Wake up Britain. You Are Still Smoking Crack.

I bought a house in London in 94 for 30% of what the previous owners had paid for it (people who thought house prices only ever went up). I sold it in 2001 for 600% of what I paid. Seven years later, after selling a company for $30M, I could not afford to buy it back from my share of the proceeds. In theory, I would have made more money had I stayed at home for the last seven years watching television.

In short, if you bought into the British dream then you implicitly believed that it was a better idea, financially, to buy a house, become a crack addict and do nothing for more than half a decade. If you believe this, as the statistics imply, then crack is what you are smoking.

So here is my Crack-o-meter guide to lingering UK house price delusion:

This ridiculous orgy of money-for-nothing greed spawned a dozen of TV shows which replaced architecture for window dressing in order to make a quick buck. This should have been the early warning sign. 50% of British TV (even here on BBC America) seemed to be one giant infomercial for the economic potential of your own living room, if you bought an IKEA lamp and painted it orange.
Conclusion: early experimentation with crack

After house prices started to level, plot lines were running a bit thin on ‘half hearted house makeover: paint your front door and make half a million quid’. The leather panted ponce who presented one show I watched took a new tack – falling house prices were a good thing, you could make money because the rungs on the housing ladder would get closer together and you could move up more easily. Unbelievable.
Conclusion: social crack smoker, says he/she can give up.

As house prices started to drop the mantra was that ‘house prices never really drop, they just stagnate’. However, a graph of UK and US house prices compared to Japan showed that this was patently false. See here.
Conclusion: habitual crack smoker.

Since I posted the graph comparing UK/US in August 07, the US has experienced dramatic falls in house prices. The median house price in Detroit has dropped 57% in one year to less than $10,000 (this is not a misprint). This is less than the price of a breeze block garage in a deprived area of England. But the sub prime market in the US was believed to be an isolated problem that would not affect the UK.
Conclusion: mental impairment from crack smoking.

The catalyst that created the UK house price boom in both the 80s and now, financial industry bonuses, has vaporized. The subsequent layoffs and contagion of the broader economy have only just begun, while 97.3% of UK houses have already declined in value by an aggregate 13%, before the crash.

And yet: 32% of UK home owners believe their house is not worth less and 38% believe it will not be worth less in future and 30% believe their house price is about to go up. Irrational denial is revealed by the fact that statistically, people think their own house will hold value but not the next door neighbors’. But the irrational denial does not stop there, real estate companies predict another 15% maximum price drop (and this is the gloomy prognosis), starting to correct next year. I we look at Japan things could be a lot worse.
Conclusion: crack dealers.

He is my prediction. In two years time, I will be able to buy a house in England, and I will pay less than 50% of what it was valued at the peak. The aggregate will not decline by as much, but the decline will nevertheless be catastrophic. At that rate I will still be getting a worse deal than my last house, so this is hardly without precedent. Am I smoking crack? We’ll see.

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