Everyone, I am sure, will remember the story of the three little pigs.
Yes, those dynamic and lovable little creatures who sought to put a roof over their heads. No wallowing about in the mud for these three dudes. No, they had bigger ambition. One little pig makes his house out of straw. The second little pig uses sticks. While the third little pig takes a more secure approach and builds his house out of bricks. You’ve got to give them full marks - a most industrious set of triplets. But, like many situations in life, there is always a baddie. And in this case the baddie is the big bad wolf. There is no real surprise in piggie number one being blown away by the wolf as his house was made of straw. The wolf did well then to topple piggie number two’s abode made of sticks.
But, he could huff and puff all wanted, but there is no way he is going to knock down piggie number three’s brick-built fortress. I think this piggie was more the economist than a builder as he bought into the mantra of “safe as houses”. But, I’m not so sure . . .
For years now, a barometer of how well someone was doing was how well they were faring on the housing ladder. Over a ten-year period, someone could make two or three moves to jump up the ladder and amass some tax-free equity.
Many of us have done this and we are in a strong position financially as a result. But house prices in London are now 14.5 times the earnings of the average Londoner, I am worried for all three pigs. But not just English pigs, we are all in danger from our love affair with residential property.
With interest rates still at ridiculously low levels and not really set to go up much in the next two years, many younger people have no concept of what an over-heated and unsafe housing market truly looks like. I recall my first mortgage with the Leamington Spa Building society at a fixed rate of 13.5 per cent in the early 1990s.
My mortgage was tiny as I had borrowed £30,000 enjoying the Miras relief. Miras? Youngsters will not remember that one either: Mortgage Interest Relief at Source. In effect, a sweetener on the first 30 grand one borrowed. But, even so, paying my mortgage took up a big slug of my salary.
House price crashes are not fun and negative equity is a financial disaster for many who have worked hard to get on the ladder. But yes, house-price crashes do happen, and large swathes of us end up in negative equity situations. You know, as the Bank of England this week gives a thumbs-up to the big banks on their performance in stress tests, I cannot but wonder at the timing of this. There is no doubt that these big beasts need to ensure that they can withstand financial meltdowns. I fully support this. But, the omens are there, as many households in Scotland and the UK are very much aligned wealth-wise to how well our properties are performing. And the signs are that the whole ecosystem is over-heating – again.
The average house price in London is a whopping £496,000, while earnings are £34,200 a year. This is enough to put any proper economist on red alert. But London is just the start. Manchester and Birmingham both are experiencing high rates of residential property growth, at 7.9 per cent and 7.4 per cent respectively. Both these cities overtook that bastion of Scottish property growth – Edinburgh – which last month had the fastest-rising prices. Apparently, data from Barclays Mortgages found that the highest house-price growth in Scotland was Holyrood in Edinburgh. All this data supports the anecdotal evidence on the ground that houses in Edinburgh are selling like hot cakes. But, this must send out a worrying signal to us all.
Like all fairy tales, there is a baddie or big bad wolf. In this case, there are several. But, alas no one is taking heed and the bandwagon rolls onwards and upwards. No, the big bad wolf will not blow your house down. But he is preparing for something much bigger.
Jim Duffy is co-founder of Moonshot Academy and author of Create Special