Despite a totally stagnant housing market across most of the UK, Savilles estate agents have reported that top-end London property prices have increased 18.6% in 2011. This increase is ascribed to international buyers sinking money into UK real-estate as a tax-efficient safe-haven while other investments look increasingly volatile. By assigning property to an off-shore company, it can exchange hands via the sale of shares rather than deeds. So rather than the usual top rate of 5% stamp duty land tax, only 0.5% stamp duty is paid. It goes further than this though, by exchanging equity in an offshore holding company, capital-gains and inheritance tax can also be avoided, as can tax on rental income if the property were to be let. To add insult to injury to the UK taxpayer, many of these super expensive properties are left empty much of the time. They are purchased as a secure store of wealth rather than a residence. So despite seeing the majority of the London workers being forced to pay an increasing proportion of their income for housing, the most desirable residential locations are becoming increasingly under-utilised.
In fact the only tax that is likely to be paid consistently on property purchased in this way is council tax. However if these properties are left long-term empty then a 50% discount is available for 6 months and 10% discount thereafter. Perhaps in an attempt to lure further foreign buyers to invest, Westminster council proudly proclaims the second lowest council tax in the UK. An apartment in no.1 Hyde Park, valued at £30 million, will pay less in council tax than a 'band C' two bed terrace here in Oxford. Remember that Council tax does not pay for local services but more properties left empty by foreign owners does mean fewer bins for Westminster to collect which is handy for them.
And of course central Government proudly announced that, although they have increased VAT and National Insurance, they would be continuing to freeze council tax this year. Bravo.
Wednesday, 28 December 2011
Monday, 5 December 2011
"It is hard... to identify asset price bubbles"
A quote from Mervyn King, Governor of the Bank of England, in 2004 agreeing with Alan Greenspan the Chairman of the Federal Reserve. Perhaps he should have looked at the plot below which I put together with data from the Bank of England's website.
The peak in the rate of change of mortgage lending occurred around the same time as the words were being uttered. As far as the central bankers were concerned, since inflation was low and stable, all was fine and dandy. This conclusion was made despite the huge amounts of credit money pouring into real estate. Yet as the financial crisis has developed there has still been no genuine acknowledgement of this failure to spot the critical factor - the change in private debt.
Note the discontinuity in the mortgage lending plot. This occurs where there is a change in the source of the numbers from BoE derived to mortgage lender derived. It is almost as if the BoE want to disown the data.
Note the discontinuity in the mortgage lending plot. This occurs where there is a change in the source of the numbers from BoE derived to mortgage lender derived. It is almost as if the BoE want to disown the data.
Saturday, 19 November 2011
Government set to help established homeowners
News is filtering out of the government's overdue housing strategy paper and it looks set to be a major shot in the arm for those at the top of the housing "ladder". The government appears to be siding more with the CBI's recommendations rather than those of the Intergenerational Foundation. However the proposal that both reports recommend, namely the removal of Stamp Duty, looks set to be ignored. The government instead is likely to go with a state-backed mortgage indemnity scheme.
"Under the mortgage indemnity scheme the government would cover the risk for the lender, which should enable first-time buyers to take out larger mortgages relative to the value of the home."
Firstly we can ask why tax-payers should be taking the risk when the banks get the interest (have we not learned anything from the financial crisis?). Secondly we can surely see that the ability to take out larger mortgages only serves to increase house prices (again a take-home message from the financial crisis is that inflating asset prices with ever increasing debt leads to bust). So this policy looks set to boost existing homeowners at the expense of first time buyers.
"The plans also propose that borrowers should be able to use money in their pension pots to boost deposits."
So not content with first time buyers paying an ever increasing proportion of their disposable earnings into housing, now we propose that they put their pensions into it too! As above, this only serves to inflate house prices which helps established homeowners at the expense of first time buyers.
"Cameron is also expected to develop his plan, first set out at the Conservative conference, to extend right-to-buy for council homes... The consultation will reveal the level of discount available to tenants wishing to purchase their homes and a broad outline of how sales receipts will be distributed."
An established government policy is to sell off stuff that we all own at a discount so that private owners can sell it back to us at a higher price. Witness the number of former council homes that are now rented out privately at the market price and typically sold at prices above which first time buyers can afford (since former council houses are typically bigger than new builds).
"Grant Shapps, the housing minister, has developed a "build now, pay later" model, to be applied on many of the sites. Developers will not have to pay for the state-owned land until homes are complete, relieving pressure on their cash flow."
