Personal Finance: It's murder out there

House prices are going crazy. Why? How long will the boom last? And how do we cope?

Playing the property market is back in fashion in Britain as house prices head off into hyperspace. You know you are winning, when your home earns more for you each year than you do. The question is: what will happen when the music stops?

Playing the property market is back in fashion in Britain as house prices head off into hyperspace. You know you are winning, when your home earns more for you each year than you do. The question is: what will happen when the music stops?

Tales of the zeitgeist are legion; house-hunters camped for eight days outside an agent's office to buy ex-naval married quarters at Crownhill. Contracts were exchanged on all 84 houses within three hours.

A similar race took place at Gosport, in Hampshire, where 150 purchasers queued for the privilege of snapping up 152 homes the minute they came on to the market. And at Euston Road's Lizman's House, in central London, 18 of 20 contracts were exchanged within an hour of the launch. The deal on the other two was struck moments later.

House price inflation is booming, as figures published this week by both the Halifax and Nationwide confirmed. In central London, where values have more than doubled since the last recession, family houses now start at more than £1m.

Old-fashioned estate agency wars have erupted in parts of the South-East where a chronic shortage of property has made any house coming on to the market gold dust. Agents have been accused of not passing on offers fairly, selling properties they are not instructed to sell and deliberately scuppering each others' chains. The Halifax has been fined £6,000 following the unprofessional conduct of one of its agents.

But the fun could be about to turn sour. Both the Halifax and Nationwide reported that house prices are now more than 9 per cent higher than a year ago across the country as a whole, including areas that remain deeply depressed.

This is perilously close to the 10 per cent threshold that experts agree will prove a watershed for the Bank of England. At this point it can no longer ignore the froth building up in the property market and will be forced to raise interest rates. The lesson of history teaches that once the market gets up a head of steam, people feel richer and start borrowing against their winnings. Before long, the whole economy is spinning out of control.

The real fear is a rerun of the disaster of the late 1980s. After doubling in five years, prices started to fall sharply, particularly in London, where they slumped by a quarter. In the early 1990s around 1,000 families a week lost their homes through mortgage debt and more than a million were trapped by negative equity.

That cycle of boom and bust was triggered by a very specific set of circumstances, not least the Government's bungled withdrawal of joint tax relief, a booming economy, a cut-throat mortgage price war, an abundance of equity release schemes and historically low interest rates.

By contrast, today we have a cut-throat mortgage price war, low interest rates, flexible and current account mortgages and low unemployment - but also (and this is the major difference) a superbly managed withdrawal of mortgage interest tax relief (Miras), which will be completed next April.

But, ironically, some commentators believe that it is this final extinction of Miras, which in its own way has been holding back the market, that could store up trouble for the future. Its demise removes from the Government the only other method than interest rates of controlling spiralling prices.

Price rises have not been uniform during this boom. They are still falling by 10 per cent in parts of Wales and the North-West. Even in London there are as many black as hot spots. Prices in Barking and Dagenham for example grew by only 1.92 per cent in the last quarter. Higher interest rates could prove a severe set back to many areas still struggling to shake off the recession.

In central London, where prices have entered the realms of fantasy, nearly half of all properties are bought not by ordinary families, but by foreign investors. Yet to put a brake on this activity, higher mortgage bills may be forced on all home-owners - even those whose homes are still plummeting in value.

As an alternative, the Joseph Rowntree Foundation, a left-wing think tank , this week suggested that some form of capital gains tax, as is imposed on most home-owners in Europe, might be a better deterrent against excessive profits in particular regions. However, it is hard to see any UK government introducing such a measure and surviving.

More likely, the market will cool of its own accord following Bank of England interest rate hikes before Christmas and again next year. The spectacular crash of the 1980s is unlikely to be repeated, unless stock markets go into freefall and there is a bloodbath in the City of London.

But the risks of a more serious downturn increase all the time inflation roars unchecked and affordability becomes stretched. House prices in Germany have been falling for seven years now after just such a boom, simply because people cannot afford to buy.

