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.
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.
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.
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.