House prices down 10% – more to come

I heard this morning that UK house prices are now down by more than 10% so far this year. I listened in vain for a government Minister to come on to claim success from their policy. For years Ministers have told us we needed to make houses more affordable. They have become mighty shy now their policy of starving the Money markets of cash last summer and nationalising the UK’s most aggressive lending bank, Northern Rock, is delivering lower house prices with a vengeance.

Could it be that they have at last worked out that lower house prices do not automaticallly make houses more affordable, if there are too few mrotgages to buy them with? Could it be that at last they understand there is one thing worse than house prices soaring, and that is house prices falling? Aren’t we owed some explanation of their latest thinking, and some comments on where they want to take the mortgage market next? After all, they now own and manage one of the largest mortgage banks, and intervene regularly in the money markets, so much of this is down to their efforts.

We should be told by the government how much further they intend to let house prices fall before taking the necessary money and mortgage action to stabilise them. We should be told whether they think that the shortage of housing they identified in previous years has now corrected, given the lack of buyers for new homes. Does that make them want to alter their targets for new house construction, as they think new home starts determine house prices?

Commercial property has already fallen by more than 20%, twice the fall so far in houses. There is more and more empty space available as developers finish building projects in progress. As migrants from overseas return home in search of jobs elsewhere, and as people staying here give up on trying to find a mortgage for a better home, we should expect further falls in residential property prices. There will be more repossessions as people struggle to pay the mortgages they already have, forcing more properties onto the market.

No more boom and bust? That does not seem such a clever soundbite now ownership of Northern Rock and clumsy mismanagement of financial regulation and the money markets has made the UK government into an architect of bust in the property market, presiding over the collapse of the mrotgage book of one of our bigger mortgage lenders at a time of general mortgage shortage. And how does Vince Cable now think about the outcome of nationalising Northern Rock, having acted as the government’s spinner to win over fashionable opinion to such an ill judged course? Is he happy with the collapse of house prices, the shortage of mortgages and the redundancies at the Rock?

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16 Comments

  1. Dr Dan H.
    Posted August 28, 2008 at 12:42 pm | Permalink

    Essentially, what we've had over the last decade or so is little more than a set of power-mad twerps headed by Blair, who wanted to rule a country. Thanks to the masterful media manipulation that Blair and his cronies brought in, they managed this fairly easily but once in power they collectively had a very large "Now what?" moment.

    All they wanted was power. Once they got it, they didn't know what to do with it and so devolved back Old Labour doctrine writ large: borrow lots of money, tax a lot and make up lots and lots of laws. This has never worked at any point in recorded history and every administration which has tried it has worked on a Canute-like policy of standing a long way back from the tide-edge, ordering it to stop, then claiming that the interval between issuing the order and the tide finally reaching their feet is a success.

    So it is with this administration. Lax fiscal rules, a housing bubble, iniquitous taxation and reckless borrowing can keep a country going for quite a long time but eventually the policy fails. The thing to remember is that this was ALWAYS going to happen; the decade of living on tick was not a success but merely deferred failure with no hope of salvation.

    Anyway, it looks like we've now gone full circle. We're back at the default position for an incoming Conservative government: huge national debt, Labour-induced crisis and nowhere else to turn. The next few years are going to be rather unpleasant, especially for Labour's vast army of dole-claimants and civil servants, since both lots are going to have to find productive work at long last.

    • mikestallard
      Posted August 28, 2008 at 9:56 pm | Permalink

      I could not agree more! Well said!

  2. Posted August 28, 2008 at 3:24 pm | Permalink

    I have recently graduated from University and am looking to buy soon. Over the last few years I have been filled with dread everytime I read an article about house prices – up 10%, 15% or 20% a year or the panic if they drop 1% or 2% while there have been glib staements about first time buyers who either morgage to the hilt or rent.

    If there is a crash, current owners and people who view their property as a pension will be severly hit and I do feel sorry for them, but the crash will be a salvation for me. If prices do fall I can buy, if the rise I cannot, this is the situation for me and millions of other youn people.

  3. Matthew Reynolds
    Posted August 28, 2008 at 7:19 pm | Permalink

    My view is that asset sales should be speeded up & Channel 4 needs selling off too ! That could fund stamp duty reform by exempting the first £300,000 of all property deals from that tax and only taxing each £1 by which that threshold is exceeded by say 1% , killing off stamp duty on shares and axing CGT so that capital gains where taxed as income for the first two years and are tax free after that . This would boost the economy by helping the housing & share markets while encouraging business investment . The BBC could be sold off to fund cutting income tax by 1p to 19p with a long term target of 15p so that hard work , saving , private pensions and share ownership would be rewarded by lower taxes . Some neo 1980’s medicene is needed to rectify the flawed 1970’s policies of Gordon Brown . The FTSE , housing sales , entrepreneurs and the middle classes ahve been over taxed with very bad results and the economy could do with some prime pumping via supply side measures that will not fuel inflation as they will stimulate productivity growth .

