Q&A: Chris Hamnett

From the 1950s, increasing home ownership reduced wealth inequalities in the UK, and promoted social mobility. But soaring prices over the last decade or so are reversing this trend. So what are the key underlying factors and what insight do they provide for the future?

A generation ago, it was hard to get a mortgage, but then an era of easy credit helped fuel rapid price growth. So what will be the impact of the current credit squeeze, which is driving up the cost of borrowing?

The rate of supply of new housing has lagged the rate of formation of new households in the UK for some time. Are planning difficulties to blame or are there other reasons?

Currently, house prices look unsustainable compared to earnings, so how fragile is confidence and how big is the risk of a crash? If price growth stalls, is a sell-off in the buy-to-let market likely, and how big an effect would that have?

Then there is the question of regional variations, with prices continuing to rise in London, while falling elsewhere. What is the link between earnings and the high and low ends of the domestic property market?

Put your questions to housing expert Professor Chris Hamnett, from the geography department of Kings College London. His recent article in the FT discussed house price patterns in London. In his distinguished career, he has taken particular interest in housing inheritance and wealth, gentrification, converted and purpose-built flats, and has been a member of a number of public advisory boards in the UK and abroad.

Post a question now to ask@ft.com or use the online submissions form below. Professor Hamnett will answer your questions live online at 2pm GMT on Tuesday 4 December.

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Is a slump in house prices not eventually inevitable when you consider that house prices in the UK have always had a cyclical trend and that recessions are an inherent characteristic of capitalist economies the world over?
Matthew Jones, Chester

Chris Hamnett: I think a stabilisation or a fall in house prices is probably inevitable sooner or later, as I would agree that house prices have been quite strongly cyclical in the UK since the early 1970s. Such downturns (not necessarily slumps) can occur in response to a variety of factors, sometimes recession, but sometimes to sharp rises in interest rates or simply that the house price income ratio has risen so high that affordability becomes very problematic and demand is choked off.

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In your opinion, which would be worse: a short crash or a long stagnation?
Jason Bridger,Berkshire

Chris Hamnett: That’s tricky and it raises the key issue of worse for whom? For existing home owners or for potential buyers? Much of the media comment during booms is focused on affordability problems, but as soon as prices start to fall, the focus of media attention turns to the real or paper losses of existing owners.

This aside, it is probably good for overall market stability if house prices rose steadily by the rate of inflation rather than remaining static. Most of the corrections over the last 40 years have been relatively short and sharp with the exception of the 1990-95 slump which did lead to a crisis of confidence in some quarters. So, probably a sharp correction rather than a long stagnation.

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Do you think average house prices will return to somewhere near the 3 1/2 times average earnings? If so, over what timescale do you think this will take place?
Timothy Atkins, London

Chris Hamnett: I am not sure that average prices will return to that level, not least because more households today consist of two earners, which has helped to push up the effective purchasing power. In addition, the era of 3.5 times average earnings was also the era of higher interest rates and more restricted lending.

I think that the house price-income ratio will fall in the next year or two but I would be surprised if it were to fall back to 3.5:1. Mortgage lending is much more easily available today and at lower rates of interest so buyers can afford to pay a higher percentage of income than in the past.

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There is no doubt for me, we are in a housing bubble, but for house prices to return to trend requires a trigger like interest rates in the early 1990s. Do you agree this is a bubble and what will be the trigger to correct this bubble?
Dave Hills, Shropshire

Chris Hamnett: I would broadly agree that we are in a bubble, but I would suggest that three factors will help to correct this. The first is simply that house price income ratios have risen to extremely high levels, choking off potential demand. The second factor is that interest rates have been rising for some time now, and a substantial number of buyers on fixed interest rates will shortly move onto higher rates. The third factor is the credit crunch which has affected Northern Rock and the fears about sub-prime lending contagion which are arguably leading to mortgage lenders tightening up their lending requirements to both ordinary buyers and also to buy-to-let landlords who have accounted for a large chunk of recent demand. It will probably become more difficult to get mortgages at low rates of interest and this will lead, and already is, to falling demand and prices.

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If there is a slowdown, would you advise a restriction in supply to balance this, such as refusal of all planning permission for new homes?
Peter Byrne, London

Chris Hamnett: I don’t think that in a market economy government imposed restrictions in supply are a possibility. In addition, this would lead to a complete collapse of the house building industry and large scale layoffs. On the contrary, the government are committed to a large scale increase in housing supply over the next 10-15 years in order to try to match household growth. What I suspect will happen, and already is, is that falling demand is leading to falls in numbers of new sales and a reduction in new construction. House builders will simply build what they can sell, although they may be willing to reduce margins in order to sell more. In this respect, I think supply will automatically adjust to any fall in demand.

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One of the principal arguments used against a major house price fall in the UK is that the limited supply of housing and land in this country will prop up house prices. However Japan, with even more limited land and property supply, suffered a major crash in property prices during the last 10 years. Are there any lessons to be learnt by comparing the UK market to that of Japan? I am a confessed property bear who is currently renting!
Mervyn Alan Hinton, London

Chris Hamnett: The limited supply of housing has arguably helped to partly prop up prices, but the other factor has been low mortgage rates and high rates of new household formation. Japan, of course, had a spectacular property boom and bust and they are still living with the aftermath to some extent. I don’t think, however, that the situation here is comparable to that in Japan in the late 1980s and early 90s as huge sums of money were pumped into property in Japan at that time, fuelled in part by a stock market which had risen three-fold. Our bubble has been of much more modest dimensions, though you may be right to rent! We have not, to date, seen the advent of 100 year mortgages which I believe were seen in Japan.

