Winners And Losers

Chris Hamnett

• Publisher: Routledge
• Year: 2005
• eBook ISBN: 9781135366742
• Topic: Politics & International Relations
• Subtopic: Geography
• Index: Geography

First published in 1998. The growth of home ownership since the end of the Second World War marks one of the most fundamental social changes to have taken place in Britain. From being a nation of renters at the end of war, Britain has been converted into a nation of home-owners. In 1945 approximately 25% of households in Britain owned their own homes. Today the proportion is just over two-thirds. In the process, the proportion of households renting from private landlords has fallen from 65% to about 8%. As a result, the home ownership market in Britain plays a far more important role today than hitherto: both in housing the population and as a potential source of capital gains and losses. In addition, the home ownership market plays a significant role in the overall health of the economy. This is not to deny the importance of social and private rented housing or the major problems of homelessness. It is simply to assert that the home ownership market now affects two out of three households in Britain, and many more who wish to gain access to it. This book is about the dramatic booms and busts of the home ownership market in Britain during the last twenty years: and their causes and consequences both for the individuals involved and for the economy as a whole. It argues that the home ownership market in Britain, particularly in southern Britain, where the booms and slumps have been experienced most sharply, has been akin to a casino. There have been big winners, but there have also been big losers. The last thirty years have been a roller coaster ride for owners: exhilarating, but potentially highly dangerous, not least for those who fell off, or were thrown off, in the slump of the early 1990s.

CHAPTER 1

Home Ownership in Britain

Riding the Roller Coaster

The growth of home ownership since the end of the Second World War marks one of the most fundamental social changes to have taken place in Britain. From being a nation of renters at the end of war, Britain has been converted into a nation of home owners. In 1945 approximately 25% of households in Britain owned their own homes. Today the proportion is just over two-thirds. In the process, the proportion of households renting from private landlords has fallen from 65% to about 8%. As a result, the home ownership market in Britain plays a far more important role today than hitherto: both in housing the population and as a potential source of capital gains and losses. In addition, the home ownership market plays a significant role in the overall health of the economy. This is not to deny the importance of social and private rented housing or the major problems of homelessness. It is simply to assert that the home ownership market now affects two out of three households in Britain, and many more who wish to gain access to it.

This book is about the dramatic booms and busts of the home ownership market in Britain during the last twenty years: and their causes and consequences both for the individuals involved and for the economy as a whole. It argues that the home ownership market in Britain, particularly in southern Britain, where the booms and slumps have been experienced most sharply, has been akin to a casino. There have been big winners, but there have also been big losers. The last thirty years have been a roller coaster ride for owners: exhilarating, but potentially highly dangerous, not least for those who fell off, or were thrown off, in the slump of the early 1990s.

The Booms of the 1970s and 1980s

The origins of the modern British housing market can be traced back to the 1960s, when Britain experienced a decade of slow but sustained house price inflation which doubled house prices. This was followed in the early 1970s by the first of three major postwar booms which doubled house prices once again. Then came another boom in the late 1970s, and the long boom in the mid-late 1980s. Not surprisingly, home ownership came to be seen as an insurance against inflation and as a source of capital gains. This experience coloured the attitudes and expectations of a generation of home owners in Britain. From the mid 1960s onwards, if not before, buying a house was considered a sound investment, possibly the best anyone could make. As inflation ticked away, the real value of the debt was progressively reduced, while the value of the asset increased. By the time the mortgage was paid off, owners were sitting on a substantial capital asset. Home ownership functioned as the principal vehicle of domestic capital accumulation for millions of people. From this perspective houses were not simply places to live in or roofs over our heads: they also functioned as important investment vehicles.

As Doling and Ford (1991) noted: “A feature of the housing market in Britain is the enduring belief that home ownership is one of the best, if not the best, investment accessible to ordinary people”. House prices and house price inflation were a common topic of conversation in London and the South East (providing a source of radical embarrassment or smug complacency depending on political outlook). Cartoons by Alex, Heath and others (Figures 1.1 and 1.2) highlighted the mood of the time. For a small minority, playing the housing market through a sequence of upward moves, renovations and resales became, rather like the stock market, a source of both satisfaction and profit. For most people, however, the housing market was something that provided financial benefits in addition to the benefits of residence. There was a fantasy or fairy tale element to it all, rather like medieval alchemists turning base metals into gold. At the height of a boom the value of your house could easily rise by more than the average annual salary.

