Why aren't house prices falling?
Some friends of mine are trying to buy a flat.
It's their first flat – a one-bedder in south-east London.
They're not rich, but their finances are sound. They have a large deposit, no debt and a proven habit of spending less than they earn.
And yet they can't get a mortgage.
Today we tell their story, and consider its implications for the housing market.
A sound case for buying
Let's start with a quick summary of the whos and whats.
My friends are both in their early 40s.
You might think that's a little late in life to be buying your first flat, but it's less unusual than you might expect. According to 2013 research by MoneySupermarket, the average age of the first-time buyer in London is now 38. That same buyer will be geriatric before he can start a family.
The same survey found, by the way, that across the country, 35% of young people believe they will never be able to own a home. The figure is above 50% in London, according to the Evening Standard.
Anyway, back to my buddies. He is a TV producer, who, although not well known, works constantly and has at least ten years of consistent gross earnings in the £40,000-£60,000 area.
She has recently left her job with a large corporation, where she worked for ten years, to set up her own business, which is already turning over an annual equivalent of about £25,000.
The flat they want to buy – which they are currently renting – is £320,000. The owners want to sell and have given my friends, who have lived there many years, first dibs. My friends have just over £100,000 of that in cash (so we're talking a deposit of 30%-plus) and are looking to borrow £200,000.
Interestingly, the interest they would expect to pay on that £200,000 is less than half what they currently pay in rent – and they're already getting a cheap deal on their rent, which hasn't been put up in six years.
(Existing homeowners, you have no idea of the fortune the government response to the financial crisis brought you – a largesse for which non-homeowners paid.)
The unbearable difficulty of getting a mortgage
But here's the thing: my friends can't get a mortgage. Even with the guarantee of my friends' parents, no bank will lend them the money.
The problem is that she has left her old job, so her proof of income from that is not satisfactory, and her new business has not been running for long enough to be acceptable. Meanwhile, his earnings are gross – netted down for tax purposes, they are lower.
They've been offered just over £100,000.
Of course, in the days of the self-certificated mortgage, this would be a doddle. They could declare one set of earnings to the taxman and another to the bank. And the money they needed would be theirs.
But those days are gone.
And what's more, no interest-only mortgage is available to them. They can only get one that involves some kind of repayment. So their actual monthly costs – even if they could borrow the money – would be not far off what they pay in rent.
(Again, those of you that are still on interest-only base-rate tracker mortgages from pre-financial crisis days, thank the stars – or rather the central bank. Their reaction to 2008 made your fortune.)
Now, you may argue that the banks are right not to lend this couple the money they need. That may or may not be the case. It's not an argument I want to get into here.
But the reality of my friends' predicament is that they are going to have to find a way of getting that £100,000 – not something most people can just do – or they're going to have to move.
The point I am making is that this story demonstrates that lending is much tighter than it once was. The days of easy debt are gone. And yet still the housing market, particularly in London, is unaffordable.
You might have thought that the lack of available credit would have brought down prices. It hasn't. Why not?
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House prices aren't falling because turnover has dried up
One reason is the sheer lack of supply. So many people have got such good deals, as I alluded to earlier, that they don't want to move house and lose those deals. So they stay where they are. The dearth of supply means that house prices stay high.
The sheer cost of moving – dead money – also leads many to find a way of making do where they are. Say it would cost you £100,000 (in stamp duty, legal fees, estate agents fees and removal men) to move house. £100,000 is about £180,000 before you've paid income tax on it.
You've got to be either very rich, or have very pressing circumstantial needs, to be prepared to wave goodbye to those kind of sums. Many would rather spend £100,000 on doing up their existing house, and see some kind of return on that money in terms of value added.
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In terms of turnover, the housing market has crashed. In terms of price, little has changed. Even the much-vaunted post-election turnaround hasn't happened. All we've seen is that people have put their asking prices up. But nobody cares about turnover, except estate agents, surveyors, lawyers and stamp-duty collectors. Price is everything.
I keep hearing about there being more cash buyers – that's because the credit isn't available. And the term 'cash buyer' needs some qualification. To an estate agent it often means somebody who isn't selling anything.
The housing market has seen intervention after intervention – a money system that allows banks to create credit, excluding house prices from official inflation measures, planning restrictions, zero interest rate policies, 'help to buy' – the list goes on and on. It has all led to this overpriced, stagnant inequality-creator.
These interventions have created a generation of people who are psychologically damaged by high house prices. I meet under-40 after under-40 (and the occasional over-40 as well, such as my friends above) who feel completely inadequate because they can't afford to buy a simple flat.
Fundamental changes in policy are needed. The government must stop propping up this market.
But as for what will actually happen – that will depend on the chancellor's next budget. My view is – not much. There'll be some kind of headline grabber, but it won't bring down prices or increase turnover. There's too much vested interest in keeping things as they are.
Read more on MoneyWeek:
Why productivity in the UK is so low: in-work benefits
Student loans – yet another reason they won't ever be repaid
£5.7bn for parliament repairs? Here's how other countries have done it
Factors damaging property value
Why aren't house prices falling?
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