The growth in London property prices may be good news for current owners but is it really good news for society in general? The UK is emerging from years of stagnation and doing so quicker than many countries on the European mainland. If the fuel that is generating the growth is property there is an argument that it is an accident waiting to happen ...again!
The average home in London is valued at approaching £500,000, a rise of £63,000 since a year ago, a rise of almost 18%. The figure is in contrast to the average pre-tax income in the City of £35,250.[1] The Office of National Statistics’ figures demonstrate that homes in London are becoming out of reach of the ordinary man in the street and certainly those looking to move there for employment. So many of the buyers are from overseas and hence the growth does not really relate to the true health of the UK Economy. There are of course regional differences but the national average is approaching double figures and predictions suggest the growth will continue.
The percentage in both cases is the largest annual rate of growth since 2007 just before the ‘crash.’ While the beginnings of the worldwide financial crisis began across the Atlantic the question is whether the basic ingredients of a crisis are being created once again? No single economy can survive in isolation. China was not immune to the problems in the West when the Collateralised Debt Obligation (CDO) Crisis stunned Wall Street and spread to Europe immediately.
The problem was financial institutions in search of profit were ever eager to take on board credit that at best was dubious, at worst toxic. There had been a complete lack of control when it came to approving applications for finance because there was a perception that property values would continue to rise. It was a false perception; inflation had got out of control and the ‘crash’ came as more and more people defaulted on their financial obligations.
As problems rose, businesses failed and unemployment rose so did demand fall. The production lines well to the East ground to a halt. There was no longer any demand for the products they were producing. Economists have identified five particularly vulnerable economies, ‘The Fragile Five’, namely Brazil, South Africa, Turkey, India and Indonesia; the phrase was originally coined by Morgan Stanley.[2] These countries are now finding it increasingly difficult to attract foreign investment and their current account deficits are growing. As they represent 7% of the world’s economy this cannot be ignored.
The question of confidence must be addressed. As property prices rose in the early years of the 21st Century, consumers were happy to spend. They were seeing their assets grow and could remortgage to raise funds at will. The credit crunch that resulted from the CDO Crisis brought a halt. Money became increasingly difficult to obtain as the Banks looked to restore their equilibrium. Gradually people have been able to relax and the financial sector has widened. The Government initiative of ‘Right to Buy’ supporting first time buyers with a 20% long term subsidy has boosted the property market from the bottom. Credit is available from varying financial institutions and confidence is returning.
The question is whether that will translate back into the overall market place and get more business sectors moving. There is a housing shortage in the UK which will be difficult to satisfy even by the end of the decade. It does mean that the construction industry and its suppliers have plenty of work.
Is this the beginning of the whole process starting again? Property has always been a good medium to long term investment. It was no different during the years of stagnation between the CDO Crisis and today unless householders were forced to sell because of becoming an unemployment statistic. At one time statistics showed that a property doubled in price every seven or eight years. People who have owned their properties for decades are sitting on a large asset. However that asset can only be cashed in if they sell and downsize or do not need to buy something else.
Many of the Mediterranean economies have yet to see any real growth. Unemployment levels, especially amongst the young are reaching horrendous levels. This is certainly putting a brake on because national economies are so closely interlinked. EU bailouts are helping but it is questionable whether countries such as Greece, Italy and Spain are able to eradicate the structural faults within their economies. It is also questionable as to whether future bailouts can be done on a similar basis.[3]
One of the dangers back in the UK is that people will once again be caught up in the positive cycle of growth and forget that from time to time housing crises occur. In London in the early 1970s prices were rising rapidly; that stopped after a few years. Growth through the 1980s was good but by the end of the decade things were far less positive. The recent problems were for a longer period that most blips but there is an obvious danger that people are going to forget the lesson almost overnight.
The financial institutions have received very bad publicity for causing the crisis in the first place as well as for some of their mis selling such as Payment Protection Insurance (PPI). The latter has led to their having to make provisions for compensation in their balance sheets. Such costs need to be retrieved and it will be interesting to see whether they see that retrieval from the relaxation of lending criteria.
Those ‘Fragile Five’ will hope that they do, relaxing both to the consumer and to business so that demand and investment can return to pre crisis levels. China likewise is looking for the reestablishment of consumer confidence in the West so that its production lines can return to full capacity. If the fuel for increased demand is property inflation it may be another accident just waiting to happen.