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something not quite right with the popular explanation that soaring prices were caused by too many households chasing
too few houses.
There are other factors that explained the bubble rather better. Easy credit was the key. Competition among mortgage lenders
produced a bewildering variety of mortgage products – 15,600in July 2007. They were often aggressively marketed, on terms – in relation to income and property value – that enabled more
and more people to enter the market. Northern Rock was not the only bank willing to lend 100 per cent or more of the value
of a property and five or six times the borrower’s income. The research firm Data Monitor suggests that 7 per cent of recent
mortgages were made to people with a poor credit history, and another 5–6 per cent have been ‘self-certified’, requiring no
proof of income.
As prices rose, the sense that property is a good investment – even an alternative to a pension – also grew. The growth of
the buy-to-let market and of the market in second homes was in part due to speculation that prices would continue to rise,
generating nominal wealth and the potential for capital gains. Ten per cent of mortgages are currently held by buy-to-let
landlords, as against 1 per cent a decade ago. Another former mutual, Bradford & Bingley, specialized in this area of business.
There are also an estimated 276,000 second homes, many of them unoccupied for much of the year (with another 200,000 second
homes overseas), partly acquired for investment purposes. An academic study by David Miles explained 62 per cent of the doubling
of prices over the course of a decade as being due to the expectation of future price rises, with rising population accounting
for only 9 per cent of the price rise (increases in incomes and low real interest rates explain the rest). An IMF study of
changes in house prices between 1997 and 2007 concluded that in the UK (as also in Ireland and the Netherlands) around 30
per cent of the increase in prices could not be explained by ‘fundamentals’, such as population, rising income and lower interest
rates – compared with a figure of around 20 per cent for France, Australia and Spain, and only 10 per cent for the USA. Any
market that is inflated by expectations of future price rises, supported by the easy availability of credit, has the character
of a bubble. Bubbles burst. This one has done, with spectacular and worrying consequences.
What made the British housing price bubble so dangerous in economic terms was that it was so highly leveraged (that is, supported
by debt). The thousands of first-time buyers who acquired what came to be known as ‘suicide mortgages’ of 125 per cent of
the property value were merely the vanguard of an army marching to the rhythm of ever increasing house prices. They borrowed
to the limits of their capacity, or beyond, in order to get a foothold on the housing ladder. Mainly because of mortgages,
but partly also because of personal borrowing, average household debt has risen to 160 per cent of income, double the 1997
level – the highest of any developed country, and the highest in British economic history.
It might reasonably be asked why these developments were allowed to continue unchecked, not least by the guardians of financial
stability in the Bank of England and by the political over-lord of the economy, the Chancellor of the Exchequer. There were
many expressions of anxiety about increasing personal debt, and it was clear that growing numbers of people were being encouraged
– in some cases through aggressive promotion – to take on more debt than they could sensibly manage. In 2002, in the
Daily Express
, I published a warning about rising household debt and proposed a plan to address it. Then, in November 2003, I raised the
issue with Gordon Brown in parliament, in the context of the Budget Report, only to be met with a contemptuous dismissal of
the
too few houses.
There are other factors that explained the bubble rather better. Easy credit was the key. Competition among mortgage lenders
produced a bewildering variety of mortgage products – 15,600in July 2007. They were often aggressively marketed, on terms – in relation to income and property value – that enabled more
and more people to enter the market. Northern Rock was not the only bank willing to lend 100 per cent or more of the value
of a property and five or six times the borrower’s income. The research firm Data Monitor suggests that 7 per cent of recent
mortgages were made to people with a poor credit history, and another 5–6 per cent have been ‘self-certified’, requiring no
proof of income.
As prices rose, the sense that property is a good investment – even an alternative to a pension – also grew. The growth of
the buy-to-let market and of the market in second homes was in part due to speculation that prices would continue to rise,
generating nominal wealth and the potential for capital gains. Ten per cent of mortgages are currently held by buy-to-let
landlords, as against 1 per cent a decade ago. Another former mutual, Bradford & Bingley, specialized in this area of business.
There are also an estimated 276,000 second homes, many of them unoccupied for much of the year (with another 200,000 second
homes overseas), partly acquired for investment purposes. An academic study by David Miles explained 62 per cent of the doubling
of prices over the course of a decade as being due to the expectation of future price rises, with rising population accounting
for only 9 per cent of the price rise (increases in incomes and low real interest rates explain the rest). An IMF study of
changes in house prices between 1997 and 2007 concluded that in the UK (as also in Ireland and the Netherlands) around 30
per cent of the increase in prices could not be explained by ‘fundamentals’, such as population, rising income and lower interest
rates – compared with a figure of around 20 per cent for France, Australia and Spain, and only 10 per cent for the USA. Any
market that is inflated by expectations of future price rises, supported by the easy availability of credit, has the character
of a bubble. Bubbles burst. This one has done, with spectacular and worrying consequences.
What made the British housing price bubble so dangerous in economic terms was that it was so highly leveraged (that is, supported
by debt). The thousands of first-time buyers who acquired what came to be known as ‘suicide mortgages’ of 125 per cent of
the property value were merely the vanguard of an army marching to the rhythm of ever increasing house prices. They borrowed
to the limits of their capacity, or beyond, in order to get a foothold on the housing ladder. Mainly because of mortgages,
but partly also because of personal borrowing, average household debt has risen to 160 per cent of income, double the 1997
level – the highest of any developed country, and the highest in British economic history.
It might reasonably be asked why these developments were allowed to continue unchecked, not least by the guardians of financial
stability in the Bank of England and by the political over-lord of the economy, the Chancellor of the Exchequer. There were
many expressions of anxiety about increasing personal debt, and it was clear that growing numbers of people were being encouraged
– in some cases through aggressive promotion – to take on more debt than they could sensibly manage. In 2002, in the
Daily Express
, I published a warning about rising household debt and proposed a plan to address it. Then, in November 2003, I raised the
issue with Gordon Brown in parliament, in the context of the Budget Report, only to be met with a contemptuous dismissal of
the
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