We’re so used to frantic house price growth that we’ve come to see it as normal.
So when the Office for National Statistics (ONS) published figures this week showing UK house prices rose 11.7% in the last year, nobody blinked.
Crazy growth in London of 19.1% was similarly shrugged off. That’s just how London rolls these days.
On the same day, the ONS published the latest CPI inflation figure, which showed a slight dip to 1.5%.
I expected screaming headlines pointing out that house prices are now rising at eight times inflation, or almost 13 times in London.
Nobody seems to have noticed.
Wage Slaves
Here’s an even more astonishing figure. The ONS also published annual wage growth figures which showed that pay, including bonuses, rose a meagre 0.6% over the last year.
This means UK house prices are rising a mind-boggling 20 times faster than wages.
In London, the figure is almost 32 times faster.
This can only end one way.
20 Reasons Why House Prices Will Crash
Even more amazingly, most commentators in the property and mortgage industry actually welcomed the house price growth figures, claiming they were the sign of a healthy market.
I beg to differ. It is the sign of an insane market.
House prices simply can’t keep rising at 20 times wages.
Crazy Days
There is more growth to come. Estate agents and mortgage brokers are now gearing up for a hectic autumn, and they’re in a confident mood.
Lenders have embarked on yet another mortgage price war, as they battle to hit their lending targets before the end of the calendar year.
The property industry can smell blood, or rather money, and they’re not going to stop now.
Never Ending Mortgage
Worse, neither are buyers.
Instead of saying no to insane house prices, first-time buyers are stretching their repayment terms to as long as 35 or even 40 years, rather than the traditional 25-year term.
More than one in 10 existing homeowners are doing the same, according to figures from the Council of Mortgage Lenders.
Yes, this can cut your monthly repayments, but there is a price to pay.
If you took out a £150,000 repayment mortgage at 3.5% over 25 years, you would pay total interest of £75,282. Over 40 years, your total interest bill would be £128,923.
That’s £53,641 more.
Mortgage Madness
As Herbert Stein’s law says: “If something cannot go on forever, it will stop.”
The only question is when.
In April, the Financial Conduct Authority launched a regulatory overhaul called the Mortgage Market Review, designed to take some of the heat out of the housing market. That calmed lenders… for about a fortnight.
Bank of England measures to cut maximum loan-to-income ratios don’t appear to have slowed the beast at all.
If interest rates start rising next year, as most people assume, maybe that will put a brake on borrowing.
But even if rates do rise, and I’m not convinced they will, they will creep up only slowly. By historical standards, mortgages will remain dirt cheap.
Debt Disaster
Cheap money is the reason why house prices can outpace earnings. That makes servicing the interest much easier, but the ever-increasing amounts of capital we are borrowing to keep up must still be paid off.
No wonder household debt is going through the roof. Last year, it hit an all-time high of £1.43 trillion, according to the Bank of England.
At some point, the insane house price party will come to an end. And when it does, the hangover will be brutal. The financial crisis has taught us nothing.
