Safe as houses?

It is time to think again about Stein's law - developed by the American economist Herb Stein - who once observed: "If something cannot go on forever, it will stop."

by Stefan Stern
Last Updated: 31 Aug 2010

How true. But as far as the housing market is concerned, will that stop ever come? There is a limited supply of properties, especially in desirable areas, but a seemingly limitless amount of capital emerging from all around the world, eager to buy up the smartest addresses in London and beyond. Stein's law risks being trumped by that other one about supply and demand.

Are there any clues that house prices may have reached a peak? The buy-to-let market offers some. According to the FT, some absurd mortgages are now being offered to people on very modest incomes, allowing them to create mini property empires. Over £38bn of buy-to-let loans were taken out last year, up 57% on 2005. When ordinary people of limited means are being lent millions of pounds to make "sure-fire" investments, it is usually time to get worried.

In America we are already witnessing the collapse of the so-called "sub-prime" debt market - that is, people who are allowed to borrow more than they should at terms they may not be able to afford. In Spain property companies have seen their share prices tumble in recent days as the market senses that huge over-supply is about to bring prices crashing down.

People who should know better are predicting that UK house prices can only go up and up, and that we should all be leveraging up as much as we can and buying the most expensive property we can. Meanwhile, interest rates have ticked up from their low of 3.5% four years ago, and are heading perhaps as high as 6% later this year.

Personally I would not be taking out a huge mortgage right now, and not just because I'm an impoverished hack. After all, that sort of background does not seem to be stopping other people being lent hundreds of thousands of pounds.

My non FSA regulated advice would be: sit tight, enjoy the house you're in, pay down debt if you can, and wait for that crash. You won't regret it. But others, up to their eyes in mortgages they should never have been granted, will.

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