So as far as the land goes (which is often most expensive element of UK homes) the developers are simply acting as an intermediate passing on the cost to the homebuyer. Why not then simply take them out of the chain so the developers do not need to worry about the cost of the land. This way the state really could make homes "affordable" by simply leasing the land to the buyer, so the buyer only need to raise immediate funds to cover the build costs. Without such a policy we are back at the previous point with the state selling off national assets, that we all have a stake in, at a discount. History tells us that this is one way street and we will soon reach the point where this land is being rented (either explicitly or imputedly) back to the nation with the proceeds pocketed privately.
So all in all a thorough package to boost the finances of existing homeowners. And we all know who are the biggest homeowners, currently holding the most property title deeds, the banks of course!
"Under the mortgage indemnity scheme the government would cover the risk for the lender, which should enable first-time buyers to take out larger mortgages relative to the value of the home."
Firstly we can ask why tax-payers should be taking the risk when the banks get the interest (have we not learned anything from the financial crisis?). Secondly we can surely see that the ability to take out larger mortgages only serves to increase house prices (again a take-home message from the financial crisis is that inflating asset prices with ever increasing debt leads to bust). So this policy looks set to boost existing homeowners at the expense of first time buyers.
"The plans also propose that borrowers should be able to use money in their pension pots to boost deposits."
So not content with first time buyers paying an ever increasing proportion of their disposable earnings into housing, now we propose that they put their pensions into it too! As above, this only serves to inflate house prices which helps established homeowners at the expense of first time buyers.
"Cameron is also expected to develop his plan, first set out at the Conservative conference, to extend right-to-buy for council homes... The consultation will reveal the level of discount available to tenants wishing to purchase their homes and a broad outline of how sales receipts will be distributed."
An established government policy is to sell off stuff that we all own at a discount so that private owners can sell it back to us at a higher price. Witness the number of former council homes that are now rented out privately at the market price and typically sold at prices above which first time buyers can afford (since former council houses are typically bigger than new builds).
"Grant Shapps, the housing minister, has developed a "build now, pay later" model, to be applied on many of the sites. Developers will not have to pay for the state-owned land until homes are complete, relieving pressure on their cash flow."
So as far as the land goes (which is often most expensive element of UK homes) the developers are simply acting as an intermediate passing on the cost to the homebuyer. Why not then simply take them out of the chain so the developers do not need to worry about the cost of the land. This way the state really could make homes "affordable" by simply leasing the land to the buyer, so the buyer only need to raise immediate funds to cover the build costs. Without such a policy we are back at the previous point with the state selling off national assets, that we all have a stake in, at a discount. History tells us that this is one way street and we will soon reach the point where this land is being rented (either explicitly or imputedly) back to the nation with the proceeds pocketed privately.
So all in all a thorough package to boost the finances of existing homeowners. And we all know who are the biggest homeowners, currently holding the most property title deeds, the banks of course!
Monday, 31 October 2011
Royal landowners still calling the political shots
Interesting little story in the Guardian suggesting that the Prince of Wales has been exercising a constitutionally enshrined political veto over any government policy that could be seen to affect the Duchy of Cornwall. Through the Duchy, the Prince is one of the largest landowners in the UK and as such, gains much of his income from land rents. To hear that he has been vetting government bills over economic development, planning, housing and other land related issues, raises questions over whether those bills are being shaped in the best interests of the general public.
Saturday, 22 October 2011
The Queen slides towards poverty
As reported in the FT, with the recent hikes in electricity and gas costs, the Queen is now approaching "fuel poverty", defined as spending 10% or more of your income on energy supply. For the coming financial year the royal household is forecast to spend 8.2% of it's income from the government on energy bills and this assumes no further price rises.
This inevitably leads to a debate of whether poverty should be defined in relative terms or absolute terms. I think that everyone would agree that the Queen is not 'poor' by any sensible definition. Indeed recently, the current definition of 'fuel poverty' has been under review. The report in question offers a number proposals that involve switching from the straight 10% proportion of income to a measures that look at incomes after fuel costs in relation to the 'poverty line' (60% of median income) but also considers the proportion of income spent on energy and the quality of housing. I think it's worth noting that the warm homes and energy conservation act 2000 set out to "eradicate fuel poverty as far as reasonable practical" by 2016, this is going to be extremely difficult with a relative measure linked to median income. Whether such a target can be achieved is likely to be more down to changes in income distribution rather than considerations of fuel expenditure.