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Could the fast accelerating tendency for parents to go skiing (spending kids inheritance) by buying properties abroad permanently affect the prospects of first time buyers entering the market? It is a new departure on this scale. There are now about 4 million Britons with properties abroad of which about 1.2 million have second homes. The latter figure is rising fast. What are the longer term social implications of this? Could we see an increasing trend for younger workers in central London commuting from, say, Switzerland?
Nigel Grimshaw, Cambridge

Chris Hamnett: A growing number of parents are chosing to use up some of their housing equity in consumption or shifting it out of the country to buy property abroad. This is unlikely to affect the prospects of first time buyers entering the market however, as housing inheritance has generally tended to pass on to the next generation when they are in their 40’s or even 50’s and have already bought. And, of course, inheritance could include property abroad which could be sold to fund a move up market in Britain. So, interesting though it may seem, I do not think we will see the advent of commuting from Switzerland on a large scale although there is evidence of some British second home owners commuting on a weekly basis from abroad to business jobs in the UK.

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Would you argue that some specific neighbourhoods in Central London (e.g. in Mayfair or in Chelsea) never go down in price but rather stay flat for a few years because their owners are very wealthy and simply not income elastic at all? If yes, which are those areas?
Savvas Savvides, Boston

Chris Hamnett: I would agree that some areas or properties are likely to be more resistent to falls in prices. However, where properties in central London have been bought speculatively or if owners need to sell to realise cash, they may well seek to sell at lower prices.

In addition, the likely reduction in city bonuses and an increase in job insecurity is likely to result in less money going into central London property which may well lower confidence that this is a good investment. Confidence that prices are likely to rise, or at least not to fall sharply, is an important element in the housing market, so any indication that the market has turned down is likely to inhibit the more speculative investment purchases. Is is also true that in the early 1990s it was possible to purchase properties in central London as prices much lower than in the late 1980s. So, while some parts of the central London market may be relatively immune to major falls, I do not think this is likely to prove true for properties of under £1-2 million. Even the relatively wealthy do not like buying property which they fear may subsequently fall in price.

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How would you define a crash, and what events or factors would trigger that, as opposed to a period of treading water?
Alexander Garrett, Wiltshire

Chris Hamnett: We are into semantics here. The term ’crash’ is an emotive one and there are a range of terms from correction to downturn which may be more appropriate. I think a recession is techically defined as two or more consecutive quarters of negative growth. I would say that a minor correction could entail price falls of say, 5-10%. A major correction could entail price falls of 20-30% and also associated declines in number of sales. On this basis, the 1990-95 period was certainly a major slump and prices fell sharply in parts of London and the SE as did volume of sales. I think I have already identified some of the reasons why a downturn is likely in previous answers, including stretched house-price income ratios, rising interest rates and the credit crunch and greater selectivity in new mortgage loans by lenders.

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With a great number of interest-only loans (both buy to let and occupier), do you believe there is a risk that lenders will start to make margin calls on these loans and so accelerate any decline in prices?
Timothy AtkinsLondon

Chris Hamnett: I am not sure that lenders are in a position to make margin calls on loans for house purchase. As long as the monthly repayments are made on time and there are no payment defaults then they should be relatively happy. In addition, the worse thing that lenders want is to have to engage in forced sales, possibly following repossession, as this would depress prices. Therefore I think lenders are more likely to sit on the hands with existing borrowers. They may however, sharply restrict the availability of new interest only loans or lower the value to loan ratio from, say, 100% to 70-80% to ensure owners have equity in the property.

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Will the displacement of demand outwards from the most expensive areas towards the cheaper and more affordable areas which you have argued explains soaring property prices across London over the past 12 years, still be the dominant driving factor over the next 10 years? Are there any new driving factors that you have identified that will explain probable price rise discrepancies between London Boroughs over the next decade? Are there any Boroughs you are particularly bullish on from an investment perspective on a 5 to 10 year-view, and why?
Peter, London

Chris Hamnett: I don’t think it is the displacement of demand outwards from central London which has caused soaring property prices across London. The displacement of demand is a manifestation of rising demand. This aside, I would expect any weakening of overall demand to affect some of the most marginal properties in the more marginal areas first. Typically, these were the one bedroom flats in the early 1990s. To this extent, I would probably expect prices to fall more in some of the cheaper boroughs in the short term, partly because displaced demand from the more expensive areas would be weaker. In a 5 to 10 year view I would put my money on central and inner London, simply because these areas have the advantage of greater proximity to the centre, lower travel times and greater local facilities.

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Does the Government have any credible policy to provide extra homes for the inward migration from Eastern Europe? Did the Barker Report factor in this aspect? The various Poles and other diligent folk who are now largely renting property will before too long seek to buy. Accommodating for an extra 1 million plus folk in a short space of time - possibly to double in just a few years - is surely an exceptional issue to urgently address.
Nigel Grimshaw, Bequia, Genadines

Chris Hamnett: I note from Mr Grimshaw’s address that he is far removed from the pressures of the housing market in Britain. Nonetheless, the question is an important one. I do not believe that the Barker report took into account the rapid rise in inward migration from Eastern Europe, (with an estimated 650,000 new arrivals in recent years) largely because it was not anticipated at that time. What I think is happening is that the wave of new migrants has played a key part in underpinning buy-to-let landlordism which has grown dramatically in London. If the migrants remain it may, in time, translate into a demand for more owner occupation.

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