Personal debt threatening house-price growth

Asked recently what kept her awake at night, Rebecca Longbailey, one of the three Labour leadership contenders, replied “climate change and austerity”.

If I were asked the same question, from a purely professional perspective I would have to say, “the potential threat posed to house-price growth by personal debt”.

On paper, the lowest base rate that I can remember should have made home ownership more widely affordable than ever before. Ironically, however, lower interest rates, coupled with easy access to personal loans, have led to the value of unsecured personal credit increasing by as much as 22.5 per cent over the last five years, which will reduce property affordability for many. In 2018, affordability stabilised following five years of drops but remains much worse than the pre-recession levels of 20 or so years ago. Of course in this, as in many other things, the UK is a bit of a patchwork quilt. Housing affordability varies from the lowest in Copeland in the North-west of England, where it is 2.5 times average workplace-based earnings, to London’s Kensington and Chelsea where average house prices are 45 times the amount.

At the same time, the value of unsecured personal loans has leapt in some parts of the country with the largest increase ranging from 22.5 per cent in the east of England over the last five years to just 8.5 per cent higher here in Scotland against a British average of 18.2 per cent. The total amount outstanding for Britain in the second quarter of 2019 was £35.27 billion.

Such figures worry me in much the same way as climate change does Ms Long-bailey. While it seems comforting to believe that we have left the house-price recession behind, the figures highlight just how great an impact the pre-recession property boom of the mid to late 2000s had on the housing market and the long shadow it continues to cast across the country.

Affordability remains an issue for many because banks and building societies had their fingers so badly burned by property “bad debt” they now apply a much more stringent lending criteria, which has limited mortgage lending, although this has improved stability in the housing market.

However, while it has become more difficult to secure a mortgage, the substantial increase in unsecured personal lending hints at a growing demand for funds that could potentially limit future property lending. And while the data does not separate borrowing by those who own and those who rent property, it must be safe to assume that much of this unsecured lending is being taken up by owner-occupiers.

Demand for housing will continue to grow as the population increases, and in such a scenario there are only two ways to improve affordability: increase the supply of stock or ensure that incomes rise at a faster rate than house prices. The latter is extremely unlikely, which means greater supply is key. Consequently, a co-ordinated approach of building more social housing and increasing the number of affordable homes generally, with greater financial and regulatory encouragement for housebuilding, would help ease overall demand on the sector and produce steady, rather than exceptional, growth – the true mark of a successful property market.

The key to this success lies in maintaining a marketplace that remains vibrant and dynamic without becoming an uncontrolled arena where “winner takes all”. None but a few speculators want a return to boom and bust – but there must be incentives that enable the up-and-coming generation to see home ownership as an achievable goal. Balancing stability has been managed quite effectively since 2008 and I would not want to upset that apple cart. But a slight relaxation of lending criteria on mortgages (ie deposits and loanto-income requirements) could open the door to more home ownership aspirants without returning to the recklessness that stymied the market in the opening years of this century. David Alexander is MD of DJ Alexander

The value of

unsecured personal loans has leapt in some

areas