HOW SAFE ARE OUR HOUSES?

Christopher Fildes examines the effect of the property boom and asks when it will burst. The Spectator Poll

discovers the priorities of successful home-owners

SQUEAKY and persistent, the girl from the agents told me that the market was moving fast, houses were being snapped up, and to get this one I would need to bid the asking price or more, right away. Um, I said. Could she explain why an otherwise empty house, done up for sale, should contain a large refrigerator crammed to the roof with champagne? 'Oh, that's for next Tuesday, when we have the party, to launch the house to all the other agents.'

They at least are enjoying the boom. Their commission income rises smoothly, as house prices rise, and their costs are left trailing behind. Their own businesses are in demand, from banks and insurance companies, which see them as shops for selling house-buyers the mortgages and insurance they need. The Prudential has its cheque book out. Hambros has spent £100 million to buy control of the Mann and Bairstow Eves chain, which with more than 300 branches is the biggest. The market is moving fast, agencies are being snapped up, you need to bid the asking price, which could well be any number of times the asset value, or 20 years' earnings.

On the house boom goes. This month's figures from the Halifax, our biggest build- ing society, show that its index of house prices rose in the year to 31 October by 13.6 per cent. There are signs of a pause here and there. The index is not going up as fast as it was in the summer, and some prices in the North are falling. London prices, though, continue to rise, as they have for the last five months, at an annual rate of 25 per cent. The Halifax forecasts that next year its index will show another double-figure increase.

How long can it last? Ought it to last? What happens if it stops? The building societies have a marker for this. They see house prices as being governed by the amounts that people are able to pay out on their mortgages. They therefore measure house prices as a multiple of net disposable incomes. Prices are now rising twice as fast as incomes. Even so, they have not yet taken the multiple much above its average over the past 30 years. By that standard, therefore, the boom has life in it yet, and the lenders and agents need not start worrying. House prices, say Lloyds Bank's economists (Lloyds is itself a big lender and agent, through the Black Horse net- work), are not abnormally high.

Less simple standards give more wor- rying answers. Ratios which held good in quieter times may now give false signals. The market, as so oftens happens when markets expand at high speed, has found its quality diluted. The evidence for that is the rate at which building societies are repossessing houses from defaulting bor- rowers. The numbers doubled last year, and continue to increase. The inference is that the new borrowers are less careful with their credit than the old, or that their incomes are less dependable.

Never have borrowers had money thrust at them as it is now. How short a time separates us from the age of the mortgage queue, of would-be borrowers waiting their turn to ingratiate themselves with the building society managers, and be vetted! How shocking it was, then, to see Barclays positively promoting their home loans: `We have plenty of money to lend.' Now, alongside the building societies and the big banks and the life assurance companies, come the smaller banks and the merchant banks and the American banks and even the Japanese banks. This onrush of lend- ers, all fighting for custom and a share of the market, can only be expanding that market in cash terms — that is, driving prices up.

The natural consequence of this new co'mpetition has been to cut the lenders' margins. Their depositors, rather than the borrowers, have felt most of the benefit, but societies have been shamed out of the levy they used to charge on their bigger (and thus already more profitable) mort- gages. That, too, must have come through to prices.

Barclays, which still has a sufficiency of money to lend, has for a while now been worrying in public about the way other people are lending it If margins are squeezed, Barclays can live with that, and match others' rates for as long as it need. Competition, though, is as much on terms as on price. To get into the market, new lenders are lending for longer periods, and lending a higher proportion of the value, and lending a higher multiple of the borrower's income, and asking fewer choosy questions about the chances of that income being sustained. In London, cer- tainly, there is evidence of lending against inflated values, with minimal checks, and below the cost of wholesale money in the City's market.

Easy lending and soaring prices in Lon- don both have to do with the Big Bang and its preceding explosion in salaries. After the new high-earner has bought his new macho car, he needs a house to match. He may well be able to borrow from his employer on concessionary terms, as part of his package. He has friends in the companies now piling into the mortgage business, and particularly in the specialists who are aiming for the top of the market. Good luck to him. The consensus view is that he may need it, that the new salariat is paid by results which some, in more competitive times, will not produce, and that macho cars may find their way back to the showrooms. Where do the houses go back to?

In any other market but the house market, it would be accepted that a correc- tion was somewhere ahead. Credit condi- tions in general will not always be so easy as they are now, when the Treasury and the Bank of England have abandoned the indicator on which they relied — and which now shows a runaway growth in the money supply. In particular, the profitability of mortgage lending will decline. Roger Ack- man of brokers Quilter Goodison fore- casts: 'Intensifying competition will be a feature of mortgage markets for the fore- seeable future.' Neither the building societies nor the big banks can afford to back down: 'Most of the other new en- trants see mortgages either as a convenient way to build a UK personal customer base, or as a source of quick profits. We are extremely dubious about their prospects of success in either case.' The big winners in the mortgage market, he says, may number no more than half a dozen. Others, no doubt, will retreat from the market almost as quickly as they have advanced on it.

