Waiting for the music to stop

I'm sitting watching yet another program about the current British property boom. The theme is simple - property is being priced out of reach of first time buyers. It's a horror story I've been watching for a while, coupled with the rise in personal debt. According to a statistic I heard tonight, the British have the highest per capita personal debt, including mortgage debt, in the world.

In most respects, I'm really glad DH and I are already on the property ladder. Our house needs work, but it is a solid 1930's semi in an outer London suburb. It isn't our ideal suburb; we procrastinated about house hunting in 2002 and watched houses in our favourite area go up by £100,000. They had been in the £150,000 region; when we started house hunting in January 2003, the cheapest in that neighbourhood was £240,000. That was more than four times our joint salaries. So we started circling outwards until found a house we could afford 7 miles from our original target. If we tried to buy it today, it would be out of our price range.

The property market here is has reached scary levels. I don't understand how "normal" people can now get on the ladder; mortgage companies have been advertising multiples of 5 or 6 times salary but even at those levels most people can't afford a small flat, let alone a family home. The average salary here is approximately £27,000; at five times salary, Joe Average could borrow £135,000. I did a quick search on www.findaproperty.com: he would be lucky to purchase a small studio flat anywhere in London. I counted 5, including one in Aylesbury, Buckinghamshire (another 20 miles out of Central London from here).

The real question is what will happen now credit is drying up? Wages are rising at 3% per year, whilst house prices are rising at closer to 15%. Employment and salary figures are skewed by the recent influx of Eastern Europeans, who happily take lower wages than existing residents because they don't realise how high cost of living is and/or only plan on working here for a relatively short time until they have improved their English or reach a saving goal. This can't carry on.

Academically, I know how this game will play out. People will borrow money on larger and larger salary multiples until either property prices rise completely out of reach or the banks stop offering them. Those that have borrowed crazy money will find their mortgage payments eating up large proportions of their salaries and disrupting how they'd like to live their lives. Then a crisis will hit, probably in the form of higher interest rates, particularly as long fixed rate mortgages are almost unknown here - most people are on variable rate. The overstretched will survive for a while using their credit cards to supplement their income. And then their personal house of cards will start to topple. And their neighbours. And their friends. Personal tragedies hidden in an avalanche of bankruptcies and repossessions.

It's like an elaborate game of musical chairs, but with consequences. How many people will be damaged, how many homes will be lost, and how many banks fold as a result of debts gone bad, before the music stops?

- Pam