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    Crash Course

    20 September 2014

    The question came to me the other week when I read about a youngish graduate in London living in a space — I won’t call it a room, still less a flat — in which it is not possible to stand up. Is there anything which could possibly make London house prices fall? When I first came to London in the late 1980s, when the property market was in a similarly mad bout of inflation, we used to laugh at flats carved out of old broom cupboards. But never once do I remember anyone trying to market a strange hole hidden beneath a staircase as a habitable space. Even the priests in the 16th-century war between Catholics and Protestants had better places to hide.

    We have just been through the worst economic crisis since the 1930s. The stock market is struggling to get back to where it was in 1999, and yet London house prices are up 32 per cent on what they were before the crisis struck in 2007. Even outside London, where estate agents and developers still bleat that business could be better, prices have now quietly climbed back to the level they were that summer.

    True, asking prices in London seemed to stall in August and there are the first few jitters of people asking whether we are on course for a housing crash. Yet it has taken incredibly long to get to that stage. Last time around, the first predictions of doom began around 1998 — nine years before the market eventually peaked.

    It is easy to come up with reasons why the property inflation seems to be so stubborn: we are not building enough homes, foreign investors have fixed on London as a safe haven for their money, interest rates are still at record lows and so on. But really there is something more fundamental than any of these explanations. Prices are rising because few now believe that the government would ever allow them to fall.

    The main damage was done in the spring of 2009. At that point we appeared to be in the midst of the mother of all property crashes. Prices were down year on year by 10 per cent in London and 12 per cent across the UK as a whole. It seemed to be the inevitable comeuppance which so many had spent so many years warning about: an unsustainable boom had finally run out of buyers. Yet then something happened which not even the gloomiest Cassandra had foreseen. Government and the Bank of England, which had repeatedly taken a laissez-faire attitude towards house prices when they were on the way up, suddenly decided to intervene. Interest rates were cut to 0.5 per cent, the lowest in 300 years, and the bank started printing money — or ‘quantitative easing’, to use the more polite term favoured in Threadneedle Street.

    No one should fool themselves that these measures were about making life easier for business. They were about the housing market, pure and simple. Had prices been allowed to fall further, then the banks would have found themselves in an impossible situation, with the value of the properties on which they had advanced mortgage loans dwarfed by the loans themselves. Bailing out the housing market was the final act of bailing out the banks. But then George Osborne compounded Brown and Darling’s intervention with his Help to Buy scheme, announced in April last year. Although the Chancellor protests that his scheme — which offers taxpayer-underwritten loans to homebuyers — only accounts for a small proportion of the housing market, he misses the point. In taking this drastic action, government and the Bank of England have created the expectation that they will always bail out the housing market. The Chancellor’s attitude to the housing market will always be laissez-faire on the way up and interventionist on the way down. And when that idea gets into the minds of investors they begin to believe that housing is a one-way bet. No one wants to sell their stake in the property market, no one wants to miss out on further rises. Buyers cease to worry about interest rates going up — as they must eventually do — because they reckon that at the first sign of a falling housing market they will be rapidly slashed again.

    I have a fun game I like to play: picking out the crummiest, most overpriced hovel for sale in London. A 17-year lease on a 300 sq ft studio in Marylebone, full modernisation required, for £250,000? A £335,000, 15 ft by 8 ft room in Fitzrovia where you can’t stand up because there is a bunk bed which reduces the height of the room to four feet? I would love to say to frustrated young house-hunters, ‘Don’t worry, after the crash you will be able to buy yourself something decent.’ But even I, as big a bear as they come in the housing market, have lost confidence that we will ever see a proper crash.

    Or maybe, to take the lesson of the Wall Street crash, which was said to have occurred when the last bear turned into a bull, that is itself the sign that it is all about to come tumbling down.