A prominent agency chief is warning that record house prices could lead to a housing bust if lending gets out of control.
David Alexander - who runs the DJ Alexander wing of the fast-growing Lomond Group - says the booming housing market may result in demand for lending at higher multiples, and over longer periods, which could ultimately lead to market stagnation or even a potential bust in the coming years.
He also asks whether the news that one lender was now willing to offer seven times first salary and five times second salary over a period of up to 40 years would set off a rapid boom - followed by an equally rapid bust.
“No-one wants to deny individuals the right to be able to buy the home of their dreams. Indeed, we should encourage this where possible. However, you don’t need to have a very long memory to know that we have been down the route of very high multiples of people’s incomes before and that this ultimately resulted in a massive correction in the market” warns Alexander.
“While the 2008 crash was also related to the wider economic woes it was clear that lending too much on the assumption that property will always increase in value was a major factor and a mistake that we don’t want to repeat.”
He continues: “What we need is a sustainable, growing housing market rather than one prone to peaks and troughs. Prices will always fluctuate but in the long term it is better for everyone if prices rise at a reasonable level each year and maintain steady growth over five, 10, 20 years and beyond. In this way the market benefits most people.”
Alexander concludes: “Making someone happy in the short term by giving them large levels of lending compared to their income may be good for them in the short term but may cause more heartache in years to come if interest rates rise, the market becomes frothy and overblown, and if circumstances change. That is when the true price of high lending will become apparent.”
In Christmas week it was announced that the Lomond Group had acquired DJ Alexander, funded by Lomond Group’s private equity partner LDC. DJ Alexander will continue to trade under its existing name, with founder David Alexander leading the Lomond business in Scotland as chief executive.
DJ Alexander’s 104 employees will join Lomond Group, bringing the total group headcount to approximately 250 in Scotland and 1,000 across the UK.