Patrick Collinson: When saving is a mug's game

Patrick Collinson: When saving is a mug's game

Four years ago I wrote that the UK property market was a bubble waiting to burst. How wrong I was. The gravity-defying UK market paused in 2005 but reaccelerated in 2006 and during the first few months of 2007, in London at least, mega-bonuses have sent it soaring again. The lessons? (a) Never try to call the top of a market (b) Property is overpriced, but that doesn't stop people buying and making it even more wildly overpriced.

This week's Guardian Money features seven first-time buyers who, by hook or by crook, are clambering on to the property ladder. Like most people, I'm horrified that young adults find it necessary to take out 40-year mortgages, stretch themselves on loans of five or six times their income, and borrow more than 100% of the cost of the home to pay for fees and so on. But those who patiently saved for a deposit have been the mugs; they've seen prices jump at a much faster rate than they can save. Today's market is a perverse incentive against thrift.

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Meanwhile, those who have kept their fingers crossed for a price fall have had their fingers burnt. It's no surprise these people will now take any steps to jump on the ladder before it moves completely out of reach.

Low unemployment and low interest rates (despite the recent rises) are the bedrocks of today's market. But it is confidence that keeps it buzzing, and it's still there in bucket-loads. Propertyfinder.com this week found that, despite already bloated prices, 81.9% of people expect them to rise again over the next year, by an average of 6.4%. This is compared to 77.8% who, in February, expected an average rise of 5.9% over 12 months. The fizziness of Britain's market compares to the flat and falling market in the USA: after a heady couple of years of price rises, it is either stagnating or falling and the spectre of mass repossessions is rising. What's called the "sub-prime" market (otherwise known as lending to poor people) is rapidly falling apart; arrears are rising and the lenders who poured in are going bust. The risk of contagion is high. The woes of the lenders sent Wall Street tumbling and stock markets around the world, including the FTSE, fell sharply.

Lenders here were quick to calm nerves, insisting that the UK sub-prime market is nothing of the scale of the US, although I'm not so sure. The first-time buyers we feature this week are "prime" borrowers, as they haven't got any CCJs or other credit "delinquency". But there's a layer of borrowers who are even more stretched and will find it impossible to keep up payments if faced with interest rate rises or a change in personal circumstance.

The other great support to the UK property market is supply, and the lack of it. The tide of opinion is now swinging against the green belt, almost universally blamed for keeping house prices unnecessarily high. It's probably sensible to relax some green belt restrictions, but that, alone, can't be the answer.

Higher density and, crucially, higher quality building in the cities, is essential. I visited London's Kidbrooke Park estate last week, probably the worst housing project ever built. It's a template of how not to solve housing problems. But policy-making has, for too long, been scarred by the enormity of the mistakes made in the 1960s. High-rise doesn't have to be high-crime and deprivation. It can be highly sought-after too - just look at the Barbican towers or the Trellick Tower. We've had competitions to build the £60,000 house, but they're just a misplaced attempt to build a new generation of semis on the cheap. High quality high-rise - without a sky-high price tag - may be a much better solution.

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