The global financial crisis has shaken our economy to its foundations, and all across Britain we’re feeling the impact.
Bills are rising fast, while jobs are disappearing and house prices are falling. So how did we get into this mess?
Tonight in the third part of Credit Crash Britain: we go inside the wreckage of the property market, and report on the end of a beautiful affair - between the British and their love of buying homes
As property prices slide – up to 2 million people could be in negative equity by 2010.
The house feels like a burden. It doesn’t feel like a home any more.
And if you want to buy - the credit crash has ended cheap mortgages
The speed and severity of this downturn is unprecedented, there’s a whole generation of home buyers who’ve never seen this sort of situation before.
Frustrated first-time buyers may be forced to rent for years.
The problem with renting is that it sort of feels like throwing money into a black hole,
But is renting the smartest move you could ever make?
Where your mortgage payments and the interest is really starting to affect your quality of life. People are starting to realise that renting is often a better option.
Which makes you more money –Is it buying or renting?
We’ve been doing the sums
Everybody thinks that property is the best investment you can make.
You’re shattering illusions here.
I know, shattering a lot of illusions.
Tonight – Is it time to end our love affair with home ownership?
Just over a year ago, house prices were booming and getting a mortgage was easy
Now prices have plummeted by around 15%, but new mortgage approvals have dropped by 95%
So if you want a mortgage the credit crash means it will be tough to get.
No wonder the number of houses being sold is at a thirty year low.
I'm going to take a snapshot of the difference between renting and buying across the country, in what's fast becoming the worst housing slump ever.
Dan Thomas is property correspondent for the Financial Times; he’s been following the housing boom and now the bust for the last few years.
This is the end of an era for the housing market; many people forget what goes up comes down.
Anyone who thinks that the market will bounce back in the next 2 or 3 years even is probably fooling themselves. I think we’re going to see prices drop for at least another 4 years. I think prices will return to 2007 levels in roughly a decade.
I’m off to Sussex to meet a couple who jumped onto the property ladder two years ago - and are determined to stay on it.
Ross Butterfill and his partner Nadine are moving house.
Their fixed rate mortgage ended this summer just as the credit crash ended cheap borrowing.
Their payments went up by a whopping £400 pounds a month – almost fifty percent.
They can’t afford their new mortgage – and selling would mean losing money because of the collapse in house prices
They’re desperate; they’ve decided to rent out their home.
They’re downsizing - renting a cheaper, smaller house where they can ride out the credit crash and stay property owners.
Do you think buying that house was worth it?
Definitely was worth it but it wouldn’t have been worth selling it at this moment in time, which is why we’re having to rent it.
It’s a point of riding the storm so to speak, carrying on, renting it for a couple of years when we can maybe re-mortgage and move back in ourselves or when it’s a better time to sell. If we were to sell now it wouldn’t have been worth buying the house at all.
They’re staying with Ross’s mother until they move into their new rental home. Nadine is pregnant with their second child.
We always knew that we’d move from there one day. But when you’re forced to move…
It’s different I think. It makes it a lot sadder really. Yeah.
I feel a bit that my fingers have been burnt for something I haven’t done. You know, I’ve just been happily paying my mortgage and all of a sudden we’re in this situation and it’s quite harsh to take.
We’re hoping that the market’s going to sort itself out within the next 2 years, and that we’ll be able to move back in. However, we will, we’re going to move back in and sell it, and the reason for that is… because the house feels like a burden. It doesn’t feel like a home any more.
But they want to stay on the property ladder.
They’re wedded to the idea houses are a good investment
Even though the money they’ll get from renting out their house won’t even cover their mortgage or the extra costs they’ll face as landlords.
You’re losing money on your house because the rent you’re getting doesn’t cover your mortgage.
No, it doesn’t, but –
What’s the shortfall?
How does that feel? Because you’re paying almost for somebody else to live in your house?
I know, I know. It was not nice but it was either that or sell it at the moment and be, I think it was £6,000 in negative equity,
Merryn Somerset – Webb is the editor of Money Week magazine.