Figure 1.1 Health cartoon “Great Bores of today…the marker’s gone crazy…”

Source: Private Eye, 663, 1 May, 1987

Figure 1.2 Health cartoon: “Great Bores of Today…we bought this house for…”

Source: private Eye, 643, 8 August, 1986

Not surprisingly, some people treated these gains like fairies’ gold, borrowed against it and spent it. Then, just as in the Grimm fairy tales, the debts were called in. As Pawley (1978) tellingly described it, the home ownership market became

a game of reverse monopoly whereby, instead of using money to buy houses to put on your street, you took money out of the houses…. As house prices rose, so the housing market became a massive source of equity withdrawal for many owners, with huge sums being extracted each year in the form of loans, cash release mortgages, trading down and the like, all funded by the mortgage lenders who were only too keen to lend on the security of a house.

At the peak of the 1980s boom prices in London and the South East spiralled up to what seemed to be (and were) astronomically high levels, and media attention was directed to a handful of sales which were emblematic of the house price mania which gripped London. Two stories in particular captured media attention. The first, in February 1987, concerned the offer of £36,500 made for a converted 11′ by 6′ broom cupboard in a prestige block of apartments, Princes Court, opposite Harrods. The “flat”, which also included a 2′ 6′ square lavatory, washbasin and shower area, as well as fold-up bed (but no cooking facilities), was advertised as an ideal pied-à-terre. This sale roused the ire of Tom Torney, Labour MP for Bradford, who said: “Anyone who is foolish enough to pay that price for the sake of a swanky address is merely inflating still further the ludicrously high prices of property in London. For that money you could get a four-bedroomed house, with all mod cons and a jolly good garden in Bradford” (Independent, 1987).

The second case was in June 1987, when a one-room freehold studio house complete with a tiny kitchen and lavatory but no bathroom, in Wilby Mews, Holland Park, was sold for £58,000 (Times, 2 June 1987). Judging from the pictures it appeared to be a converted garage or single-storey extension. A variety of stories focused on the growing north-south divide in house prices and pointed out that for the price of a very small flat in central London it was possible to buy a country house in northern Britain. Such comparisons are a staple of the early years of a boom when prices have risen sharply in London and the South East but remain depressed in most of peripheral Britain. Such large disparities are a common feature of the British home ownership market in boom times and, given the geographical disparities in prices between the affluent South East and other parts of Britain, they are almost inevitable. It is usually forgotten that they narrow again during downturns when prices continue to rise slowly outside the southern regions.

The 1990s Slump

In the event, the expectations of many owners and buyers in the mid to late 1980s were dashed by the slump in the early 1990s. This started in London and the South East in autumn 1989, when the house price boom burst like a pricked balloon as a result of the rapid rise in interest rates introduced by the then Chancellor of the Exchequer, Nigel Lawson, in a desperate attempt to reduce escalating consumer spending and inflation. There had been slumps before in the British home ownership market, notably from 1974 to 1977 in the aftermath of the early 1970s boom and from 1980 to 1981 in the wake of the late 1970s boom. But, although turnover dropped sharply in both these slumps, prices remained static in money terms even though they fell sharply in real terms. Consequently, relatively few owners were forced to sell at a loss in money terms (even though they may have had a loss in real terms). In the early 1990s slump, however, prices fell sharply in cash terms and many new buyers and some existing owners found themselves with substantial losses. Between 1.5 and 2 million home owners were thought to have negative equity, that is, the value of their house was less than the outstanding mortgage, and over 400,000 homes have been repossessed by lenders during the 1990s when their owners failed to meet their repayments. In London and the South East (where the 1980s boom had been most marked) prices fell by 30% in cash terms and by far more in real terms. This proved a dramatic shock to home owners and lenders alike, accustomed as they were to steady house price inflation.

