The housing boom that's dividing the country

John Wriglesworth unravels the complexities of the property market, which is leaving the young behind

As dinner party conversations go, the price of housing ranks on a par with the latest divorces among friends or which school or university has been chosen for the children. Unlike most conversations, however, the house price debate can be supported by statistics from the latest survey or simply a glance in the local estate agent's window. Yet interpreting them is another matter.

Are rising prices automatically a good thing? There is often an unspoken assumption that they must be. We like the idea that our homes accumulate value over the years without us doing much more than living in them. And yet one person's rising price is somebody else's unaffordable home. Where does the balance, for the nation, lie?

There is no question that right now there is a housing boom in the air. House prices are likely to rise by more than 10 per cent this year, far more than four times the current rate of retail price inflation. Both Nationwide and Halifax have been reporting house price rises that are significantly higher than inflation. Nationwide has reported a 7 per cent rise in house prices over the past 12 months, while Halifax is claiming an 8 per cent rise.

The regional picture shows that price increases are by no means uniform. Prices in London have risen by a substantial 12 per cent over the past 12 months, while most other regions have seen increases of less than 6 per cent. There is little doubt though that the upward pressure on London prices is likely to ripple out to the rest of the South East, as househunters seek to find more affordable properties outside the metropolitan areas. There are already signs of this in the South East. It is only a matter of time, as the wider economy rebalances itself, before prices will rise throughout the rest of the country. One forecast predicts a national rise of 8 per cent for this year, up from 4.5 per cent just four months ago.

So, are we heading for another housing boom such as we suffered in the 1980s? And will there be another housing bust as we saw in the early 1990s? There is plenty of evidence to suggest that we are heading for another period of rapid price-rises, but thankfully not on anywhere near the scale of the 1980s.

First, with the Bank of England having cut base rates by 2.5 percentage points over the past 10 months, we have mortgage rates which are currently at their lowest level since 1965. With the medium- term prospects for interest rates remaining relatively stable, it should be possible for the averagely well-off to buy homes of their own: the Nationwide calculates that the proportion of income currently needed to finance a house purchase is 15 per cent, compared with 25 per cent at the height of the 1980s boom. In real terms house prices are still 7 per cent below their long-term trend and about 20 per cent below their 1989 peak. A second positive factor is the general health of the economy, and in particular, the lowest unemployment rate since 1980, which is helping boost consumer confidence.

We seem to have all the ingredients for another strong house price boom. Notwithstanding this, both Halifax and Nationwide are keen to play down the prospects. This is, perhaps, not surprising as they do not want the Government to put the brakes on a growing housing market which supports the growth in their own businesses.

Two reasons are offered as to why there will not be another boom. The first is that the low general inflationary rate makes buying a house less attractive as an investment. Surely this is a nonsense. If house price inflation was low then I would agree. But if prices are rising more than four times faster than the general rate of inflation, house purchase is an exceedingly attractive investment.

The second argument is that the UK's ageing population will limit house price rises as the number of young first-time buyers continues to decline. In addition, young people are increasingly indebted by the expansion of university places and student loans. This will reinforce the trend already apparent in first-time buyers who appear to be waiting longer before entering the housing market: their typical age has increased by three years to 27 since the peak of the 1980s boom.

This argument has some merit but it looks at only one part of the overall demographic picture. The 1960s baby boomers are indeed no longer first- time buyers and the number of twenty-somethings are in decline, but the baby boomers are now becoming forty-somethings and are demanding bigger, family-size accommodation. It is this part of the housing market in which prices are rising the fastest and where there is an acute shortage of suitable properties. Houses at the bottom end of the market continue to be sold to investors who then rent them out to those who cannot afford to join the merry-go-round of house buying. This has helped spur the growth of "buy-to-let" mortgages. The largest supplier, Paragon, has reported a 47 per cent annual increase in its advances.

The housing market is, therefore, supported by the 1960s baby boomers fuelling excess demand in the middle market while investor landlords underpin the bottom end. The likely outcome is double-digit house price inflation for at least the next two years and probably longer than that, unless the Government steps in to stop it.

Will there then be a bust? Probably not. House price inflation will undoubtedly slow down and prices may well fall again but not as they did in the early 1990s. This damaging housing bust was precipitated by a major rise in interest rates in 1998, which does not look at all likely in the foreseeable future. Cycles in the housing market will undoubtedly continue as a normal aspect of economic life. Unless they rise uncontrollably as they did in the late 1980s/early 1990s, the Government should refrain from interfering and let the market run its course. The record of state intrusion in the housing market has never been successful, and any interference is likely to be harmful rather than beneficial.

The present rises make it difficult for young people moving to London for the dream job. They often find the nightmare is around the corner when they cannot afford anywhere to live. Rented accommodation is often the answer, but given the English desire to own your own castle, this does not always appear the attractive option. Renting, however, is often the answer and certainly leads to a more mobile workforce.

But if you do have the money, the question remains: is now a good time to buy a house? If you want to buy a house to live in, to enjoy its amenities, then yes. If you plan to stay for a while then you will be able to live with the inevitable ups and downs of the market. Over time, houses will maintain their intrinsic value as they have for the past 50 years.

What you should not do is to panic and buy a house you cannot really afford simply to get on to the ladder. The people who did that in the 1980s and 1990s were the ones who suffered negative equity. Investment in housing is best left to those who can bide their time and weather the losses. A good rule of thumb is that houses are for nesting, not for investing.

John Wriglesworth runs his own communications consultancy, and was senior director of the Bradford & Bingley building society.