She says Ross and Nadine’s strategy would make sense if house prices were about to rise, but she thinks they’re going to keep falling, and that means their sums don’t add up.
What’s wrong with Ross and Nadine’s figures?
MERRYN SOMERSET WEBB
I think they're in a very, very difficult situation. They've got themselves in a situation where they have a house that they want to hang on to, and they think that by moving in to a small property they're doing themselves a favour financially. But if you look at the numbers again, and look at all the costs they're incurring you will find that, actually, by holding on their house they're costing themselves an awful lot more than they would if they were just to get rid of it and rent the same kind of house.
Whether property is a dream or a disaster for thousands of families will depend on what happens to their mortgage this year.
If you’re mortgage goes up 50% or so, as many people are facing at the moment, unfortunately, there’s a threat of repossession. Repossessions are going to go up to 45,000 this year and the predictions are the next year level will actually go worse.
But many people are trying to cling onto to home ownership
This is flat night fever, it’s a once a week event to put together would be landlords with would be tenants. It’s a lot like speed dating for the rental world; in fact it’s just a lot like speed dating.
The room’s broken up into 5 areas, just get a drink at the bar and make your way down.
Falling prices and expensive mortgages have created a new class of reluctant landlords
Take Tinu Ogundere, who bought her house a year ago.
Tonight she’s off to join the speed renters.
She urgently needs to ‘pull’ a flat mate to help pay her mortgage.
Thanks to rising costs and falling house prices Tinu now regrets buying property in the first place.
So you’re looking for a flat mate at the moment?
Yeah, to help me pay the bills and I’d like one fast.
You’ve bought your house do you think that was the right decision?
I bought my house last year when house prices were at their peak, so given that my property has lost probably about 20K in equity I don’t think that was the right decision.
Tamara Smith has run this event for seven months.
Across the business we’ve seen about a 20% increase in the number of people registering and using our site, compared to this time last year. Which is quite dramatic really. What’s interesting as well is the number of landlords using our service has trebled.
In the past, I’ve bought property to rent out as an investment. But this room is full of reluctant landlords.
It’s also full of reluctant tenants who can’t get mortgages because of the credit crash.
OK we’ve got a double room in an old Victorian house, there are 3 girls and we need another one to move in, its part furnished…do you like cats?
Luci Cummings would love to buy. She and her Canadian husband James live in the centre - where property is expensive.
Luci works at the University. James is an academic in IT.
Last year they couldn’t find a place they could afford.
Now prices are falling. But in spite of two good salaries the credit crash means they can’t get a mortgage without a hefty deposit.
The problem with renting is that it sort of feels like throwing money into a black hole, you don’t sort of see a return on the investment.
Their rent is £850 pounds a month leaving them some spare cash which they’re saving for a deposit.
Currently we’re saving between 100 and 150 pounds a month.
We feel like we’ve been left behind by some of our friends who got on the property ladder a lot earlier than us and are now enjoying their homes and we can’t get a mortgage at all.
We asked the editor of Money Week to study their case.
James and Luci have been renting this flat for the last 5 years.
But as tenants they could be given just 2 months notice to leave – They want the security of their own place.
What is it about buying a house that you’re so into?
Certainly an investment. It would be nice to know that, that, huge amount coming out of my pay cheque each month was going towards something that was mine, that I was buying rather to finance somebody else’s mortgage.
I suppose there’s an element of following in your parent’s footsteps
That feeling of ownership, that feeling that, that you have something that belongs to you
MERRYN SOMMERSET WEBB
By failing to get on the property ladder, have Luci and James really missed out?
Feeling that you own somewhere, that's yours that you can always come back to has an emotional value. But we mustn't confuse that emotional value with a financial value.
These two are incredibly lucky; the market has prevented them from ruining their lives by borrowing a huge amount of money at the top of the market and ending up stuck with a debt they can't repay for 25 years.