  4. Matthew Reynolds
    Posted August 28, 2008 at 8:19 pm | Permalink

    My view is that asset sales should be speeded up & Channel 4 needs selling off too ! That could fund stamp duty reform by exempting the first £300,000 of all property deals from that tax and only taxing each £1 by which that threshold is exceeded by say 1% , killing off stamp duty on shares and axing CGT so that capital gains where taxed as income for the first two years and are tax free after that . This would boost the economy by helping the housing & share markets while encouraging business investment . The BBC could be sold off to fund cutting income tax by 1p to 19p with a long term target of 15p so that hard work , saving , private pensions and share ownership would be rewarded by lower taxes . Some neo 1980's medicene is needed to rectify the flawed 1970's policies of Gordon Brown . The FTSE , housing sales , entrepreneurs and the middle classes ahve been over taxed with very bad results and the economy could do with some prime pumping via supply side measures that will not fuel inflation as they will stimulate productivity growth .

  5. Kay Tie
    Posted August 28, 2008 at 8:56 pm | Permalink

    I do not see why tax payers should pay for the foolish actions of people who believed there would always be a greater fool.

  6. mikestallard
    Posted August 28, 2008 at 9:58 pm | Permalink

    Today I was idly watching a programme about a couple of young Brits looking at house prices in Perth WA.
    For a quarter of a million, they could buy a palace with Jarrahwood flooring and a jacuzzi. For half a million, they could buy a palace.

    I am now, myself, rather pleased that house prices are falling because of the many people like Chris above.
    Surely, since you have to live somewhere, the relative price, rather than the absolute price is what is most important?

    Or am I missing out on something here?

  7. DBC Reed
    Posted August 28, 2008 at 10:46 pm | Permalink

    All of the above is not unfair but the criticisms apply to all the political parties which have coasted along for decades keeping the owner occupiers happy.
    The government cannot be accused (or commended )for bringing house prices down: the responsibility lies with the banks ,which have defied the elected government's wishes and not supplied the housing market with cheap credit despite accepting copper-bottomed public sector securities to replace worthless private paper.
    Unless the Conservative Party decides to nationalise the banks there is nothing to be done because the banks' actions look like a legitimate private sector response to their own problems -and the Guvmnt can go hang as far as they are concerned.

  8. William B.
    Posted August 29, 2008 at 7:48 am | Permalink

    Your article today could be construed as a lament over falling house prices, Mr Redwood. I do not believe the fall to be a matter for lamentation but for celebration.

    Only by houses and flats returning to, what I believe to be, a true market value can those like Chris buy a home. I have commented here before about the problems caused by lenders throwing money at all-comers in the race for a quick buck. It creates an artificial bubble of demand which pushes prices far above the true underlying value of the property.

    Only if the bubble is burst (not just deflated a touch) will the next generation of hard working aspirants become home owners. There will be victims along the way, especially those who bought when the market was high are have to sell because they must relocate for work. But protecting them is no reason for continuing the bubble one minute longer. A drop of 40% or more from prices this time last year will be needed for the market to revert to non-bubble values.

    It is only when market prices reflect true underlying value that we will see a fair deal for first time buyers like Chris.

    Reply: I too want a fair deal for first time buyers – which is why I want to see an end to Stamp Duty and HIPs charges to help them. I too regret the monetary laxness and the Credit binge on the way up which took house prices so high, but that has happened. The danger of the present situation is that falling prices undermines existing owners without necessarily helping new buyers, as they will find it very difficult to get a mortgage to take advantgae of the lower prices. Affordability is not just about price, it is also about access to mortgages. The irresponsible authorities have created boom and bust. We are now about the discover that a bust is not good for first time buyers, anymore than near the top of a boom is.

    • William B.
      Posted August 30, 2008 at 1:03 am | Permalink

      Affordability is indeed also about access to mortgages and I am certainly not advocating closing the market. However, if we return to loose lending the bubble will simply be reinflated, LTVs of 90-100% and limited analysis of availability to repay are both bad business and a trap for the very people least able to protect themselves. The market must be restricted so that mortgage finance is available to those with a decent deposit and good prospects of being able to meet repayments. This will restrict demand and squeeze prices down.
      It will not make mortgages more expensive (indeed it makes them cheaper because there is less capital to repay than with a 100% mortgage) but it will prevent those who, at the moment, cannot afford to buy from being misled into thinking they can afford it.
      Of course I am advocating a path which will lead to negative equity for many in the short term, but I believe that to be a lesser evil than lending too much to too many and creating a permanent bubble.
      Bubbles can be very pretty, but if they get in your blood they give you the bends; the housing market has a severe case of the bends and requires depressurisation treatment.

