Don’t waste your time with crystal balls or tea leaves: the best way to predict the future of the property market is to see how easy it is to borrow money, says Ross Clark
I REMEMBER THE exact moment that I realised there was going to be a big property boom, possibly even bigger than the one that crashed at the end of the Eighties. It was in January 1999, when I was sitting in my then-cramped office contemplating moving house. I added together the sum of my savings, the value of my existing property and how much I thought I could borrow — three times my previous year’s earnings — and fixed on a figure.
Then the phone rang. It was a salesman from Standard Life, with which I had a pension fund and which was then in the process of setting up a new mortgage bank. Would I like to know how much I could borrow? I said yes. Within a few moments the salesman had run through his figures and come up with a sum equivalent to four and a quarter times my then earnings — increasing my buying power substantially.
I didn’t end up taking out one of their mortgages, but I was thankful for the call: it told me all I needed to know about the property market. If Standard Life was making this offer to me, it — and no doubt other banks, too — would be making similar offers to everyone else. I found a property and bought it quickly — sure enough, just before prices surged.
There is no shortage of property market pundits willing to give you their ha’p’orth of wisdom. Some claim to have read the runes of the Land Registry Index, or to have seen signs in the number of applicants signing on with estate agencies linked to the Royal Institution of Chartered Surveyors. Some like to follow the number of hits on the Rightmove website, or they have heard that a friend of a friend has just been gazumped in Wandsworth.
But there is only one thing that really matters when it comes to predicting the future of the property market, and that is the cost and availability of credit. There will always be a few cash buyers around, some of whom are prepared to pay fancy prices, but they are never enough to drive the property market for long. The vast majority of property purchases — at the top end of the market as well as the bottom — rely on a loan.
That is why the property market began to slide the moment the credit crunch struck in 2007. And it is why the property market has stumbled following its surprise revival in 2009: while cash buyers were prepared to bid up prices of the few properties on the market, their piles of cash were soon spent. It isn’t just in Britain, either: Knight Frank recently found fourteen countries, mostly in Europe, where apparent property revivals went into reverse in the third quarter of 2010.
The revival won’t be in the near future — there were just 48,000 mortgage approvals in December, little more than half the number in a typical month during the boom years. But one day the credit taps will be turned on again and, when it happens, it will begin very quietly. After a crash things are always ‘going to be different this time’. But don’t believe it for a moment.
Just try to name one change, one reform that will prevent the same cycle of fear and greed repeating itself all over again. There hasn’t been a single one. Proposals have been floated for a statutory cap on the loan-to-value ratio of mortgages, punitive property taxes to prevent speculation. But none has happened, and the more time that passes, the less likely that the Government will bring any reform.
THERE IS A straightforward way to tell when the next property boom is imminent: keep on asking to borrow money. I remember in the early Nineties thinking that the property market was on the rise again — until I tried to apply to a building society for a loan. I was shown the door by a manageress who didn’t like the colour of my money and — literally — locked out of the branch. A decade later she would very likely have dragged me off the street and tried to sell me a loan.
Try it: every three months approach a lender and ask for a loan that really stretches your finances. At the moment you will be rebuffed at every turn: asked to provide all manner of documentation, if not treated like a suspected money launderer. But the time will come when the bank will call you in and say, ‘Well, maybe.’ Next time the bank will try to sell you a loan even larger than the one you asked for. That will be the sign: the next property boom will be rumbling.
No government will try to stop it. Ministers and bankers will shrug their shoulders and say, ‘This isn’t like it was last time; this is a sustainable increase in prices thanks to a growing economy.’ They will keep on saying that until long after it has become evident that it is another bubble — by which time it will be too late for anyone to stop it if they wanted to. But in the years before the inevitable crash comes there will be ample opportunities to make fortunes. Booms and busts are in the human blood and, so long as we have a free economy, they always will be.
Illustration by Jeremy Leasor