Stifan Mitropoulos, a Deutsche Morgan Grenfell analyst in Frankfurt explains: "We have plenty of supply but no demand. There is a problem, particularly in the East with empty houses. We had a construction boom to provide good quality housing to meet the country's needs. But people just didn't earn enough to buy them." How much more can prices rise before that sentiment is echoed in Britain?

How To Clinch The Deal And Beat Rival Buyers

l Badger estate agents remorselessly. Houses change hands as soon as the vendor calls an agent in many hotspots. He passes details on to his most pressing buyers. Make sure you are on these priority lists.

Be prepared to move quickly. Agents are likely to put up obstacles at the slightest whiff of a higher offer.

Don't raise tiny obstacles and nitpick over minor faults. There will be other buyers in the wings and you'll be ditched.

Be resigned to paying much more than you really want to for a house if you want to be the preferred buyer.

Avoid sealed bids where possible. Prices are going through the roof.

Consider chain-braking finance to keep a purchase moving.

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: DBA Developer - SQL Server

    £30000 - £35000 per annum: Recruitment Genius: This is an exciting opportunity...

    Recruitment Genius: Customer Service Administrator

    £13000 - £15000 per annum: Recruitment Genius: Are you passionate about custom...

    Recruitment Genius: Dialler Administrator

    £22000 - £25000 per annum: Recruitment Genius: Main purpose: Under the directi...

    Ashdown Group: Contracts Manager - City of London

    £35000 - £37000 per annum + benefits : Ashdown Group: Contracts Manager - City...

    Day In a Page

    Blairites be warned, this could be the moment Labour turns into Syriza

    Andrew Grice: Inside Westminster

    Blairites be warned, this could be the moment Labour turns into Syriza
    HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

    The mystery of Britain's worst naval disaster is finally solved - 271 years later

    Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
    Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

    'I saw people so injured you couldn't tell if they were dead or alive'

    Nagasaki survivors on why Japan must not abandon its post-war pacifism
    Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

    The voter Obama tried hardest to keep onside

    Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen
    RuPaul interview: The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head

    RuPaul interview

    The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head
    Secrets of comedy couples: What's it like when both you and your partner are stand-ups?

    Secrets of comedy couples

    What's it like when both you and your partner are stand-ups?
    Satya Nadella: As Windows 10 is launched can he return Microsoft to its former glory?

    Satya Nadella: The man to clean up for Windows?

    While Microsoft's founders spend their billions, the once-invincible tech company's new boss is trying to save it
    The best swimwear for men: From trunks to shorts, make a splash this summer

    The best swimwear for men

    From trunks to shorts, make a splash this summer
    Mark Hix recipes: Our chef tries his hand at a spot of summer foraging

    Mark Hix goes summer foraging

     A dinner party doesn't have to mean a trip to the supermarket
    Ashes 2015: With an audacious flourish, home hero Ian Bell ends all debate

    With an audacious flourish, the home hero ends all debate

    Ian Bell advances to Trent Bridge next week almost as undroppable as Alastair Cook and Joe Root, a cornerstone of England's new thinking, says Kevin Garside
    Aaron Ramsey interview: Wales midfielder determined to be centre of attention for Arsenal this season

    Aaron Ramsey interview

    Wales midfielder determined to be centre of attention for Arsenal this season
    Community Shield: Arsene Wenger needs to strike first blow in rivalry with Jose Mourinho

    Community Shield gives Wenger chance to strike first blow in rivalry with Mourinho

    As long as the Arsenal manager's run of games without a win over his Chelsea counterpart continues it will continue to dominate the narrative around the two men
    The unlikely rise of AFC Bournemouth - and what it says about English life

    Unlikely rise of AFC Bournemouth

    Bournemouth’s elevation to football’s top tier is one of the most improbable of recent times. But it’s illustrative of deeper and wider changes in English life
    A Very British Coup, part two: New novel in pipeline as Jeremy Corbyn's rise inspires sequel

    A Very British Coup, part two

    New novel in pipeline as Jeremy Corbyn's rise inspires sequel
    Philae lander data show comets could have brought 'building blocks of life' to Earth

    Philae lander data show comets could have brought 'building blocks of life' to Earth

    Icy dust layer holds organic compounds similar to those found in living organisms