Why Britain Still Has A Housing Bubble, And Why This Will Lead The Economy To Collapse

Nearly all financial crises are either closely related to, or because of, a property bubble. Britain still has a property bubble (average house prices are currently £246,387 with an average income of £22,800, making that nearly 11 x income!). Anecdotely, those selling say they can't shift their homes - but yet those home owners (almost all born between the 50s and 70s) are clinging to their values, desperately trying not to accept lower prices.

How Did Prices Get So High?
The average baby-boomer home owner did not earn the £61k-£80k/yr traditionally required to afford the home they now live in. In general they will have bought their home for well under £100k, on a 25yr mortgage that they could afford. However, they do feel they "deserve" or "have earned" the £250k they now sit on.
What happened is like a giant pyramid scheme - an unconscious collective scheme for everyone to get rich without actually generating any wealth (here-in lies the first clue as to why bubbles always go spectacularly bad). Everyone 'agreed' to sell their price for a higher amount. Bob puts his price up, which causes Jane - who is buying Bob's house - to put her price up. At some point over the past decade (due in part to property programs and those ads that claimed you could become a millionaire by doing nothing through buy-to-let) everyone agreed that actually - rising house prices rule! So let's ALL push our prices up together - then we'll be richer!
This also worked for the economy - everyone feels richer, they buy more - even equity releasing a 'little bit of money' to buy an M-Series. So the government loves it to. But there's a problem - if no-one can buy Jane's house, the whole thing stalls. The solution? Make bigger and bigger loans available to those people at the bottom of the housing ladder! Make buy-to-let loans available to pretty much anyone! And huge loans at that.

But that doesn't work either does it - because it's risky to lend 100,000s of pounds to these people? Ah, we have a solution! Banks figured out a way to not take the risk on themselves, but 'resell' those mortgages (and actually make MORE money out of them). The mortgages were resold in selection boxes so the people who "bought" these loans didn't see the obviously-ludicrous coffee creams amongst the jam rings and bourbons. These selection boxes of maybe a thousand or so mortgages were selling for so much money, that most banks got into the swing of buying other people's! (this stupidity seems mainly driven by traders who got a huge bonus for making these trades, but didn't suffer from the consequences, and the people whose money it actually was didn't know nor understand what the traders were doing). The perceived spreading of risk - and the belief that surely the whole thing couldn't collapse - is what led Gordon Brown to declare the end-of-boom-and-bust - possibly the most dangerous, bubble-inflating statement of all time.
A few years after these selection boxes were sold, people started to realise that they weren't getting their £500/mth interest payments from all of the mortgages they bought - in fact homeowners (in the US initially) started defaulting wildly, and the whole sorry mess started to untangle.

Of course, banks are no longer lending the bottom of the ladder these silly sums of money (even though those with property further up the ladder are often whinging that the 'housing market has stalled' because of 'the unwillingness of banks to make credit available' - or something along those lines). The bottom of the ladder has been kicked away - but prices remain.

So Can Prices Stay High?
What IS clear is that prices cannot go higher. A junior doctor earns ~£30k - going up to £53,781 to £81,158. These are people in the top-end of the wages world, and yet they could not get a mortgage for an average home without a substantial deposit.
This in itself has implications - first time buyers of the recent past were happy to get £1/4million loans so long as prices went up. It was all relative, so a friend of mine told me before jumping into a massive loan that would take 35 years to pay off. It did not strike him that this was less a housing ladder he was getting on, but a millstone he was strapping to his feet.
I had been thinking about those who I knew were buying - their parents were helping out with the deposit - generally from taking equity from their own homes. The only way I could see house prices staying up was if the baby-boomers provided the unobtainable sums to their children, or indeed bought up the majority of available property as buy-to-let.
There is a reason why this won't happen - or not indefinitely - and that is age. Banks may open up increased lending to wealthy 40/50 somethings now - but as they age, there simply won't be enough earning life left to forward them another say 50,000 on their mortgage. Without selling up, this will come to a natural end.

So When Will The Falls Come
Soon - if Ireland and the US are anything to go by. What forges a virtuous circle when the bubble is inflating becomes a vicious problem on the way down. When prices start falling, people don't want to buy until they level out. Buy-to-letters start losing more money each month than they are gaining from rent - and have the not inconsiderable hassles of being a landlord chucked in to boot. Those who tip into negative equity soon join in the glut of those trying to sell, and people stop saying how houses are easy money and point out that the Emporer never really did have any clothes on.

What Will Happen
Ireland are on the way down, and the impact on the economy continues to be devastating. From just this cursory assessment of prices, easy to see that our bubble is HUGE and - combined with spending cuts and rising unemployment - potentially ruinous.