Tag Archives: housing bubble

What I meant to say on Radio 4

Last Friday, I appeared as a guest on the Today programme on Radio 4. The subject was a report that had been done by the Institute for Fiscal Studies about how the wealth of those born in the early 1980s was half of those born 10 years earlier (when they had been in their early/mid 30s). The largest factor behind this was the inability of those born in the 80s to get on the housing ladder.

The interview was done before 7am, I hadn’t had any coffee and speaking to an audience that probably numbered in the hundreds of thousands, if not millions was rather nerve-wracking. So I stumbled over my words and didn’t make all the points I had wanted to.

This then, is my attempt to clarify and expand a little on what I had hoped to say.

The economic reality

I was born in 1983 and as such I fall squarely within the demographic being studied. I fall at the tail-end of Generation X, just a little older than those increasingly referred to as Millenials. The housing situation comes with a double-edged sword. The starting point is that rental prices are high. The effect of this is that it is difficult to save as much of one’s salary as one would like in order to contribute towards a deposit. Yet it’s a goal that is constantly moving. Moving further away. In January, the Halifax bank said that the average deposit needed for a first time buyer in my area was £91,000. More recently, the Land Registry recorded house price inflation in the 12 months to July 2016 as being 8.3%. So what ends up happening is that the real value of the savings towards a deposit is being eroded by inflation. Interest rates aren’t keeping up either. The highest rate of interest I can get on my savings is 0.75%.

As such, I cannot foresee a time within the next few years when houses may become affordable. One of the few hopes of the Brexit vote was that it would bring house prices down, but the devaluation in the pound seems to have offset any domestic instability in the market by making buying houses in the UK cheaper for overseas investors.

A fairer economics

So what needs to happen? Here are some suggestions:

  • Rent controls. First of all, curb any increases in rents and then seek to bring them down, starting with those that are most exploitative (e.g. by looking at rent charged per square foot of living space). At present, tenants are simply being milked for their cash to slake the thirst of landlords’ greed.
  • Build new houses. One of the main driving factors behind house price inflation is a lack of supply. We need new homes and they need to be built sustainably and sold affordably. There’s no point going down the “grand designs” route if all the houses you build come with a £400,000 price tag. The prices need to be linked to average local incomes. There’s also the added benefit of investment in housebuilding is invariably a boost to the economy, creating jobs.
  • Factor in house price inflation into either CPI, RPI or create a 3rd There’s a saying I use at work (nicked off a book on steady state economics): “You measure what you care about and you care about what you measure”. At present, the Bank of England willfully turns a blind eye to house price inflation. This leads to them keeping interest rates artificially low. If they cared about the economic problems caused by uncontrolled inflation, then they would start to factor it into their measures. And once they do that, they’d care about getting it right and getting it down.
  • Increase interest rates to control inflation. Linked to the above, it has to be recognised that inflation of 8% is not healthy for the economy. Incremental increases are needed to a) curb the reliance on debt and b) assist savers in going someway to stop the real value of their savers being eaten away.
  • Limit buy-to-let investors from having an unfair advantage over first time buyers. As well as the under supply of new houses, one of the problems that is contributing to the problem is that homes are being bought by those who don’t intend to live in them. Examples of such measures could include: a) penalties for property owners for not letting out empty properties, b) increased taxes on the profits from rents, c) tariffs on overseas companies & individuals buying UK residential properties, d) Legal maximum on the number of residential properties an individual can own.

Objections

The above suggestions are not universally welcome.