      Reply: There are 2 effective ways to limit credit – one is to put interest rates up, something the MPC failed to do in the good years. The other is to control the amount banks can lend overall through their capital ratios.

      • SMcC
        Posted September 3, 2008 at 10:22 am | Permalink

        There is another way of limiting credit which used to be the norm. It is for lending institutions to look carefully at the lendees ability to repay the loan and also to require a substantial deposit. When I was young building societies asked for a 25% deposit and would not lend more than 2.5 times one's annual salary.
        A return to these principles, and the abolition of estate agents, would cut the rapid rise in house prices and return thenm to more realistic levels.

  9. Posted August 29, 2008 at 6:33 pm | Permalink

    Firstly can I say thank-you for the support of William B and mikestallard and anyone else who has expressed support for myself and others in my position.

    "Surely, since you have to live somewhere, the relative price, rather than the absolute price is what is most important?"

    I agree this is an important point and in most cases relative wealth is more important than absolute (as in keeping up with the neighbours). but the difference between my current major assets (£0) and any house I could buy (£100,000s) is major and here to me the absolute price is the more important than the relative.

    (Or to put it another way I don't care how much a 3 bedroom house costs if I cannot afford a 2 bedroom house)

  10. Arlene
    Posted August 30, 2008 at 5:34 pm | Permalink

    Am I cynical in believing that the government will hoover up properties when the housing market bottoms out? Could this be Labour's opportunity to re-introduce social housing in the name of 'helping the people'? Doubtless, they will again call such action "investment" of one sort or another.

    Kay Tie (7:56 pm) – a rather arrogant view, methinks. I would rather pay a monthly mortgage fee which will result in eventual ownership of property, than to pay rent, which is essentially money down the drain. For example, my flat costs me £500 per month in mortgage payments but I get £700 per month in rental income from it (and I will eventually own the property). As the credit crunch reduces people's ability to purchase property, so rents rise.

    This means that those without properties pay more, just as those with variable rate mortgages pay more.

    Yes, people who fail to consider future rate rises must take responsibility for their own actions. However, the government is responsible for allowing the reckless increase in money supply, to encourage consumerism and debt. How much did it gain in taxes from this policy?

    It is high time that somebody made the case for fractional reserve banking to be squeezed incrementally until it ceases to exist.

    Where is England's version of Ron Paul?

    • Stuart Fairney
      Posted September 2, 2008 at 5:14 pm | Permalink

      Not sure either would enjoy the comparison, but you are blogging on his site !

  11. Martin
    Posted September 17, 2008 at 10:51 am | Permalink

    Labour were handed a modern balanced economy that Mr Brown spent the next ten years claiming were all of his making. We constantly heard the phrase prudence and even Iron Chancellor while he was happily increasing spending at an unaffordable rate. We all know that the credit fuelled binge of the past ten years is well and truly over and one consequence of that is that house prices are going to tumble. As a long time property owner I am quite happy with this, as it means that when the time is right, my children will be able to buy a home at a sensible multiple of their income. The banks will lend at the moment as long as it is no more than 70% of the current value because they know that prics are going to go down.

    Once prices have dropped to a sustainable level (down at least 30% ) then they will start to lend again at a max of 90% LTV with sensible multiples again.

  12. Albion
    Posted September 29, 2008 at 4:42 pm | Permalink

    Credit binge fuelled property booms followed by bust and a devaluation of sterling have been constant features of the British economy since the sixties. Amidst Conservative and New Labour boasts that the UK ranks amongst the most competitive economies in Europe with the largest share of foreign direct investment, the trade deficit has consistently worsened over the last twenty years to reach a staggering £90bn in 2007.
    The tax revenues from North Sea oil and botched privatisations financed the Thatcherite economic experiment which predictably ended with the humiliating exit of Sterling from the ERM and Lamont's record budget deficit.
    New Labour economic mirage is built on an unregulated credit binge and housing boom which is now ending in tears.
    When will you face the facts Mr Redwood? The UK economy has been in decline for years. The budget deficit will soon reach £100bn, there is nothing left to privatise and manufacturing is in terminal decline, unlike in Germany and France.
    I could also mention the fact that the class-ridden nature of the UK has produced a lamentable state education system which is of course why, compared to other European countries, the UK is uniquely cursed with a mass irredeemable underclass.
    I fear the current crisis is a replay of 1978/79 for the UK, except this time there is almost no North Sea oil left, most of the state assets (inclding gold reserves) have already been sold off (mostly to foreigners ….) and, quite frankly, the young 'Dave' Cameron and his Eton chums is no Margaret Thatcher. What a mess !!

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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