The house market, though, is conven- tionally supposed to be different from other markets, in that it does not go down. That miraculous quality has, in fact, been attributed to other markets over the last 15 years — commercial property, oil, and farmland, for three. None has retained it. House prices have not fallen, for a period of more than three months at a time, for a quarter of a century. Are they different?

They have had intimations of mortality. One such followed the boom of the early 1970s, when the money supply ran away upwards, and so did house prices — rising by 34 per cent and 36 per cent in the years 1972 and 1973. The crack was abrupt. At one moment a house-owner had happily arranged to sell his house at a large profit and buy another, more expensive. The purchase went through, the sale fell through, and the luckless owner found himself owning two houses, almost entirely financed with borrowed money, in a buyer's market. His next address was Carey Street. Most owners were luckier.

They sat tight, and within a few years saw the hyper-inflation of the 1970s reduce the real burden of their debt. It would be rash to assume that in the changed conditions of the 1980s, hyper-inflation will come to the borrowers' rescue a second time.

The Treasury, too, relied on inflation, as offering the best chance of reducing the amount of revenue forgone in mortgage tax relief. Fix a limit on the size of the loan which qualifies for tax relief on the in- terest. Take care not to index that limit, but leave it alone — at £25,000 for years, and now at £30,000. You know (murmured the mandarins, as they strolled down those endless corridors of magenta linoleum), if we got a really profligate Chancellor and a financial debauch, mortgage relief could become as little trouble as the tax-free luncheon voucher.

It has not worked out like that, because any sensible person who needs to borrow at all will now arrange to borrow his first £30,000 in the form of a mortgage loan. He can simply rearrange his finances the next time he moves house. He can take out a house-improvement loan, which qualifies for relief — and who can say that his house needs no improvement? He might even give his bank or building society a slightly adjusted version of where the money will go. The Bank of England tries to guess how much tax-relieved lending is leaking out like this, for the Bank knows, best of all, that money flows downhill.

The leaks make it harder to maintain that these loans are for a uniquely virtuous purpose, and therefore deserve unique relief from tax. The assumption is itself in question. All parties now agree that home ownership is a virtue, though some owners may be accounted more virtuous than others. Is that virtue unique? To a privatis- ing government, to a prime minister who says that she wants to see every earner an owner, is not the ownership of productive investment virtuous too? A wise banker, Deryk Vander Weyer (now on the Court of the Bank of England) asked long ago: `Building societies? Why must it always be building? Do you think we could start an industry society?' His idea's time may have come.

The threat to the special tax treatment of home loans is not that it will be taken away, but that it will become less special. Its value falls every time tax rates come down. It falls whenever a government seeks to foster some other purpose. Plain- tive were the cries of the building societies when their depositors took out their money, on an unprecedented scale, to buy shares in the Trustee Savings Banks: this, said the societies, may mean rationing, either by price or by queue. Heaven knows what they will say to a rush for British Gas. Even that may Ile only the beginning. The Government is now counting on privatisa- tion issues to raise £5,000 million a year for the next three years, and will scarcely want the odds of the tax system stacked against it.

A surveyor's report on the house market now would give it full marks for paint and polish — it has, after all, been done up for sale — but warn that the foundations show signs of subsidence. It may, as such houses can do, simply settle down comfortably, a little out of shape. At the other extreme, subsidence here may set off strain there and produce a sequence of stresses to bring the whole building down.

Deteriorating quality, thinning margins, a rise in bad debts and repossessions, extended commitments taking their toll, London prices coming back into propor- tion with the rest of the country, new lenders learning their lesson and pulling out, a mortgage famine to follow the mortgage glut, credit in general less lax, and a shift in public policy to reward other kinds of investment and ownership — if all these came in succession, they would crack the market, and could bring on a major financial and social crisis. The boom and bust in commercial property lending, 15 years ago, would have been repeated, item by item, in house property. Nothing col- lapses like a market which was thought to be shockproof.

A change less apocalyptic and more gradual still seems more likely. It would give time to shift resources towards parts of the economy which, unlike housing, had something to do with Britain's capacity to pay its way in the world. It would let a market develop between the two fixed poles of public rented housing and private owner-occupied housing — fixtures which still do so much to keep people and jobs apart.

Bad news, though, for squeaky girls and smooth young men. They will have to go without their champagne. The house party will be over.