  • Free market fundamentalists object to the idea of rent controls as a matter of principle, as they abhor “market interference” regardless of how justified it is. The reality is that with inelastic demand in the housing market, unfettered market forces will only push prices even higher. Those who subscribe to neoliberalism, though, subscribe to a failed economics and their opinions on such matters need not be taken too seriously, as they are always driven more by ideology than they are by sound reasoning.
  • There tend to be fewer objections here. The main issue is about where houses are built. Brownfield sites are preferable. The downside is that extra supply may push prices down, though given the rampant inflation of recent years, it seems likely that it would just temper that runaway increase in prices. Even if house prices were to come down, this is not as bad a thing as some might think it is. The term ‘negative equity’ still haunts those who remember the late 80s and early 90s, but today’s recent inflation means that homeowners have already benefitted hugely, so it is unlikely that the value of their homes would dip below the amount they bought for it. E.g. Let’s say someone bought a house for £200,000 three years ago. If inflation was about 8% a year, then that house would now be worth about £50,000 more. So if a market correction brought the price down to £220,000 they would still have a £20,000 gain, even though it had decreased by £30,000 from its inflated peak.
  • I’ve heard some contest that this isn’t necessary because mortgage inflation is already factored into the RPI. However, I don’t see this as an objection holding much weight as it only takes into account those fortunate enough to already have mortgages. It does nothing to measure how much more difficult it is to get a mortgage in the first place.
  • This is the big one that people hate. It depends on whether you are part of the “haves” or “have nots”. The downside to increased interest rates is that those with existing mortgages will find they get more expensive. It would also push up the cost of borrowing for businesses. This is where we find out if the lessons of the 2008 crash have been learnt or not. Sensible financial planning, whether personal or in business, needs to take into account the possibility of interest rate rises. If you haven’t got enough headroom to be able to afford a rate rise, then your financial planning abilities should be seriously called in question. In the case of the homeowner, when enjoying the advantages of low rates, it is prudent to save some of the excess; a rainy day fund, if you will. In the case of a business, you need to have modelled your banking covenants with sensitivities built in. Not everyone will have been so sensible, and those who have indebted themselves to such an extent that they would be unable to cope with increased will find themselves struggling more than they have done in the past. Of course, it is the job of a responsible government, with the will of the populace, to support any who fall on hard times. Some people would be hurt by an increase in interest rates, but it’s a necessary consequence of a correction to the market, and there ought to be a sufficiently robust welfare state in place to ensure that nobody is made homeless or bankrupt as a direct result of any interest rate rise.
  • Here, there are difficulties of practicality. How enforceable might they be? In particular, proposal d) might be easily dodged by the having properties owned by a spouse/partner. I must confess I’ve not thought through all the possible loopholes and there’s significant improvement needed to make this a workable suggestion. Yet the principle appears to be sound. For while on the one hand, the rhetoric of the current government is increasingly xenophobic, to pander to the support they get/need from the far right, there is at the same time keenness on investment into the UK from overseas. But we need to both educate out the xenophobia that is endemic in society and be more nuanced about the nature of overseas investment. If it is a case of “put a little in, get much more out” then this should be recognised as a threat to the economy, as opposed to blaming doctors who come from overseas and do a great job in the NHS under (unnecessarily) difficult circumstances.

Political Will

The existing economic situation is a result of the economic and political will of the past. To have a hope of changing things for the better we need a fairer economic and political will now, though it will take time to come to fruition. One of these is the need to change an unhealthy mentality that sees houses as investments rather than as homes. Just a few days ago, I saw on Facebook a post from an old school friend who is an estate agent encouraging people to see how much their house had increased in value. Someone I used to sit next to at work also had an odd boast that his home made more money in a year than he did. This is the kind of thinking that has been allowed to fester for many years and will take a long time to fix. With the above measures, there should be a reduction in the rate of increase in property prices and therefore lower returns for those who have used property as a means of investment. But none of this will happen if the political consensus carries on in the same way it has done for the last few decades. There needs to be a change, but it needs to a sensible change. As we’ve seen particularly in the last year, change for the sake of change can turn up some distinctly unsavoury characters and ideas that should never become part of public policy.

Side issue: the radio experience

Having gone through the experience, there are any number of things I would have liked to have done slightly differently. I had lots of thoughts (which I’ve tried to enunciate above) but I didn’t arrive in the studio with a set of points to make. I was given some idea of the questions, but John Humphrys could ask me what he liked, having been given a briefing paper on the think tank report and on what I had told the show’s producers the evening before. So I have something of a new-found respect for the politicians who go on live interviews. They come on with a set agenda, something they have come prepared to say. While we were off-air, just before the interview, John asked me “So you’re going to say you’re broke, are you?” which I wasn’t. When the microphone was on, I could think of 3 different things I could have said, each worded in another 3 different ways, and so in trying to pluck the right words out of the air, I hesitated, mumbled and then stumbled over what I actually said. That’s why I’m ever so grateful for the existence of a backspace key on the keyboard. I was also conscious of the rumour that if Radio 4 goes silent for 6 seconds, it’s a sign that something’s gone very wrong, so every moment of silence on my part (while my pre-7am coffee-less brain was trying to work) added to the pressure I felt in the interview. I do admit to dodging one question, as it was about another member of family (who’d been invited on, but declined) where I wasn’t prepared to speak on their behalf.

Final thought

As frustrating as it is to be living a relatively miserly existence, certainly compared to friends and colleagues, I am by no means poor. There are many more who have been hurt far worse by the failures of Conservative economics. One need only look at the proliferation in the need for food banks in the last 6 years to see the damage that Cameron & Osborne wreaked upon the citizens of this country.  Whether we are rich or poor, as measured by non-liquid assets, cash or income, there is far more to life than materialism.