The current measure of fuel poverty effectively picks out people, like the Queen, who have large amounts of (typically old) housing relative to their income. I think this is interesting in itself particularly in the light of the report from intergenerational foundation on the distribution of housing across UK society, which has been received with a lot of hostility. The fuel poverty review only considers income in its calculation of poverty and not assets. I think this is an important factor when you consider that the bulk of the measures to alleviate fuel poverty have involved giving income related grants to improve the energy efficiency of a house. Should a person with a low income but in possession of large old house worth a significant amount of money get a state hand-out to do it up, but a person with a moderate income paying a large mortgage on a small house get nothing? On the face of it, those households in older houses that are bigger than they need would do well to exchange house with people with enough income to afford the modernisation and improvements in energy efficiency. At the same time those leaving old larger houses would improve their income by freeing up capital and reducing their outgoings on property heating and maintenance.
This inevitably leads to a debate of whether poverty should be defined in relative terms or absolute terms. I think that everyone would agree that the Queen is not 'poor' by any sensible definition. Indeed recently, the current definition of 'fuel poverty' has been under review. The report in question offers a number proposals that involve switching from the straight 10% proportion of income to a measures that look at incomes after fuel costs in relation to the 'poverty line' (60% of median income) but also considers the proportion of income spent on energy and the quality of housing. I think it's worth noting that the warm homes and energy conservation act 2000 set out to "eradicate fuel poverty as far as reasonable practical" by 2016, this is going to be extremely difficult with a relative measure linked to median income. Whether such a target can be achieved is likely to be more down to changes in income distribution rather than considerations of fuel expenditure.
The current measure of fuel poverty effectively picks out people, like the Queen, who have large amounts of (typically old) housing relative to their income. I think this is interesting in itself particularly in the light of the report from intergenerational foundation on the distribution of housing across UK society, which has been received with a lot of hostility. The fuel poverty review only considers income in its calculation of poverty and not assets. I think this is an important factor when you consider that the bulk of the measures to alleviate fuel poverty have involved giving income related grants to improve the energy efficiency of a house. Should a person with a low income but in possession of large old house worth a significant amount of money get a state hand-out to do it up, but a person with a moderate income paying a large mortgage on a small house get nothing? On the face of it, those households in older houses that are bigger than they need would do well to exchange house with people with enough income to afford the modernisation and improvements in energy efficiency. At the same time those leaving old larger houses would improve their income by freeing up capital and reducing their outgoings on property heating and maintenance.
Sunday, 16 October 2011
The Folly of the Parliamentarium
Friday saw the opening of the European Parliament's new visitor centre in Brussels, the "Parliamentarium"
At a cost of 21 million Euro, reportedly 30% over budget and 3 years late. It consists of a number of interactive 3D audio-visual installations "reflecting the desire of the Parliament to reach out to citizens and become more transparent to the outside world".
It appears rather ironic that the "brains" behind the project is a Greek MEP. Given the austerity measures now currently enforced in his home country, I wonder how many Greeks might feel it a little 'Mickey Mouse'...
At a cost of 21 million Euro, reportedly 30% over budget and 3 years late. It consists of a number of interactive 3D audio-visual installations "reflecting the desire of the Parliament to reach out to citizens and become more transparent to the outside world".
It appears rather ironic that the "brains" behind the project is a Greek MEP. Given the austerity measures now currently enforced in his home country, I wonder how many Greeks might feel it a little 'Mickey Mouse'...
Thursday, 6 October 2011
Cameron's doublethink on debt
From David Cameron's speech to the consevative party conference 2011:
"The answer is straightforward, but uncomfortable. This was no normal recession; we’re in a debt crisis. It was caused by too much borrowing, by individuals, businesses, banks, and most of all, governments. When you’re in a debt crisis, some of the normal things that government can do, to deal with a normal recession, like borrowing to cut taxes or increase spending - these things won’t work because they lead to more debt, which would make the crisis worse. "
The message is pretty clear: Debt is bad. Even if we want do productive things like cutting taxes with big dead-weight costs or building infrastructure to reduce barriers to private investment, more debt will make things worse.
But wait, what's this bit further on:
"The failure of the housing market is bound up in the debt crisis. Because lenders won’t lend, builders won’t build and buyers can’t buy. "
So the problem is that there isn't enough debt being taken on by homebuyers. Debt to fund a house purchase clearly effects the younger end of the productive element of society most, since they typically don't start out with a stake in property. So it appears that debt is bad unless it is taken on by young people to buy what is an unproductive asset but, as a shelter, a fundamental human need. In this case, more debt is supposedly part of the solution to the "debt crisis".
