Is the Secular Bear in Homeownership Under Way?

Published Friday August 8th 2008.

Warning signs of an evaporating desire to be homeowners came in figures released by the Council of Mortgage Lenders today as the number of mortgages dropped by 81,000 from 11,822,000 in the second half of 2007 to 11,741,000 in the first half of 2008.

The drop was the largest ever recorded and only the third since the inception of the figures in 1971. The previous two declines being for 18,000 in the second half of 2004 and 14,000 in the second half of 2007. The unprecedented back-to-back declines between July 2007 and June 2008 make it the first ever decline over a twelve month period in the whole 37-year history of the figures, reducing the number of mortgages by 95,000.

The acceleration in the reduction of mortgages, which cannot be laid solely at the feet of those who have finally cleared their mortgages and are now unencumbered, corroborates data from other sources which indicate a dearth of buyers.

The decline suggests that a secular bear in homeownership, and by extension house prices, is well under way.

First proposed in the free report "Sell Now! Why You Don't Want to be a Homeowner" ("Sell Now!"), published by Debt Advice Bureau™ in October 2006, the secular bear hypothesis incorporated the view that the country was at or very close to saturation homeownership. That is that the multi-generation expansion of homeownership was about to got into reverse as the annual number of new people becoming homeowners would be less than those ceasing to be homeowners.

The chart below, taken from "Sell Now!", highlights how relatively feeble the growth in mortgage numbers for owner-occupiers was during the house price boom.

In 1990-1992, the three years directly following the 1989 peak in house prices, the number of mortgages increased by 715,000. All when house prices fell, repossessions soared and interest rates were much, much higher than during the Noughties. However, from January 2000 to June 2006, the most recent figures when the chart was prepared, the number of mortgages increased by only 689,000 ... and on an ever declining growth rate.

Prices rocketing whilst growth rates fall did not suggest a strong underlying economic reason for ever-rising house prices.

Further confirmation of the theory, or should that be multiple confirmations, came in 2006 and 2007 courtesy of the ultimate contrarian indicator, Gordon Brown, with his uncanny ability to get the timing perfectly wrong. Headline hogging promises to: have three million homes built; use tax payer money to subsidise purchases by key workers; expand the ill-conceived shared ownership schemes, and; increase homeownership to 75%, all served to underscore that homeownership and property prices were about to head south.

Secular trends are generational by nature, usually lasting 16 to 24 years. It is because of this that they happen. Everyone believes things only go one way. Once everyone believes that, they invariably change. Initially, no one can comprehend it. It will take time for the ingrained mindset to change. Even with prices falling, people will be talking of holding on, of buying low for the inevitable rise beyond the old highs. Only after more than a decade or two, when it becomes commonplace to think of investing in "that thing" as a bad idea and a waste of money, will the secular trend change and the next secular bull be under way.

As discussed in "Sell Now!", factors that will help erode the desire to be homeowners and so contribute to a secular bear in homeownership, include:

  1. Secular bull in unemployment. (Already started).
  2. Multiple recessions between now and 2020. (Includes the 2008 recession predicted by the "GDP Wedge of Doom").
  3. The demographic timebomb.
  4. Large debts carried by non-homeowners will make getting mortgages difficult. the effect, they will not be their to provide a floor to prices as they continue to decline.
  5. An expansion of the number of people per household. Reversing a multi-decade trend and a symptom of lower disposable income, increased unemployment and increased repossessions.
  6. The ultimate realisation that UK PLC is bankrupt. Government induced debt and unfunded liabilities currently stand at £360,000 per household on a Net Present Value basis.

The collapse in house prices and current Credit Revulsion are the catalysts for the first wave down. Whether the secular bear that follows charts an a-b-c pattern, which was the preferred choice in October 2006, or takes the form of a relentless protracted Japan-style decline, which became much more likely after the Northern Rock debacle, may only become clear once it is too late.

In the meantime, three key projections from October 2006 appear to be on course:

  • Expected bottom in RPI-adjusted house prices in 2018-2023;
  • A 100,000-repossession year;
  • A 250,000-insolvency year.