The effect of the credit crunch on the housing market must give many adults over the age of 35 a sense of déjà vu.
After all, they will say, weren’t we here 15 years ago, when Britain’s inability to stay within the European Exchange Rate Mechanism (ERM) was followed by a long period of house price stagnation and falling values, during which time many more thousands of families than usual went into negative equity, often losing their homes as a result?
However, while there may be a few relatively small similarities, it would be a mistake to draw parallels with the wider situation today from that of 1990’s. This is a new ball game, as the following comparisons show.
Origin. The crises of the 1990’s came to Britain from Europe, as a consequence of the then Conservative government’s (ultimately unsuccessful) struggle to keep this country within the ERM.
Today’s situation is an aftershock from the American so-called “sub-prime” market (in reality it should have been called “sub-average”, because so many of the mortgage defaulters were never financially viable home-owner material in the first place). Or, if you want to be precise, the willingness of British banks to get their noses stuck in the same “sub prime” trough without thinking through the consequences.
Interest rates. Just as the causes between the crises of the 1990’s and 2007/8 are different, so are the effects. When John Major threw in the towel and took Britain out of the ERM, interest rates immediately fell back from 15 per cent to 12pc and decreased rapidly in the months afterwards. But the damage had already been done and repossessions soared as people were unable to meet higher mortgage payments or to sell houses that were worth much less than the outstanding debt on them.
Over the past 12 months, largely over fears about higher inflation, interest rates have, on average, risen and even though the last meeting of the Monetary Policy Committee produced a small cut, many lenders have declined to follow suit with their own lending rates. Contrary to the 1990’s, the pointers are for interest rates to rise, not fall.
Money supply. Despite the economic difficulties, lenders in the mid-1990’s still had plenty of money to lend; the problem was a lack of buyers in a position to take up the finance available.
Today, in complete contrast, there is no lack of potential borrowers wishing to obtain a home loan; the shortage is now in the form of restricted mortgage finance.
Lending. The end of the 1990’s crisis was a watershed in mortgage lending policy. After that what remained of the old restrictions on personal lending (some of which, in retrospect, now seem quite sensible) appeared to be swept aside as banks and building societies went all out for targets, a phenomenon that accelerated with the demutualisation of so many well-known institutions.
As a result of the present day credit crunch, lenders have produced a volte face: 125pc mortgages have been withdrawn, 100pc loans are difficult to achieve and penalties for advances with a high loan to value ratio have increased significantly.
Employment. In the early- to mid-1990’s, unemployment was relatively high - the price many people paid for the government squeezing inflation out of the system – and this also had a debilitating effect on confidence in the housing market.
Today, with virtually full employment, even people in good jobs have become apprehensive about buying a new home before securing a buyer for their present one (a process which is necessary to maintain the buoyancy of the market).
Investment. High interest rates and levels of inflation meant that an investor could achieve an annual return of 12 per cent in the early 1990’s.
With low inflation and relatively low interest rate, yields per annum are at present in the region of circa 3 per cent, causing some seasoned private investors in property to look overseas for future opportunities.
Demographics. A decade and a half ago Britain had a more settled population, which on its own eventually returned to buying and selling houses again, following a rise in employment levels and sustained lower inflation.
By contrast, the next housing revival will be fuelled by greater longevity, increased family break up and the need to accommodate mass immigration which, if not checked, has been forecast to add several million to the population by the end of the next decade.
The future. With the benefit of hindsight, we are obviously aware that the housing crisis of the1990’s lasted for three to four years during which time many people suffered. In the end, however, the nation did not lose its zeal for owner-occupation.
Without access to a crystal ball, we have no idea how long the present crunch will last, how many households will become casualties – and where it will all end.
THE SCOTSMAN, 13 June 2008