The property bubble is waiting to burst

10 February 2010

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Andrew Gimson asks why, in the middle of a violent recession, London property is still so hideously overvalued. The real pain may be yet to come

As a general rule, it is a mistake to go through life thinking about how much one’s house is worth. In the summer of 2002, when I bought my ‘lovely end of terrace period cottage providing compact character accommodation’ in Gospel Oak, London NW5, I assumed I had managed, with unerring incompetence, to buy at the very top of the boom. It seemed to me unimaginable that anyone would be willing to spend more than the grossly inflated sum of £385,000 which I had paid for my small, damp, jerry-built house.

My imagination was defective: to my stupefaction, the property boom continued for another five years, until the collapse of Northern Rock in September 2007. So instead of avoiding thinking about the value of my house because it was worth less than I had paid, I avoided thinking about it in order not to succumb to the smug illusion that I was several hundred thousand pounds richer.

This was bound to be a transient gain, for boom would be followed by bust. Such ludicrous prices could not last: the bubble would burst, and although this would be reported as a disaster in the press, it would have the great advantage that people of modest means — nurses, police officers, bus drivers — would once again have some hope of buying a house. MPs tended not to worry very much about the hardships endured by other public servants, for our legislators had made special arrangements for themselves, and had acquired a vested interest in high house prices.

But now we come to the oddest bit: the bust has not taken place. There has been no drastic adjustment of the kind that casino capitalism ought to be so good at providing. Instead of collapsing, the market froze, and hardly any houses changed hands: in 2008, Day Morris, the small firm of estate agents in north-west London through which I bought my house, experienced an 80 per cent fall in transactions. But according to John Morris, one of the founders of the firm, prices only came down 20 per cent from the peak, and in the majority of cases they have since recovered. Mr Morris reckons my own house is now worth twice what I paid for it, and points to a smaller one down the road which is on the market at £675,000. My neighbour Bruce Robertson has done some research which shows that in 1966, the average house price in our street was £11,250 (this admittedly at a time when Camden Council wanted to knock the whole street down). How our currency has been debauched.

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