Prior to 1989, owners’ experience of the home ownership market in Britain had been largely positive. While some leasehold flat owners in London had suffered at the hands of rapacious freeholders or agents (Hamnett and Randolph, 1987) and some council tenants who had bought their flats under the “Right to Buy” provisions had found that they could not sell so easily, for most people home ownership was an insurance against inflation and a source of capital gains. The prolonged housing market slump of the early 1990s radically changed this set of expectations. In London and the South East (where the 1980s boom was greatest), where the fall in prices and the rise in negative equity was much sharper than elsewhere, large numbers of young first-time buyers drawn into the buoyant housing market in the late 1980s had their fingers badly burnt. For this group, the shift in outlook and confidence was dramatic. The home ownership market was not a source of capital gains, but a source of financial losses, and in some cases of debt and repossession. As Forrest and Murie (1994: 55) put it:

The inflationary discourse of trading up, gentrification, gazumping, and equity gain has given way to a new language of negative equity, debt overhang, repossessions and arrears. In the late 1980s an overheated, over-indebted, hypermobile housing market rapidly degenerated towards a gridlock of immobile households adjusting to very different expectations of home ownership.

The losers were those who had bought their house fairly recently at, or near, the peak of the market and who faced a paper loss of some tens of thousands of pounds or even more in some cases. This did not matter too much if you kept your job and income and were able to keep paying the morgage. In such cases, the loss was simply a paper one. The problems occurred where people had lost their jobs, split up or divorced and had to sell their house. Then the loss was converted from paper to a real one with damning consequences. Perhaps the most emblematic case of the 1990s slump concerned a London based interior designer, who borrowed £630,000 from the Town and Country building society to purchase a three-storey terraced house in Hampstead. When his business ran into difficulties after just two payments, he applied to the DHSS for assistance in paying his mortgage and they agreed to meet the interest costs of £7,000 a month. When it emerged that he had defaulted on a previous loan, the payments were stopped and the Town and Country was forced to repossess. The house sold for less than £450,000 and, with accumulated arrears, the Town and Country was left with a £300,000 bill. This was by no means the society’s only problem loan and it was subsequently taken over by the Woolwich with provisional debts of £42 million in a successful bail out operation (Rathbone, 1992).

As the slump dragged on and sales stagnated and prices continued to fall, the focus of media attention shifted: commentators began to ask whether the slump would ever end and whether the home ownership market was sliding into an abyss. As Rachel Kelly (1992:34) wrote in The Times: “No one believes that house prices will boom any more. The bonanza of the 1980s was a one-off. When prices finally start to rise, they will do steadily and in line with inflation. Gone are the days when you could make more money by listening to the experts and waiting for their predictions of house price rises to come true.” And John Eatwell (1992) writing in the Observer commented that:

it looks increasingly likely that the decline in house prices will become self-perpetuating. As prices fall, it is rational for buyers to postpone purchases, while sellers desperately try to sell as quickly as possible. With little new demand coming into the market, the overall price level of the housing stock is held up only by what people believe houses are worth. It only needs every-one to believe that houses are worth 10 per cent less for them actually to be worth 10 per cent less.

Eatwell was right. Houses are worth what someone will pay for them and, in a slump, what people are prepared to pay can fall sharply as expectations fall. But memories are often too short. When a boom is under way it seems inconceivable that it could end, and during the depths of the slump some thought that the market would never recover, that an era had ended and that housing market booms were a thing of the past. Some have longer memories. In a perceptive article, “Nightmare on Acacia Avenue”, written in the depths of the slump, Gail Counsell (1992) noted the sense of fear which permeated the market and identified what she termed the “doomsday scenario” where the house price slide turns into free fall: “As house prices have tumbled across a swathe of southern England, dismay has increasingly turned to panic. Home owners and the housing industry have begun to feel as though they are gazing into a bottomless abyss, and the Government is under pressure to do something to shore up the market.” But, as Counsell pointed out, “There are precedents for what we are seeing, and on the evidence of those precedents there is every reason to assume that the market has a bottom. We are simply not there yet.” Pointing to previous booms and busts, she argued that house prices might not recover until 1994 and that prices, which had fallen by around 6%, would have to slide a further 5–10% to restore equilibrium. She firmly rejected the doomsday scenario: “For prices to fall below three times earnings, there would have to have been either national economic collapse or a radical shift in the desirability of owning property. In the absence of an economic slump comparable with the 1930s—and we are a long way from that —it is difficult to imagine what could provoke such a shift.”

