How long does it take for financial habits to change? We are about to find out.
Until the crash of 2008, the view that buying a home was a good financial decision was firmly lodged in the wallets of all Britons. It was only briefly dented by previous crashes because even with stationary house prices in the mid 1970s, high inflation meant that a big mortgage made you packets of money because your earnings rose in line with inflation. And even if you bought at the top in 1988, you still ended up ahead less than a decade later.
But all this depended on dodgy accounting. House price indices are phoney because they take no account of maintenance costs, and when buyers are choosy you have to spend a lot to get your house in good enough nick to sell. The endowment effect, familiarity, confirmation and mental accounting are all too obvious in the positive view of property by committed owners.
Today, people increasingly do the maths. Is it cheaper to rent than buy? To the cost of mortgage interest, add maintenance and buildings insurance costs in order to compare with rents. And in my view, add a risk premium. Only if the sums show a big gap in favour of buying does it make sense for people in work to buy. That qualification is because of the other cost people do not account for, stamp duty and the other costs of a move – often 3 to 4 per cent of the price and equivalent to about six months’ rent.
I think we are on the way to a more continental approach to housing, in which people rent while they work in cities and buy when they retire or move to the countryside. As yet, we have not got the right type of city centre housing with communal facilities (laundry, heating, waste disposal) that smart continentals have.
Lots of those 2004-06 flat blocks just do not cut it in terms of efficiency and ambience.
What we really need is to allow people to build their own homes more easily. French and Italian villages have plenty of new houses but because they are individually built in the same style as existing homes, they look fine. What we all hate is identikit neo-Georgian legolikes dumped in random fashion on existing villages.
I like the Irish countryside, dotted as it is with white bungalows in small plots, much better than the chocolate-box pretence of England, where “protection of the countryside” justifies the continuing concentration of land ownership by a tiny minority of the population and denies millions of people the chance to live outside cities while ensuring the genocide of proper English pubs.
Without first-time buyers, the property market stalls. That is where we are now. And I do not see it picking up in a hurry. Sluggish economic growth, even more sluggish earnings growth, student debt, uncertainty – all point to a moribund market for several more years, except in Planet London where foreigners call the tune.
Starting with Adam Smith, economists have agreed that rising house prices do nothing to make a nation wealthier. So the end of our love affair with property should be a good thing, and would be if only we could stage a jubilee to write off the mortgage debt (Leviticus 25).
Chris Gilchrist is the joint author of The Process of Financial Planning and editor of The IRS Report