First time buyers would be mad to buy a house at the moment given the fact that prices are going to fall a lot further before they get better, so maybe they should hold onto their cash…and jump on the market when it gets better.
It might be crazy to invest in property right now, but what about people who sunk their savings into bricks and mortar decades ago?
This is a list of UK house prices since 1952.
Now the traditional wisdom is that houses are a good investment but in fact in these figures there’s another story.
We’ve all know that shares go up and down in value… but so do house prices.
Supposing instead of buying a home, you’d put your deposit into a fund invested in UK shares.
Would you have made more money than on a house?
We asked the team at Money week to get their calculators out.
MERRYN SOMMERSET WEBB
What we'll do now is we'll go away and look at the numbers, we'll look at the cost of renting, the cost of buying, and we'll see exactly what the answer is.
And we’ll find out their results later….
There’s a class of successful, affluent Britons who believe that owning property is not the path to wealth and happiness.
Meet Ray Wright. He’s an economics lecturer, who uses his own money to help finance housing developments.
So what’s this going to be?
This is going to be a large family house.
Having stumped up a large chunk of the cash needed by the developers to build this house, you’d expect Ray to be a fan of home ownership.
Would you buy this house?
Well in a pure economic sense, rental I think actually makes a better bet. In a nutshell I wouldn’t buy this house, if it was available to rent, I’d prefer to rent it.
And it’s NOT just a cold academic theory…
Ray practices what he preaches.
He rents this penthouse flat for just over £3000 pounds a month
And he doesn’t believe he’s throwing his money away,
Well the maths for me are quite simple. For £39,000 a year, which would only get me a £450,000 mortgage, I live in a nice, nice £900,000 flat.
I think the key thing about house buying is it’s an enforced savings plan. If people take out a repayment mortgage, then after 25 years they’ve paid, repaid all their capital and the gain is theirs and its tax free which is, you know, is good.
Equally, somebody renting might also have made gains over that period of time as well. Who makes the most gains is difficult to forecast.
Private landlords like Ray’s now provide three quarters of rental homes
Your landlord for example in this flat now is he coining it in?
Err I don’t think so. I mean he in affect is lending me £900,000 at an interest rate of around 4 ½ per cent. I can do better than 4 ½ per cent with £900,000, almost anyone can at the moment, putting it into a bank on deposit.
As recession looms more and more of us will be forced to give up on home ownership.
But its good news for some…
I’ve come to the North East of England to meet a man who made his fortune during the last property downturn
Mike Goddard started a lettings agency in the 1990s – it’s now one of the biggest in the UK
He’s now a multi-millionaire but he still lives in this rented house.
Ok. Lloyd Grossman is unavailable so you’ll have to make do with me. Do you want to give me the tour?
Let’s go to the lounge.
Mike’s convinced renting is the future – but we need to stop thinking of it as second best.
What do people say to you when you’re saying I’m just renting a house?
There is very much a stigma, for example my bank manager just 4 or 5 years ago, one of the questions on his form was, do you, are you an owner/occupier or do you rent? And I felt a little bit as though I was a naughty boy and, and admitting I could see my credit rating going down because the little cross went against…
And the red pen came out.
Yeah, and I found that quite disturbing actually.
It’s partly that stigma that makes us want to be homeowners…
The other reason is we believe we’re making a good financial investment.
So the kitchen.
And it looks like you’ve got a new floor here.
Yes, this is a new floor. We laid this just over a year ago.
How much did this floor cost to put in, then?
This floor cost around about £2,000 to lay.
People are going to be screaming, saying you’ve just thrown that money away. You might as well have taken it out into that field and burnt it.
But I consider that to be a very British attitude. When we came here, I had every expectation to stay here, maybe as long as 10 years, so I consider any money I spend on it as being a good investment for me living in it.
The problem with renting for most of us is that it never feels like home.
And if your landlord wants to get rid of you – you could be out on the street in just a few weeks.
But it doesn’t have to be like this – and if you want see why…. just cross the channel.
