Property mania in Britain is back. After a steady rise in the late ’90s, home prices are tipping skyward. Last month alone the value of the average house rose a dizzying 4.5 percent. The annual rate of increase now stands at 18 percent, double the figure last September. Newspapers are filled with stories of converted public toilets selling as [Pound sterling]135,000 “studio” apartments or London homeowners who’ve seen their wealth double without stirring from the couch. Would-be buyers, afraid to miss the opportunity, are taking out mortgages equivalent to four times their salaries. The only question now is just how long the boom can last.
Doomsayers say the end is near and may come suddenly. Earlier this month the Bank of England warned that “price rises were unsustainable.” There’s widespread talk of an early interest-rate hike to dampen the market. Estate agents already report a new wariness among buyers. The buy-to-let market is on the slide as rentals fall. At worst, that could mean an abrupt turndown, says Cambridge economics professor Wynne Godley: “These bubbles don’t deflate; they get pricked.” The memory of the last great spike in the late ’80s is unhappy–and not only for homeowners. Property prices tumbled 30 percent as interest rates rocketed and unemployment soared.
For some, the next bust can’t come too soon. Public employees who work in inner London, for example, can’t possibly buy a home there. Last week Mayor Ken Liv- ingstone pledged that up to half of all new developments would be “affordable housing.” But it may prove beyond the power of government to change the basic psychology: British fondness for a home of one’s own fuels spending manias rarely seen elsewhere in Europe. Says Hugh Dunsmore-Hardy of the National Association of Estate Agents: “The ownership of land has always been seen as a statement of your position in society. We do say our homes are our castles.”
It’s possible, some argue, that the boom will never really end. Britain avoided the latest tremors in the global economy in large part because of the damn-the-downturn spending habits of its consumers. Encouraged by the Bank of England, which kept interest rates low, the public has been amassing record debts, much of it in home mortgages. Newcomers to the market needed to equip their homes; existing owners felt the confidence to squander. Says Jonathan Loynes, of the London economics consultancy Lombard Street Research: “The need to save doesn’t seem so urgent when your house is doing the saving for you.”
The upward spiral of prices is not necessarily irrational. “Surging house prices are the result of real things that have a real effect on the economy,” says economist John Wriglesworth of the property data company Hometrack. Overall inflation is running at less than 2 percent, interest rates are at their lowest level in 40 years, unemployment is negligible. A prosperous Britain can pay those scary prices. That [Pound sterling]500,000 riverside apartment may stretch the budget, but it’s still affordable. “It’s the rate of [house price] inflation that’s unsustainable, not the prices themselves,” says Martin Ellis, chief economist at the Halifax, the country largest mortgage lender. The optimists believe the market will top out and slowly cool to single figures without crashing.
Years from now, they say, the British may look back and conclude that there was no 2002 real-estate “bubble” at all. Britain is a crowded island with a chronic shortage of homes. Thanks partly to a restrictive planning system, builders began fewer new homes last year than at any time since the second world war. Meanwhile, the old are living longer and the young are leaving home sooner. One recent report suggested that Britain could face a shortage of a million homes by 2020. All that suggests a future of strongly rising demand and prices for real estate. But don’t bet your house on it.
