The anatomy of a housing boom

Although booming house prices take their toll on house-buyers in terms of emotional well-being, they still manage to rationalise the high purchase price in the firm belief that prices will continue to go up, according to ESRC-funded research.

A research team, drawn from Edinburgh University and the School of Planning and Housing at Edinburgh College of Art, studied buyers in four areas of Edinburgh to find out how people made decisions in a booming housing market, what motivated them, and where they got their money. The researchers also interviewed estate agents, solicitors, and surveyors to establish their part in the booming market, and the extent to which, along with buyers, they were instrumental in a situation where rising house prices seemed more like a lottery than a market place.

The chosen areas were The Grange and New Town, traditionally high priced areas; Merchiston, with medium-priced houses; and Leith, low priced, and dominated by tenement like-flats - although this was also a rapidly rising neighbourhood. The team interviewed 66 owner-occupier households who had all recently moved into or within the four areas. The sample including 15 first time buyers.

Much of Edinburgh witnessed a house price boom in the late 1990s which the householders attributed to the accumulation of �cultural capital�, including the change in Scottish politics, the consolidating financial centre, and the fact that the city has a stock of distinctive domestic properties. Just as in London, the perception was that the

Edinburgh housing market was a special case. Interviewees cited several additional factors as being responsible for fuelling the boom. These included media hype, collusion among intermediaries, and the Scottish sealed bidding procedure - which prompted ever higher bids as people became desperate to secure a house.

Most buyers caught up in what was one of the strongest rising housing markets did not borrow the maximum mortgage available despite paying well over both the asking price and the surveyed value of the house.

Between 1996 and 1999, the prices of all properties exchanged within the four study areas rose by an average of 64 per cent. Among those interviewed, buyers in the higher priced neighbourhoods largely managed to accommodate such prices from the capital they realised from their previous home. This accounted for an average of 56 per cent of the price paid in New Town, an area close to the centre, and 43 per cent in The Grange. The new mortgage averaged 30 per cent of the total in New Town and 37 per cent in The Grange. The balance was made up from savings (3.4 per cent and 7.5 per cent respectively) and inheritance money (9.7 per cent and 10.1 per cent respectively).

In Leith, where most of those interviewed were first-time buyers, mortgages accounted for an average of 81 per cent of the purchase price. Many of these buyers said they could not have become home-owners without the help of their families: an average of 6.7 per cent of the purchase price was met from family gifts or loans, and 4.5 per cent came from inheritances.

Some buyers in Leith felt they had had to compromise by buying there in the first place, although they were glad to be on the housing ladder at all. Finances may have become a bit tighter but there were holidays and treats that could be cut out without having to skimp on basics.

The researchers found that traditional market signals became unreliable in the latter part of the 1990s. For example, more than two-thirds of the interviewees had paid more than 10 per cent more than the asking price for the property in which they were now living,

while nearly one third had paid more than 10 per cent more than the value attached by a professional valuer. Almost everyone paid more than they had intended. In some cases in the higher priced neighbourhoods, this was as much as �100,000 more. Over half had bid unsuccessfully for one or more properties.

Most people remained confident that they could manage the repayments since there were few worries over job prospects. Even among those who had paid well above the valuation of their house, the feeling was that any financial stress would be short lived and outweighed by the gains that they had already made. Reasons given for making the purchase at such high prices differed by area. In The Grange, for instance, people spoke passionately about the quality of the neighbourhood, whereas in New Town, good investment potential figured strongly in the rationalisations.

But the researchers found that participating in such a booming market was extremely stressful for people. They point out that bids are as much a statement of emotional attachment to a potential home as a financial contract, but that they can also easily fail when so much about the market is uncertain and uncontrollable.

For further information, contact Dr Liz Bondi in the Department of Geography at Edinburgh University. Tel: 0131-650-2529. Email: Liz.Bondi@ed.ac.uk , Professor Susan Smith. Email: sjs@geo.ed.ac.uk , Professor Moira Munro at Heriot-Watt University/Edinburgh College of Art. Email: m.munro@eca.ac.uk Or, Dr Hazel Christie at Heriot-Watt University/Edinburgh College of Art. Email: h.christie@eca.ac.uk Alternatively, contact Lilian El-Doufani, Lesley Lilley or Karen Emerton in ESRC External Relations.Tel: 01793-413032 or 01793-413119

NOTES TO EDITORS

1. The ESRC is the UK�s largest funding agency for research and postgraduate training relating to social and economic issues. It has a track record of providing high-quality, relevant research to business, the public sector and government. It invests around �46 million every year in social science research. At any time, its range of funding schemes may be supporting 2,000 researchers within academic institutions and research policy institutes. It also funds postgraduate training within the social sciences. The ESRC website address is http://www.esrc.ac.uk REGARD is the ESRC�s database of research http://www.regard.ac.uk