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(Guest Post) The housing bubble: a homeowner’s perspective

In response to my piece last week on the housing bubble from a would-be first time buyer’s perspective, my brother-in-law, Radionotme, has written from a homeowner’s perspective. 

Used under creative commons license. Picture by walknboston.

Used under creative commons license. Picture by walknboston.

As someone on the other side of the divide, as Simon puts it, I have to say I broadly agree with what he says. As with most things though, it’s not quite that simple.
To own your own home is an aspiration for most of us, although oddly in some cultures this isn’t the case at all. French, German and Japanese home ownership rates are less than 50% for example.
It is an aspiration I share, and am currently working towards.
Some would say that since I live in a house that I have a mortgage on, that I own that home. I’ll even refer to myself as a homeowner most of the time, but of course the truth is that I do not own the home. The bank, and in turn the institutions that the bank has borrowed from, own the home. If I miss a payment, then my home is at risk of being taken away from me. If I miss several, then this is virtually guaranteed. As such, I do not think I can truthfully say that I own my own home at this stage.
What I can say, is that I am fortunate enough to be on the property ladder. I agree with Simon, that renting is inherently more expensive that buying, but for different reasons. Renting is usually cheaper to start with than buying, but whereas rental costs will increase over time (dependent on market conditions), the price you have paid for a house is final, and the only changes to the monthly payments relate to the interest rate, which can go either up or down (though you may be forgiven for not realising that up is a potential direction for interest rates given the last few years!).
I am currently able to ‘enjoy’ the low interest rates in terms of how it affects my monthly payments, although I remain opposed to them when considering how they affect the wider economy. Even so, my mortgage payments take up between 30 and 40% of my take home pay.
When I first bought my home, and locked into a 6% interest rate for 5 years (oh, what a mistake with the benefit of hindsight), my mortgage payments were over half of my take home pay.
I expected however, and have so far fortunately been proven correct, that my take home pay would increase over time, and so that percentage of my salary that the mortgage payments took up, would decrease.
This plays into Simon’s figures, once you have the relevant context. Mortgages on average take up a smaller proportion of salaries, however that is in part due to people towards the end of their mortgage term won’t be paying much, when compared to those just starting out. Those people are often paying significantly more than their renting peers.
I’d also disagree that 5-10 years ago, prices were ‘cheap’. They may look that now, however even in 2003 there were warnings of an impending house price crash, and reports that houses were out of pace with wage growth. Although I’m on the property ladder, I jumped on years after some of my friends, and years before others. The ones who jumped on earlier were able to make more from the house price rises than I could, even though I bought 10 years ago, and they bought 13-14 years ago.
Finally, I take issue with the rather flippant comment that those on the property ladder don’t care about those not on it. We do, both for selfish reasons, and unselfish. I care deeply that my younger siblings, have and will have considerable difficulty getting on the ladder. I worry for my son, and whether he will be able to own the roof above his head when he grows up. I worry about the wider economy, and how the unending house price rises give rise to buy to let landlords, who have no interest but to make as much money as possible.
I agree that something needs to be done, but I have little faith that any of the main government parties are up to the challenge, or even that it is a problem that government alone can tackle. Whatever the solution though, it has to start with more ‘normal’ interest rates, that can encourage people to save, as well as to borrow.

The housing bubble: A would-be first time buyer’s perspective

Used under creative commons license. Photo by meddygarnet

Used under creative commons license. Photo by meddygarnet

Anyone who reads the economics section of the press can hardly have failed to notice the concern over house prices at the moment. While it can be easy to look at numbers and forget the humans behind them. I am just one of those humans and here I present a wholly individual anecdote, with some reflections on the wider economic scene. My circumstances won’t match everyone’s, but there may be echoes that are recognisable. And if the current housing market does not currently affect you adversely, then perhaps this may help you see things from another’s perspective. If anyone who is on the other side of the divide would like to respond, I would be very willing to host it as a guest post on this blog and give it equal publicity.

From the time I started my current career, shortly before I turned 23, I have aimed to save money. In so doing, I freely confess to having a selfish streak within me. I try to be generous where I can, so I save less than I can possibly could. The purpose of the saving has always been clear: it is for a deposit to buy my own home. Having abandoned any youthful hope of ever marrying, I know that I shall never have to spend money on a ring or two, a wedding or children of my own. Of course, that then precludes the possibility of marrying someone more wealthy who could contribute a lump sum towards the deposit. Though, given the average cost of weddings these days, if I were to contribute towards that I wouldn’t have a penny left towards a home.

So while I save, I wait. I acknowledge and am grateful that I am paid more than average salary for this country and that by virtue of having been born into the family and country that I was, I enjoy far more privilege than the vast majority of people in the world. That is just to put things in a little perspective.

