubble was bigger it will take much longer to recover. So why haven’t house prices fallen sharply as they have in America, which has suffered an otherwise similar recession? I would argue that this has little to do with economics and more to the deep-seated psychological change that has taken place. Houses have gained an almost mythical position in British society, something reinforced by an army of TV shows, magazines and newspaper articles; they are concurrently the ultimate store of value, the true expression of your personality and the demonstration that you have “made it”.
So the British economy finds itself in the midst of the worst decline since the 1930s, with little light at the end of the tunnel, but we cannot countenance a fall in house prices. Banks have tightened lending practices sharply and developers are building record low levels of hew houses, but house prices remain at almost peak levels (and beyond peak in London), resulting in lending multiples way beyond anything either normal or sensible. It is almost as if house prices are being kept up but by a process of collective will, or more properly, collective delusion. By most realistic measures, UK houses remain 50% overvalued; such a decline would be inline with the US market.
The problem with collective delusion is that when the cracks come, they come big time; the collapse of the Soviet Union and the Arab Spring are good examples. So my question is when will the rose-tinted spectacles of the UK housing market crack, because crack they surely must; when this happens the psychological impact may be even greater than the financial one.