The Daily Telegraph - Saturday, 11 August 2001 Property - LONDON LIVING - Page 6

Pyramid that is built on sand

How will the predicted house-price 'correction' hit Londoners?
Ross Clark sounds a grim warning

the growing disparity between house prices and salaries

If you are a successful woman living in London, you will almost certainly have been asked by now to join a pyramid-selling scheme that claims to be backed by a host of celebrities and promises to make you a profit of thousands of pounds within a matter of weeks.

It is called the London housing market, and it has very close resemblance to Women Empowering Women, another pyramid-selling scheme which has been doing the rounds in recent weeks. What happens is this: your friends persuade you to shell out thousands for a stake in a non-productive asset. As other wide-eyed hopefuls join the scheme, you, hopefully, move up the pyramid. If you join early enough, you become immensely rich. If not, you may be in trouble: ultimately, the supply of gullible individuals is bound to dry up, leaving late entrants nursing big losses.

While worries about the housing market multiply by the week, it is Londoners who have the most reason for concern. Prices for prime property in central London have trebled in the past nine years. Over London as a whole, the average property price is now 9 per cent higher in real terms - that is, adjusted for inflation - than it was at the peak of the last property boom in the second quarter of 1989.

Prices have reached the stage at which a small, one-bedroom flat in Clerkenwell last week was on the market for 215,000: more than the average British employee will earn in a decade. Yet, as always, it pays to be wary of buying into yesterday's success story. While London property prices have soared by 7 per cent in the past three months, according to the Halifax, it is unclear quite how such rises can be sustained.

Like a pyramid scheme, the housing market relies on the constant recruitment of first-time buyers. Without anyone to buy the one-bedroom flats at the bottom of the heap, the sales of bigger flats and houses will eventually be put in jeopardy, too. And there are signs that first-time buyers are becoming priced out of the market. The ratio of house prices to earnings in London now stands at more than six to one: a level only ever exceeded briefly in the 1980s housing boom. Certainly, low interest rates have made it possible for earners to take on bigger mortgages than they have been able to historically - as the building societies are only too keen to point out - but in the long run capital still has to be paid off.

Couples who stretch themselves to the limit to buy a one-bedroom flat for 200,000 will find the debt a millstone for years to come; unlike in their parents' day, they will not be relieved of their debt by inflation.

According to FPDSavills, the average first-time buyer in London is now paying 40 per cent of their net income on their mortgage repayments. It is little comfort that the corresponding figure for 1990 was 60 per cent; then, interest rates were 15 per cent. Anyone spending 40 per cent of their income on mortgage repayments when, as now, interest rates are at a 40-year low, is living on a precipice: a relatively modest reversal in the Bank of England's strategy - say, a 2 per cent rise in base rates to 7 per cent - will leave them in an impossible situation.

The distress of first-time buyers has been apparent for some time. An entire generation has now been priced off the housing ladder in London: the average age of a first time buyer now is 33; in the late 1980s, it was in the low twenties. Savills calculate that 55 per cent of London households would simply be unable to afford to afford the meanest 75,000 flat if they were looking to buy a home at the moment.

There is some comfort for those who have recently invested in property in London: underlying the surge in property prices is a fundamental shortage of housing. Last year, fewer houses were built than in any peacetime year since 1924. While population growth may be low, the fragmentation of the family and the desire for more living space has kept demand for housing high.

Moreover, the increased mobility of labour and a booming south-eastern economy has led to a drift southwards. Whether shortages are enough to explain the levels to which excited house-buyers have pushed prices in recent years is another matter.

The trouble is that London property prices have reached such a level that there can be no happy ending. Should the market crash, it will bring about the misery of repossession for thousands of homeowners and destroy the investments of many more. Should prices fail to crash, it will cause misery for others priced out of the chance to find a decent home, and disaster for Londoners, in general, who will run out of nurses, teachers and affordable plumbers if they don't have the means to live in the capital.

Either way, as they say in the movies, someone out there's gonna get hurt.

Recommended reading for the Homebuyer, by Ross Clark

The Telephone House Neighbours Association, Tunbridge Wells
The aims are to heighten peoples' awareness and concern for the development on Telephone House site, Church Road / York Road, Tunbridge Wells, Kent.