Most of the debt in the UK is borne by individuals in the form of mortgages. Between 1960 and 1996 total UK mortgage borrowing rose from £3,350 million to £409,433 million. Since then, it has more than doubled, passing the £1 trillion point in May 2006. This is mainly attributed to banks getting into the mortgage lending business (and many building societies demutualising and becoming banks) in the 1980's. As banks are not limited to lending out only the amount deposited with them, but can create as much 'money' as they wish in the form of loans to house-buyers, we now have a situation of an unlimited amount of money chasing a finite housing stock, which is a recipe for inflation.
Mortgages are commonly accepted as the normal way to 'purchase' a house. Indeed, most people who have a mortgage would describe themselves as 'owner-occupiers', when really the bank owns the property until the debt has been paid.
The word 'mortgage' means 'death-pledge' or 'death grip'. It stems from medieval times when mortgages were a method of raising money on a property that you already owned outright if you had fallen upon hard times. It was seen as a last resort.
If you fail to keep up repayments on your mortgage the bank has the right to repossess your property. The fact that banks don't actually have he money they loan you is overlooked, but they will get that money back either by your repayments, or by repossessing your house and selling it!
In the early 1900's the idea of individuals borrowing vast sums of money against their future income was not entertained. Old sayings like "neither a beggar nor a borrower be" and "if you want it, you've got to earn it" were commonplace, and warn of the dangers of borrowing.
It is was only in the interwar years that people started to buy his or her own homes rather than rent. Once borrowing money against your house had become established, pretty much everyone wanted to do it.
Houses in the 1930's were cheaper relative to income than now. They were about twice a man's annual salary, and buyers had more money to put down as a deposit, generally about 25%. The average life of a mortgage was about 8 years - not because it was transferred to another property, but because it was settled early.
Nowadays many mortgages take two annual incomes into consideration and 100% mortgages are common. In America, some lending authorities don't even ask about income, they just lend! - Confident that they will get their money one-way or the other (repossession).
Ultimately, the price of houses doesn't reflect the price of the properties (although that is relevant, see business) or how much we can afford to pay, it is dependant on what we can be persuaded to borrow.
When the prices of our houses are escalating, those of us who are owner-occupiers appear to do well out of the housing market. But we only make money if we sell up and move out of housing. Meanwhile, first time buyers have an increasingly hard time trying to get onto the property ladder.
When confidence fails in the housing market, people who have been persuaded to borrow beyond what they can reasonably afford face paying back a loan on a property that is 'overvalued', repossession or houses that they can only sell at a lower value than the price purchased.
We also have a situation now, where more people are re-mortgaging their properties to help their children buy a house, to help them through their retirement or pay for a new bathroom/kitchen/extension. This in turn means that less property is passed down to the next generation.
So why did successive governments site back and allow – even encourage –the increased borrowing which has now driven property prices up beyond the reach of most first-time buyers?
When we remember that mortgages provide the country with around 60% of its money supply, it seems reasonable to assume that any loosening of the criteria for borrowing served a definite political and economic objective. Relaxation of the rules has certainly led to a massive expansion of the money supply by making it possible for people to take on previously unthinkable quantities of housing debt.
The result is that housing costs now absorb 17.5% of the average UK homeowner’s income after tax. In 1960, the comparable figure was 9.5%, and remembers in those days 'household income' would usually refer to one full-time wage, whereas today it generally includes two.
For the banks, the property bubble is a huge money-creation bonanza. For the government, it is a valuable source of revenue, as stamp duty and capital gains tax roll in, and inheritance tax thresholds fail to keep up with grossly inflated house prices. Not to mention the fact that all those debt-soaked property 'owners' are obligingly taking on, at their own risk and expense, money supply duties which should be shouldered by a public authority.
However, there has never been a bubble which didn’t burst, and unless this one is the exception to the rule, the excessive borrowing fostered by bank and government policy may once more end in negative equity and widespread repossessions.
As long as governments rely on systemic debt to put money into the economy, it is in their interests to keep mortgage lending high and you and your children will be the ones to suffer!