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 A devestating house price crash could be just around the corner, unless something is done abut it...
warns New Nation columnist Michael Eboda
| | |  Can we avoid negative equity?Do you agree? Join the discussion by calling 0870 010 0444, lines open at 1.30pm. | |
LISTEN - Hear Michael Eboda on the crisis in our museums
This week, new figures confirmed that property prices are rising at the highest rate ever recorded in this country, and that cheap borrowing is fuelling the boom.
The Bank of England practically admitted last week that it would like to raise interest rates to calm the market down, but is afraid to do so for fear of destroying the troubled manufacturing sector.
The average house now costs four-and-a-half times average income, which isn't far off the 1989 peak - of 5.2 times - that precipitated the massive crash of the early nineties.
At the same time, consumer spending has risen at an annual rate of 4% over the past two years - twice as fast as the economy as a whole.
In the second quarter of this year alone, we have withdrawn £10 billion of equity from our homes and used the money top buy cars, go on holiday or purchase designer wardrobes.
Clearly this can't go on forever, and we have to find a way of cooling down the market without putting up interest rates. Some restrictions have to be put in place to restrict the ability of people to borrow money, and it's the lending institutions that have to police themselves better.
At the moment, many banks and building societies are guilty of scandalous behaviour. They're doling out money to people who will find it impossible to pay them back should they experience even the slightest negative change in their personal circumstances.
Many institutions are ready to lend up to six times a person's salary with, for the first couple of years, a sizeable rate discount. In addition they will allow you to pay them back over up to fifty years: so a £200,000 loan, for example, can be your's for as little as £648 a month.
The logic, apparently is that in a few years, most people will be better off and therefore, when the discounts end and the payments inevitably go up, the increase won't be too painful to bear.
The reality is that in a low inflation economy, wages don't rise quickly, and in a couple of years, most people will not be earning significantly more than they are now. But they'll be saddled with a huge increase in their outgoings. Many simply won't be able to pay, repossessions will start and the market will disintegrate.
In the past it was difficult to borrow more than three times your salary over 25 years. If that were the case now, the property market - which relies on new entrants for its strength - wouldn't be nearly so overblown as it is.
A crash - and that, traditionally, is the way booms of the past have ended - would have serious repercussions. It would leave thousands unemployed, many homeless and even more with the dreaded negative equity.
With a little less greed, lenders can prevent that...and must.
Do you agree?
Join the discussion by calling 0870 010 0444
lines open at 1.30pm.
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