FOOL'S EYE VIEW
Seven Signs Of A Housing Crash

By Cliff D'Arcy
April 15, 2003

Until 1992, my wife-to-be and I lived in a series of rented flats. However, when her father was made redundant and then immediately re-employed, he kindly gave us a (financial) helping hand onto the property ladder. At the end of that year, we bought the modest home in which we still live over ten years (and 120-odd mortgage payments) later.

However, with a growing family and only two bedrooms, we've no option but to move to a larger home. The fact that the area in which we live is one of the top 20 for house-price rises over ten years is a bit of a mixed blessing. The good news is that our home is worth over 3.5 times what we paid for it (a superb tax-free return; thanks, father-in-law!). The bad news is that we're going to have to dig extremely deep to buy more space.

I'm fully invested in shares and reluctant to sell at this time; my personal view is that the stock market looks undervalued and house prices appear top-heavy at present (undeniably in Greater London). Here's why I feel this way:

Sign 1: Income multiples on the rise

According to the Halifax, Britain's largest mortgage lender, it takes about 4.5 times the average income of a full-time male worker to buy the average house valued at £127,040.

This measure (the "average house price to average earnings ratio") has averaged 3.6 since 1983 and peaked at 5 in the summer of 1989, so it's currently at the high end of the scale. Furthermore, some lenders are offering certain borrowers loans of up to six times their salaries - a red light, if ever I've seen one.

However, some analysts argue that this measure should carry less weight than it has done previously. This is because interest rates are at a 48-year low, meaning mortgage repayments are far more affordable than when they peaked at around 15% in 1989.

Sign 2: A glut of property programmes

A quick glance through the TV pages reveals a long list of (usually primetime) property and home makeover series, including:

A Place in the Sun (C4)
Changing Rooms (BBC1)
Escape to the Sun (BBC2)
Grand Designs (C4)
Home Front (BBC2)
Hot Property (Five)
House Auction (ITV1)
House Doctor (Five)
Housecall (BBC1)
Location, Location, Location (C4)
Move to the Country (BBC2)
Property Ladder (C4)
Selling Houses (C4)
Trading Up (BBC1)

Channel 4, in particular, seems very keen to fill up its weekday schedules with these programmes. What's more, as we commented recently, conversations about house prices frequently dominate dinner parties, just as they did in 1989. Enough said.

Sign 3: The 40-year mortgage

In his recent Budget, chancellor Gordon Brown announced that he wants UK borrowers to take out more long-term fixed-rate mortgages, in order to help stabilise the housing market. Some commentators speculate that this could lead to an increase in home loans being taken out over periods longer than the typical 25 years (especially by first-time buyers). 30- or 40-year mortgage, anyone?

Although this would bring down your monthly repayments (since you have longer to repay your loan), it could mean taking out a mortgage in your twenties and not getting rid of it until your sixties! Who knows, perhaps Britain may end up like Japan, with its lifetime mortgages.

Sign 4: Workers being urged to commute from France

I had to laugh when I heard a spokesman for Kent County Council (KCC) on the radio last week, arguing the case for workers moving to cheaper homes in northern France and then commuting into Kent and London via the Channel Tunnel (!)

The idea is that at least 10,000 families move to la belle France to take the pressure off KCC, which the government has ordered to build another 116,000 homes by 2021. Have these people ever tried commuting daily into London from any of the Home Counties, never mind the Continent? I'll eat my Fool cap if the 55-minute Calais-London fast train link is completed on time in 2007.

Sign 5: Launch of several managed property funds

Historically, fund managers tend to be one step behind investment fashions, rushing to launch themed funds just as consumers start backing away from a sector. These "hot sectors" include Far Eastern funds in the mid-1990s and technology funds in 2000, both of which came crashing back to earth after the initial euphoria.

The launch of several new property funds is a classic sign that the boom is about to take a turn for the worse. Anyway, hands up those who would invest in a property fund with charges of 4.8% a year and half its money invested in gilts?

Sign 6: Winning streaks always end

Gamblers are only too familiar with the idea of winning and losing "streaks", where good or bad luck seems to take hold and drag them headlong. The problem with a streak, though, is that it has a beginning and an end.

For example, house prices rose dramatically in a six-year winning streak to 1989, before falling five years in a row. They fell again over 1995 before setting off on a seven-year winning streak, recording several double-digit rises along the way.

So, in the words of living legend Rolf Harris, "Can you see what it is yet?"

"Yes, Rolf, it's a classic cyclical boom-and-bust situation."

Sign 7: Can you buy your own home?

Here's an interesting test: take your current household income and multiply it by four (for singles) or 2.5 (for couples with joint incomes). If the result is less than the current value of your home (allowing for say, a 10% deposit), this should tell you something about property prices in your area.

Here's another way of putting it: the home-owning "pyramid scheme" relies on a steady supply of fresh meat, i.e. first-time buyers (FTBs) taking their first tentative steps onto the property ladder. In February, FTBs accounted for less than 30% of total home-purchase loans for the first time since records began. If FTBs take a step back from the housing market, I predict that the knock-on effect will leave few home-owners unscathed...

Many thanks to TMFMayn for his invaluable help in compiling the TV section of this article.

More: Visit our Homeowning Centre | Is There A Property Bubble? (from August 2001)

The author has a beneficial interest in HBOS shares.