Home Truths for the UK Economy

Article excerpt

THE anthropologist Franz Boas set off a debate that still rages today when, in the late 19th century, he claimed the Inuit folk of northern Canada have dozens of words for snow.

He might be intrigued at how in contemporary Britain our obsession with the housing market has generated a vocabulary of its own.

Terms such as gazumping, gazundering, the property ladder, gentrification, des-res, the Bank of Mum and Dad and the superbubble - a description of the current state of the prime London market - are pretty much unknown elsewhere in the world.

Nothing, not even the worst financial crisis for generations, seems capable of puncturing our penchant for property.

Once again, the risks attached to runaway house prices - which increased by 8pc in the UK in the year to March, and by 17pc in London - have become a serious concern for the Bank of England.

In the past, the Bank fought shy of trying to puncture house price bubbles and this is shaping up to be the first major test for the new Financial Policy Committee, which was set up to protect the financial system.

It is also the first big test for the banks, which are so keen to prove their new sense of social responsibility and ethics.

Back in the pre-crisis days the banks responded to rising house prices by lowering their lending standards and by offering loans that were huge in relation to borrowers' downpayments and incomes, which enabled some borrowers to go up to their necks and beyond in debt.

This is still a feature of the housing market even now. Around 8pc of homeloans are for more than 4.5 times income, the same as before the crisis - a ratio that gives the shudders to prehistoric property owners like myself, who first bought when a mere twoand-a-half times joint earnings was considered prudent.

The Bank is also concerned at a growing trend for people to take out loans over much longer terms than the 25 year norm, stretching to 30 years and beyond.

That could be viewed as a sensible reflection of longer working lives or, less benignly, as a way of meeting new tougher affordability requirements.

The latest bout of hysteria comes against a backdrop of heavy household debt, which stands at around 140pc of incomes overall, almost three times its level in 1980. Around a million households have debts of more than five times the money coming in. …