Unlike in Britain many people here rent. There’s a different attitude to property.
Borrowing money – even for a mortgage - is often frowned upon.
Here there’s no stigma about RENTING, there is one though about debt.
I think that the French are a lot more hesitant to get into debt.
If anything, I think in France it's seen as - it's seen as shameful.
Sara Williams, British by birth, and her Italian partner Pasquale have rented for 10 years.
Today they are moving to a bigger apartment as they want more room for their baby daughter Phoebe.
Its not surprising there’s a different attitude to renting when tenants have the security of long leases.
The French rental market is more developed – not least because it’s always been tough to get a mortgage – credit crash or no credit crash .
French mortgage lenders are a lot more prudent about handing out money than they have been in the UK. There are lots and lots of questions about your health, had I been a smoker, and if so was it at least 2 years since I quit smoking. And you have to take blood tests to make sure that you're in good health.
If you rent here you have rights that don’t exist in the UK.
Even if you don't pay the rent you can't be expelled from your house in the winter months
Sara’s in the new apartment deciding what she will change. In France you can treat a rented home as your own.
We’d put new flooring down, or carpet down, or, install shelves or a new kitchen, we could make those improvements.
Heidi Barnes runs an international real estate company and has been in Paris for 12 years.
This is one of her most expensive rental properties.
So here we have a rather wonderful salle a manger
This is actually an apartment we rent for 20,000 Euros a month.
A tenant when he moves in to a property in Paris, for example, knows full well that he has to equip his kitchen and do the make-up work, the decoration. He's prepared to do that because he has a lease of a minimum of three years, which more than often goes on to nine years.
The law actually favours the tenants in France. Over the last few years and especially over the last six months or so, they’re encouraging people to rent, and also encouraging the actual homeowners to have tax rebates if they renovate their property for rental purposes.
Having avoided the property boom that we’ve had - the French may also avoid the property crash.
Remember how we put the Money Week team to work on renting vs. buying? The results are in.
They’ve had to make assumptions so they’re answers can’t be definitive – it’s a snapshot survey.
Imagine instead of buying, you put the money you would have spent on your fees and deposits into a UK share fund - and lived in a rented home instead.
Remember there are lots of costs that home owners forget.
Think about the buying expenses you've got your - you've got to pay the estate agent, you've got to pay your solicitor, you've got to pay stamp duty, that kind of thing.
So you've got a lot of big up-front expenses. Then you've got the expenses of just owning a house over a long period, non-stop maintenance from your garden to your kitchen to your boiler, et cetera. And then you have the opportunity cost of what you could have done with the money otherwise.
So what’s the first result?
We've looked at 1980 through 2000 and found that, on balance, once all the expenses are taken in to account, you would actually have been better off renting than buying.
If you bought a house in 1980 and sold it in 2000…
… On average you would be over £57,000 pounds WORSE off than if you’d rented and invested in a share fund over the same period.
You’re shattering illusions here.
I know, shattering a lot of illusions here, but I think also, it’ll make an awful lot of people who aren’t on the housing ladder feel a lot better about not being on it.
But in - investment timing is everything.
We also looked at some shorter time periods – where it was a different story
We’ve looked at different seven year periods, all relatively recent, during the 90s and 2000s. In each of these seven periods house prices were rising very fast, at the same time as the stock market was not doing very well at all. And we’ve found, during those periods you would have been better off overall financially buying than renting.
Between 1995 and 2002, on average, homeowners who bought and sold would have been more than £74,000 thousand pounds BETTER off than renters.
Just two years earlier, between 1993 and 2000, homeowners would have been comparatively better off by just £15,000.
All these calculations show that far from property being a dead cert - just like shares - sometimes you win and sometimes you lose.
The home owners among us aren’t the only ones re-examining their attitude to property. Developers are re-thinking the whole way they do business.
David Brookes is – financial director of Wheeldon Homes – he’s only managed to sell about half the houses on this site – so he’s decided to rent the rest.
Is this the only option open to you?
