Sunday, 10 August 2008

An UnHappy Anniversary

This week marked the first anniversary of the credit crunch. The first that I knew of this came a few weeks later when I was addressing a tech dinner atop Barclay’s offices in Canary Wharf. I was told that they were having trouble laying off the debt for the Alliance Boots deal. The conversation that night was dominated not by tech issues but what this would mean for all of us.

I won’t repeat all the many reviews of the unprecedented events of the last year and the nasty situation that we now find ourselves in. But I will say that even then I was getting pretty sick of the continuous upward spiralling of house prices and how this had come to dominate both dinner party conversations and the media. I did live through the last period of house price falls in the late 1980s and knew the damage this could do. That’s why I have long believed that houses were for living in and not for investment; let alone as a substitute for a decent pension scheme. Many people I met violently disagreed and boasted of their growing ‘But to Let’ portfolios.

Falling house prices actually has advantages. For a start, we might get back to the point where young people can afford to buy a first home without recourse to the ‘Bank of Mum and Dad’. Back in 1969, my first house cost 3x my salary with no parental assistance. Now you need 7x and a big dollop of cash for a deposit . If your house is for living in, it doesn’t really matter too much what it is worth. If you want to move and trade up, the differential is in your favour as prices fall. It only really matters if you trade down – something that you need to do if you thought your house was a substitute for your pension.

Of course, what we do need is more mobility. A non existent house sale market is detrimental to mobility. Perhaps this will end the stigma of renting. Indeed, perhaps we will start building more social housing.

Before the emails start flooding in, I do fully understand the pain of negative equity. Indeed, I feel very sorry for the first time buyers who managed to get on the housing ladder in the last year and now find that their hard earned deposit/equity stake (if any) has disappeared.

But longer term, I really hope that we at long last get stable house prices. I hope that property investment will be made for rental yields rather than excessive capital gain. I hope that people will invest in productive companies rather than unproductive bricks and mortar.

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