Britain has been called a nation of "aspirational homeowners". About 70% of UK households own their own home, and because of this most people in the UK want to see house prices going up. Because of this majority the government also wants to see house prices going up. And estate agents, the very people who set the value of this vital asset, definitely want to see prices going up, as they are paid on commission. But rising house prices are not good for everyone.
We have all just seen first-hand the damage that hyper inflation of house prices can cause. When prices rise far faster than wages, first time buyers begin to be priced out of the market, and once that starts to happen a correction is always becoming inevitable. Research has shown that once the average house price costs more than 5 times the average salary a correction becomes inevitable. So, as long as we continue to see periods of rapid house price growth, these periods will always be followed by a period of correction.
The booms are fine. Growing house prices injects massive confidence into the economy and everything is hunky dory. But as we have seen in the recent cycle, this leads to other problems caused by greed, in this case the biggest problem was the crazy borrowing and lending. During the last up-cycle people were able to borrow at the very limit of what they could pay, and not 100% LTV, but even up to 120% LTV. As a result, even the slightest change in circumstances would put them in negative equity, or in severe danger of defaulting on the loan, or both. So it is hardly surprising that the last crash led to millions of repossessions.
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As a nation of aspirational homeowners we get proud neighbourhoods, rising house prices, growing consumer contentment and confidence and growing estate agents, which all contributes to economic growth. But we also get people being priced out of the market, a boom bust cycle, people unable to afford mortgage repayments, people losing their homes and banks almost collapsing.
The banks were hit so hard by the last crash that mortgage lending came to a near standstill; only those who could raise a deposit of at least 10% of the purchase price (better with 20%) and who had an immaculate credit rating have had any chance of getting a mortgage. Things are slightly better now, with a few 95% LTV deals on the market, but still only for those who have immaculate credit. Many first time buyers have been unable to get a mortgage since the crash, mostly because of mortgage constraints, but some because prices never fell far enough and they are still priced out of the market.
They have all been forced to join the rental market. Where they joined the tens of thousands of people who lost their home to repossession, all of whom are on top of the standard rental market, which has always been strong in the UK. So it is little wonder that the rental market is booming in the UK.
But will it become a permanent change? There are other factors that make this more likely. For a start most people have come to believe that long-term employment is a tale from a bygone era, and a person who rents can easily move around to stay in work. At the same time renting is not the chore it once was. You still read the odd horror story in the press, but that is because it makes for a good read, meanwhile the majority of landlords who are running professional rental businesses are far less exciting.
With a changed job market and a new breed of landlords, who’s to say that the recent events forcing people to rent, won’t result in a permanent change in the way we view the roof over our head?