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Could Record House Prices Lead to Record Debts?

leading Scottish agency has warned that record house prices could lead to a housing bust if lending gets out of control. DJ Alexander Ltd, part of the Lomond Group which is the largest lettings and estate agency in Scotland, believes that the recent end of year reports of the booming housing market may result in demand for lending at higher multiples, and over longer periods, which could ultimately lead to market stagnation or even a potential bust in the coming years.

The news before Christmas that a lender was now willing to offer seven times first salary and five times second salary over a period of up to 40 years is certainly responding to market demand but is it ultimately meeting a need which will result in a rapid boom then bust?

We saw in the period prior to the 2008 crash that lending multiples reached record levels as people borrowed as much as possible in order to fund the purchase of their dream home. The subsequent restrictions on lending in response to the housing collapse have resulted in a calmer, and more stable, market in the intervening 13 years. However, in the last eighteen months there has been a mini boom which looks likely to continue into the coming year and is driving demand in the lending market.

David Alexander, the chief executive officer of DJ Alexander Scotland, commented: “No-one wants to deny individuals the right to be able to buy the home of their dreams. Indeed, we should encourage this where possible. However, you don’t need to have a very long memory to know that we have been down the route of very high multiples of people’s incomes before and that this ultimately resulted in a massive correction in the market.”

“While the 2008 crash was also related to the wider economic woes it was clear that lending too much on the assumption that property will always increase in value was a major factor and a mistake that we don’t want to repeat.”

David continued: “It should be remembered that average house prices peaked in Scotland in May 2008 at £145,641 and did not return to this level until July 2017 when they reached £147,566. The UK average house price peaked in September 2007 at £190,032 and didn’t achieve this level again until August 2014 when it reached £191,932.”

“What we need is a sustainable, growing housing market rather than one prone to peaks and troughs. Prices will always fluctuate but in the long term it is better for everyone if prices rise at a reasonable level each year and maintain steady growth over five, ten, twenty years and beyond. In this way the market benefits most people.”

David concluded: “Making someone happy in the short term by giving them large levels of lending compared to their income may be good for them in the short term but may cause more heartache in years to come if interest rates rise, the market becomes frothy and overblown, and if circumstances change. That is when the true price of high lending will become apparent.”