The thread title says it all really.
London house prices are rising at 26% a year, and the average price is presently £400,000. Which means that if the current trend continues, house prices will double every 3 years. In a decades time, the average London house will be 3.2 million squidilees. This has to crash, doesn't it? This is insane.
It is insane. I don't have a particularly complex or nuanced view of the housing market, but my simple model seems to work so far.
If enough people can afford houses at, say, a certain price, to create competition, given the limited supply of houses, the price will rise as the buyers effectively outbid each other. The limit of their bidding is the availability of funds - size of deposit, income and multiple available, basically. So as the bidding goes up, the buyers thin out, as people can't afford it any more, and you reach equilibrium at a higher level.
That, basically goes on all the time the money is available. Which, until recently, seems to have been the case. But if the Bank's suggestions about controlling mortgage lending is implemented, that will (possibly quite sharply) restrict the supply of buyer, which will have a dampening effect on the prices; or interest rates may begin to rise, which will create an additional problem - while new mortgages will have to be restricted (because at 3% more interest, you have to borrow a lot less to be able to make the same monthly payments), you will have the additional problem that people who have taken out high-multiple mortgages are finding themselves unable to make the payments. Hence repossessions. Banks had to get quite careful in the last lot (1991 or so), because they realised that if they unloaded too much repo property onto the market at discount prices, they were having a bad effect on the values of other properties they might well have mortgages secured against, but if they spot a market about to topple, they may want to repossess and sell out while they can get a reasonable chunk of their loan value back, ie quickly.
You can see why the Government has been so desperate to prop up the property market - I think it is a major, if not
the major driver in our economy at the moment, and I can only guess at what the effect on the overall economy would be of a housing crash. And property is one of those strange things where, although at the outer end, the market is subject to the usual forces, the whole thing seems to run on a kind of perception that there's never a better place to put your money than property (mainly true, especially while supply is so restricted, but not a cast-iron guarantee).
But it's not hypothetical - when you've got interest rates at very low levels, and somewhat likely to rise, and borrowing at multiples of 10x salary, it doesn't take an awful lot to destabilise the situation. And what we get is not a "crash", but a "correction", as house prices return, at significant cost to many, to levels more appropriate to the prevailing circumstances.
It is going to happen. What will finally make it happen is probably not easy to predict. I think it'll be a shock of some sort. But when the shock happens, and the curve starts to tip the other way, I've got a feeling we're going to see something that makes the early 90's (I think the correction there was -40% or something) look like a walk in the park.
