More recently, in just about living memory, the most-quoted example is the great Wall Street crash of October 1929, when countless lives were ruined overnight, although the common belief that scores of distraught brokers and investors jumped to their deaths from skyscraper windows turned out to be a myth. Nevertheless, house prices in the United States plummeted as a result, dropping 31 per cent during the subsequent depression and didn't recover for almost 20 years.
Barring war and pestilence I do not see Scottish or UK house prices falling by that amount, either now nor at any time in the future but it seems reasonable to treat the recent survey (from the Halifax), reporting a rise of 9 per cent in Scotland with caution rather than optimism. The average price in Scotland has risen to £200,000 for the first time, says the survey.
In fact alarm bells should be ringing as clearly this situation is not sustainable. Everyone likes the value of their home to increase but it is happening at such a meteoric rate that I would question whether we may be on the brink of a fall in prices.
In one respect, a price fall need not be a big issue for some home owners, for example middle-aged with a reasonably-safe job, have plenty of equity in the property and are not intent on going anywhere soon. Even those who want, or have to, move house, it’s a case of swings and roundabouts. If you are forced to accept an offer for less than the market value of two years ago then it’s a safe bet that the person you are buying from has had to do the same. So in theory there’s no net loss.
And, of course, let’s not forget that every percentage point drop in house values raises the possibility of home-ownership becoming more affordable for first-time buyers, the sector of society most negatively affected by the current trend.
However problems do arise when the property is mortgaged to the hilt, which inevitably makes the owner liable for higher monthly outlays should interest rates rise, as is likely to be the trend over the next few years. If the mortgage payment becomes unaffordable then lenders will, eventually, foreclose, as many home-owners experienced in the wake of the credit crunch of 2008. Even when a mortgagee is able to maintain his or her payments, a bank or building society may still repossess on the basis that the loan-to-value ratio is too high in terms of the former.
While not disputing the veracity of the Halifax figures, it is worth pointing out that the quoted 9pc increase in prices is an average based on sales and that not every property in Scotland will have increased in value by that amount. Some price increases in Edinburgh and Glasgow’s more affluent outer suburbs, for example, have been more than 20pc while it is likely that in smaller, less economically-active towns, especially in the West, the figure may be under 5pc and in some cases zero.
Admittedly, higher house prices tend to generate a “feel good” factor among home-owners, whether or not they have any intention of moving. Just to know that the almost-identical house next door recently sold for 20 grand more than was paid for it two years ago understandably lifts the spirits.
But the level of price increases since the covid-19 nadir are not in the long-term interest of owner-occupiers, either individually or collectively. Let’s be honest, most buyers like to think of their property as an “investment” as well as a place to live but continuous soaring values threaten to offer a false sense of security. Surely the market can best be served by an economy with manageable inflation and house prices rising slightly above the annual rate, which would provide net capital growth while keeping mortgages affordable. I am told something like that existed in the Britain of the 1950s and 60s; it would be nice to think it could work in the 2020s.
David Alexander is managing director of DJ Alexander.