According to the Halifax HPI, UK house prices are down 16.3 percent from their August 2007 peak.
When I look at this chart today, I can't help remembering countless conversations about house prices that I had before August 2007. The details of each conversation changed, but the basic format always went something like this:
Alice: "House prices are unsustainable in terms of fundamentals. House price to earnings ratios are at unprecedented levels, households have accumulated a mountain of debt that will be difficult to repay and one day soon the whole rotten structure will collapse.
It will all come down; not one stone will stand upon another".
Home owning friend: "Well, you would say that Alice, you are a bitter renter who missed out on the greatest wealth creating opportunity that ever fell into the laps of ordinary people.
But lets put your bitterness to one side and talk fundamentals. Housing demand outstrips supply and with increasing incomes, rising population, changing lifestyles, the increasing number of single middle aged people, and ever more migration. Planning restrictions will nicely prevent house builders from increasing supply. With a housing market driven by these fundamentals, house prices can only keep rising."
Alice: "True, demand is high, but that is because banks have lent out huge amounts of credit to desperate home buyers and reckless buy-to-let speculators. Once that credit bubble bursts, demand will evaporate."
Home owning friend: "Banks employ very clever people who understand risk. Don't worry Alice, they know what they are doing.
Mortgage lending is a low risk business. After all, the loans are collateralized on a rapidly appreciating asset. Besides, homeowners have already accumulated huge amounts of home equity. Even if prices fell, homeowners could absorb the shock.
No, Alice, you haven't convinced me. In fact, I am thinking of dabbling in buy-to-let, not least because my occupational pension is worthless, and I need a low risk long term investment to give me a comfortable retirement"
Alice: "Ah, buy-to-let, well, good luck with that."
It is not that I want to say "I told you so". I haven't taken any pleasure in seeing my heavily indebted home owning friends suffer as they find it increasingly difficult to make ends meet.
No, the question for me is why did so many people buy into the lie that house prices would only keep rising. Why couldn't people see that it was all just one big UK bubble.