In the event, prices bottomed out in 1993 and continued to bounce along the bottom for another three years, until they slowly began to rise again between the end of 1995 and early 1996. Rather than rushing to sell at the depressed prices, potential sellers, believing that their house was worth £80,000 rather than the £60,000 the market said it was worth, or perhaps unable to take the loss, simply took their houses off the market and sat tight. The home ownership market in Britain is like other asset markets in that it is essentially cyclical with a consistent pattern of boom and busts. Although the 1990s bust was the most spectacular to date, and the most severe in its impact, it did not mean the end of house price inflation. Rob Thomas argued in 1996 for instance that, with house prices low relative to incomes and low mortgage rates, the conditions were in place for another cyclical upswing.

The Recovery

Events have already proved Rachel Kelly wrong and Gail Counsell correct. At the time of writing this chapter, the British home ownership market is climbing out of its deepest recession in fifty years, if not since the 1920s. House prices have ceased falling as they did through the early 1990s, and have begun a steady recovery, rising by 10% in 1997 and almost double this in London and the South East. Indeed, the London-based media have begun to use the term “boom” once more, particularly to describe the housing market in some parts of inner London with easy access to the City, where prices have risen sharply.

There is nothing the British press (and seemingly the public) loves more than a good housing boom, with all the thrills of big capital gains and the anguish of hopes dashed for potential first-time buyers who see prices spiralling out of reach. All the stuff of human life is there, or so it seems. There are winners and losers in the Great British housing lottery and all you need to do to take part is to buy a house and hope for a boom. The press coverage after the doom and gloom of the early 1990s is illuminating: “Housing market in best shape since Eighties” Independent, 1 June 1996; “The housing market takes off again” The Times, 21 June 1996; “Boom, boom, crash—Is this the echo of 87?” Observer, 23 June 1996; “House prices to rocket 10% in ‘mini-boom’” Independent, 1 July 1996; “Lift-off for house prices” Evening Standard, 10 July 1996; “Up but not through the roof”, Observer, 25 August 1996; “Property poised for blast-off” Independent on Sunday, 15 December 1996; “Will house prices hit the roof again?” Independent, 28 December 1996; “Another housing boom?” The Economist, 18 January 1997; “Housing recovery should pick up speed” Independent, 21 February 1997; “House prices soar in London and the shires” The Times, 12 June 1997; “The biggest boom since the Eighties” Independent, 28 August 1997; “Boom is back with a vengeance: As house prices soar in the capital there’s money to be made” Daily Telegraph, 20 September 1997.

The tone behind the headlines varies from the cautious to the near exultant. “Boom, take-off, blast-off, soar, rocket”: the words almost make you feel that we are witnessing a Grand Prix or a blast-off from Cape Kennedy, and almost without exception, the message from the headlines is that a boom in the housing market is what everyone has been waiting for. The text of some of the articles qualifies this enthusiasm, and points to the dangers of another boom, but the enthusiasm is understandable in the context of the slump of the early 1990s and the severe doubts which were expressed as to whether the home ownership market would ever ...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• Acknowledgements
• List of Abbreviations
• 1. Home Ownership in Britain: Riding the Roller Coaster
• 2. From Boom to Slump and Back Again: The Changing Structure of the British Home Ownership Market
• 3. Who Gets to Own? The Changing Social Basis of Home Ownership and its Implications
• 4. Winners and Losers: Housing as an Investment
• 5. Who Gets What? The Distribution of Home Owners’ Equity in Britain
• 6. Housing Inheritance and Equity Extraction from Home Ownership
• 7. Housing Careers and Housing Investment Strategies
• 8. Home Ownership, Housing Wealth and the British Economy
• 9. The Future of the Home Ownership Market in Britain
• References
• Index