We took the decision that renting for now is a bit of a stop gap I suppose.
David is making the best of a bad job. Making a profit from renting will take years.
If he could sell the houses he’d get an instant return.
We’ve got approximately three and a half, four million pounds worth of assets here that we need to… ideally we need to sell to, to get the cash back into the business so that we can then buy land and develop and create more homes.
This is very much a temporary measure then?
Yes, yes. We’re in many ways reluctant landlords. We’ve taken that decision to go down this route, but we are property developers and we’d much rather sell these properties than rent them out.
Wouldn’t they all.
Here’s something you see all over Britain, a building site where work has slowed down or even stopped.
One of the big house builders was putting up flats here. But there’s little point finishing them now, because potential buyers have vanished
But here it’s a different story
What’s different about this building site to others?
The main difference really between this and others is that this is housing being built for long-term let.
It’s flats being built specifically to be rented out, rather than homes that are just going to be built and sold on immediately.
Building to let is unusual –it doesn’t offer the quick profits of building to sell.
These are going to be student flats – but Doing this for private housing would require a revolution in the house building industry.
For the big companies - that may be the only way to survive.
We are in a position where the housing bubble has burst. We need more homes. Now, those homes are not going to be built by conventional house builders because they just don’t have a market to sell to.
What we want to see is the creation of a professional rented sector who would deliver that market for house builders such as Barretts and Wimpey to be able to sell their products to.
Is this just to get builders and developers out of a hole?
Well, there’s a degree to which we need to do that, because obviously if all the house builders go bust then that’s going to be a lot of jobs lost and it’s going to be a right stagnation on house building in the future
For build to let to work - developers will also need to look at renting as something more than a last resort.
We are a nation of home owner obsessives. But I think people are now starting to realise that it’s simply not the best course of action for everybody, and where your mortgage payments and the interest on those is really starting to affect your quality of life. People are starting to realise that renting is often a better option.
Even with all the extra costs and risks we can’t seem to end our love affair with property.
But before more people rent there need to be some big changes.
Here’s the paradox: Having rented for 8 years and made a fortune from the rental market, Mike Goddard and his wife Stephanie have become turncoats.
They’re frustrated they can’t get the type of lease and security that we found to be commonplace in France.
So they’re buying their next home.
I haven’t been able to negotiate a reasonable length lease, at least 10 years, which obviously is going to give me the opportunity to spend some money on a place like this and get the benefit of it.
Mike intended to spend tens of thousands restoring these gardens – but couldn’t get a guarantee he could stay long enough to enjoy them.
We have to get a little bit away from this obsession with assured short hold tenancies when we need to look at the possibility of bringing in long hold tenancies where you can think of renting as a long term way of living and having your home.
Are you disappointed that you’re almost being forced to buy a property?
I am, becauseI’m building up a potential inheritance tax problem, problems for the future. I’d rather rent, I’d rather use that as a better way of spending my money on a long lease than I would to purchase property, absolutely.
When we first met Nadine and Ross Butterfill they were renting out their house – to try to meet the increased cost of their mortgage.
They’re facing the problem that millions of us are having – is it worth fighting to stay on the property ladder?
The pressure is awful. It’s really awful.
It could be a better idea to carry on renting and save elsewhere so you’re not putting your money into bricks and mortar.
Investing in anything else is just a much as a gamble as it would be as putting your money into property at the end of the day, if it’s to be put into stocks, shares whatever, they fall, they decline.
So you’re happy to go back to the property roller coast ride?
Yeah, I think so but, um…
We might have to discuss it.
It’s been long and it’s been passionate but Britain’s’ love affair with property has not proved as solid as many of us imagined.
Thanks to the credit crash - bricks and mortar no longer look so clever.
Next week, Master Chef’s Greg Wallace investigates the changing face of food retail and the rising discount supermarkets.
What’s behind Britain’s budget binge and has it changed the way we buy food forever?
This episode of Credit Crash Britain was first broadcast on Thursday 13th November 2008 on BBC TWO.