An Englishman’s Home

15/07/2010 at 4:25 pm 1 comment

How many times have you heard somebody say, “you can’t go wrong with bricks and mortar”? Or: “My property investments are my pension”? Or: “I understand property but I don’t understand stocks and shares”?

Britain’s love affair with residential property as an asset class is well known, long standing and seemingly indissoluble. But could it also, at the moment, be badly advised?

This week saw the publication of the Bank of England’s quarterly data on housing equity withdrawal – as the Bank describes it, “new borrowing secured on dwellings that is not invested in the housing market (e.g. not used for house purchase or home improvements).”

This indicator has been in negative territory for some time, which is to say that for the last couple of years Britain has on average been repaying its mortgages to a greater extent than it has been remortgaging to pay for – well, anything really, from long term care to long haul holidays. Adjusting for inflation, over £45bn has been repaid in today’s money since the series went below zero in Q2 2008 – much smaller than the inflation-adjusted £99bn that was borrowed / “withdrawn” in the two previous years, sure, but hardly small potatoes.

What does it mean?

Well, in the aftermath of the ERM debacle of the early 1990s, house prices began to rise again much before mortgage equity withdrawal (as it was then known) returned to positive territory: mid-96 on the basis of the Nationwide house price index vs. mid-98. Property bulls might take some comfort from this.

But when you consider that mortgage approvals have yet to recover to anything like their pre-recessionary level; that this reflects the continued tightness of credit conditions for mortgage borrowers relative to that time; and that house prices have already showed signs of cooling this year even in the absence of the kind of rise in unemployment that typically catalyses a price fall through increased forced selling – then you might think twice before downloading the brochure for that little one bed place in the new development by the railway station.

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  • […] at all bad right now (especially when glancing across at the bond market). But commerical property, like its residential counterpart, is in a relatively fragile […]

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