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Negative equity on wheels - the results of government intervention

Many people would be shocked to learn that it costs nearly £200,000 to buy an average London house, and even more that negative equity had jumped the species barrier and caused a serious outbreak of mad car disease on garage forecourts.

This is a mistake. Being shocked when house prices leave you behind or migrate to other realms is naive.

The housing market is not part of the British economy, the British economy is part of the housing market! As a result, it follows the first law of enterprise which says that things will go on getting better and better until they start getting worse and worse. During the great housing boom of the 1980s everyone understood that appreciating house prices were good news. Right up to the downturn in 1989 the talk was not of 'negative equity' - owing more money than your house was worth - but of 'equity leakage' - borrowing on the increased value of your house to buy a yacht or take a holiday in the south of France.

That was the better and better stage.

The worse and worse stage started when interest rates were high, multiple tax relief on mortgage interest had stopped and the number of house purchases a year had dropped by half. But even then there was still, as the saying went, a lot of money in the system. Homeowners and borrowers went into the early '90s recession on a cushion of equity worth something like £720 billion - a figure that put the gross national product to shame then and still would today.

Hundreds of thousands of households might have gone into negative equity but millions more managed to stay afloat for the best part of the five years before the market recovered.

As a result of the forced sales and foreclosures of the recession - which, it should be remembered, followed more than a generation of steadily rising house prices - estimates of equity held by homeowners and borrowers today are somewhat lower than might be expected, only some £600 billion, but still enough to knock the export trade out of the ring and to wag the dog of the national economy. This is a hypothesis you can test today by putting a flat on the market in London, waiting to see it advertised in Hong Kong and then seeing it sold to people from America who think themselves lucky to pay 3 per cent in transaction costs instead of 10.

Why then the migration of negative equity from appreciating houses to depreciating motor vehicles? According to Henry Ford, the founding father of mass production, rising wages and falling prices, this should never have occurred; and it did not in the days of the utilitarian Model-T.

Unfortunately since then motoring has evolved from simplicity into luxury and - through globalised distribution and the holding of buffer stocks - the cost-depressing effect of excess production has been contained.

Now, under a supplier-controlled regime, as with housing, it has become possible for car marketeers to predict rates of depreciation and calculate future value. 'Personal Contract Purchase' like 'shared equity' has been the result: a huge step in the direction of mortgage finance. The only weakness is that any softening of car prices inevitably leads to some cars ending up worth less than the loans taken out to purchase them. This is what happened. Thus negative equity was made to bloom on the forecourt, where it never bloomed before, and the used car trade started to follow farming into the black hole of insolvency. Today, although negative equity among car owners is a microscopic phenomenon compared to its house price equivalent, it shows exactly what would happen if the government ever did seriously attempt to hold house prices down.

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