If one cannot buy then the only viable alternative is to rent. Yet renting is inherently more expensive than buying. At the end of a rental period I own nothing more than at the start. With property ownership via a mortgage, when make a payment against the mortgage you have the expense of the interest but you also pay back some of the debt. When all the debt is paid, you owe nothing and you own a home outright. It takes decades to do, but incrementally, month by month, you will get there.

As someone who is forced to rent, there are several frustrations. There is what one might refer to as a ‘gap of years’. It’s not even a generational gap. Those who are 5 or 10 years older than me have owned their own homes since they were in their mid-20s, having had the opportunity to put a deposit on their homes when the prices were cheap and the deposit requirements much lower than they are now. As a consequence, it means that those who have mortgages, for an equivalent property, pay far less in mortgage repayments monthly than I do in rent.

As an indicative, rent alone constitutes about 35% of my monthly income after tax. This makes me fairly average for a renter, as a recent survey I read showed that the mode bracket for renters was 30-40% of their net income, while those with mortgages paid 20-30%.

The upshot of this is that those who need to save the most (in order to pay for the deposit) have inherently less disposable income than those who don’t need to save as much. But when this is coupled with the high rate of inflation on house prices, a wedge gets driven between those with property and those without. One of my personal irritations is the smugness I witness from some of those who were fortunate to be able to buy when they did. One person I know likes to boast that the increase in the value of his property on a month by month basis is greater than his net income. The same person then periodically ‘encourages’ me to buy, even though I have told him repeatedly that I cannot afford to do so. In his imagination, I must be able to save the tens of thousands of pounds needed in the space of a couple of months. I have tried making the point to him that now would be a good time to invest in buying a yacht and that it doesn’t matter whether or not he can afford it, he should just do it. Unfortunately, my sarcasm is rather wasted on him as he just doesn’t see the absurdity of his own (lack of) thinking.

To try to put some numbers on the matter, after some investigation, given my income, expenses and current amount of savings, I could probably afford a property up to the value of £200k. Unfortunately, the average price of a 1 bedroom flat where I live is around £330k. The answer is obvious, though, isn’t it? Move to somewhere less expensive!

If only it were that simple. Part of the reason I moved into London last year was because the overall fixed cost of living (rent + council tax + cost of commuting) was cheaper than when I lived in Sussex. Even though the rent is more expensive in the capital, the cost of train fares comes down by more than the rent goes up. So if I were to move back out of London again, then my cost of commuting goes up and therefore the amount I can afford to borrow goes down.

It could be argued that the M25 is a kind of vicious circle. Once you’re inside it, it becomes hard to leave again. A factor in this is the lack of reliability in the private train companies (Southern have been particularly bad this year). The fact that I now have 4 different routes home through London rather than the monopoly that Southern have on the Arun Valley line means that if one or two fail, I have backups I can take.

Another choice would be to move jobs entirely. I’m sure £200k would get me a decent home in my old stomping ground of County Durham. Yet an equivalent job would almost certainly not pay the same as I get in London and so again, the amount I could reasonably borrow would decrease. Then there would also be the problem of leaving a job where I have some level of job security (though is there really such a thing anymore?) and trying to secure a new one in a location where I don’t currently live.

That’s the essence of the problem. Those who got on the “housing ladder” don’t care that the bottom few rungs have come off; for them, it is up, up and away. I’m not arguing that this is inherently unfair, but it is indicative of a problem with our current economics. The low interest rates are partly what is driving this wedge between the propertied and those who aren’t. It means that those with mortgages pay little interest and those who are saving cannot keep their savings value up to speed with inflation. Ideally, the saving rate should be pegged to house price inflation, though I’m not sure any banks would be wanting to offer an 11.8% savings rate.

Another factor is the fashion for buy-to-let. Some buy-to-lets are necessary for the rental market to continue in existence, but I am yet to be convinced that the current number is right. In effect what a buy-to-let does is take a property off the market that could otherwise be bought by someone who needs to live there. Yet the person buying a buy-to-let property isn’t the one who lives there. So they are merely reducing the supply of housing which is exacerbating the problem of increasing prices.

It’s a big problem, which needs a coherent, holistic approach. Tinkering here and there is not, in my view, the best approach. So while we may come up with ideas to tax more heavily the buy-to-let landlords as a disincentive or plan the building of more homes, we need to look at the picture as a whole. Looking to the future, what we may end up with if the market direction continues as it is, is we end up with a generation who will not be able to save enough to ever afford a deposit and must wait until they bury their parents before a home of their own becomes a realistic prospect.

That’s my perspective. What’s yours?