"The answer is straightforward, but uncomfortable. This was no normal recession; we’re in a debt crisis. It was caused by too much borrowing, by individuals, businesses, banks, and most of all, governments. When you’re in a debt crisis, some of the normal things that government can do, to deal with a normal recession, like borrowing to cut taxes or increase spending - these things won’t work because they lead to more debt, which would make the crisis worse. "
The message is pretty clear: Debt is bad. Even if we want do productive things like cutting taxes with big dead-weight costs or building infrastructure to reduce barriers to private investment, more debt will make things worse.
But wait, what's this bit further on:
"The failure of the housing market is bound up in the debt crisis. Because lenders won’t lend, builders won’t build and buyers can’t buy. "
So the problem is that there isn't enough debt being taken on by homebuyers. Debt to fund a house purchase clearly effects the younger end of the productive element of society most, since they typically don't start out with a stake in property. So it appears that debt is bad unless it is taken on by young people to buy what is an unproductive asset but, as a shelter, a fundamental human need. In this case, more debt is supposedly part of the solution to the "debt crisis".
Sunday, 2 October 2011
Eric Pickles confirms that council tax does not pay for local services
How are my local services funded? Surely by my council tax?
Wrong.
This is a common misconception but Eric Pickles, Secretary of State for Local Government and Communities, demonstrates that it is simply not the case, with his announcement of an extra £250 million from central government to fund the most important of local services (in his opinion), weekly rubbish collections. Looking at the numbers from my local council, Oxford, you can see the breakdown of where funding for the council's expenditure comes from.
Oxford council tax revenues are £12.5 million (2011), Oxford hospitals expenditure (2011) is £625 million and the plot above displays these numbers as areas. Obviously including spending on local schools would make the council tax receipt look even smaller. So, given that there are: excellent public transport options, two highly regarded primary schools, two world-class hospitals, all within walking distance from my home. I would say the 'local' taxes I pay, with respect to the public services on my doorstep, look pretty good value. For other people this may not be the case(!) and I will return to elaborate this point in later posts.
Data from www.oxford.gov.uk and www.oxfordradcliffe.nhs.uk
Wrong.
This is a common misconception but Eric Pickles, Secretary of State for Local Government and Communities, demonstrates that it is simply not the case, with his announcement of an extra £250 million from central government to fund the most important of local services (in his opinion), weekly rubbish collections. Looking at the numbers from my local council, Oxford, you can see the breakdown of where funding for the council's expenditure comes from.
Council tax accounts for only 43% of council spending. The bulk of the council's income comes via central government through a redistribution of business rates (levied locally but pooled nationally) and a straight grant. It should be noted however that the government is mandating that business rates, via the localism bill, should in future stay in the locality in which they were collected. This could act as an incentive for local communities to accept new business development in their area.
Additionally it is important to define what 'local services' actually include. Rubbish collection and street lights are obviously local. However, despite the fact that they are funded nationally, I think that many people would regard their local schools and hospitals as 'local services' since they typically expect to find education and medical services within their community and they are not prepared to travel across the country for alternatives. In this respect the amount of money raised by council tax pales into insignificance when you compare it to spending on other 'local services'.
Oxford council tax revenues are £12.5 million (2011), Oxford hospitals expenditure (2011) is £625 million and the plot above displays these numbers as areas. Obviously including spending on local schools would make the council tax receipt look even smaller. So, given that there are: excellent public transport options, two highly regarded primary schools, two world-class hospitals, all within walking distance from my home. I would say the 'local' taxes I pay, with respect to the public services on my doorstep, look pretty good value. For other people this may not be the case(!) and I will return to elaborate this point in later posts.
Data from www.oxford.gov.uk and www.oxfordradcliffe.nhs.uk
Monday, 26 September 2011
Whose Housing Benefits?
Over at Mark Wadsworth a post cites an article in the The Daily Mail which reports that, for buy-to-let landlords the best returns can be gained from cheaper houses let to housing benefit claimants. It should then not be a surprise that, along with the big increase in number of bought-to-let properties, we have seen a dramatic escalation in housing benefit payments going to private landlords in the past few years.
Data from DWP/ONS
The plot also shows that rent payments to social land lords (council and housing association) has increased significantly although the growth appears linear rather than exponential. You might also like to consider this escalation in cost to the tax-payer in light of the collapse in number of new houses built in the UK in the past few years. If you were so inclined, assuming a generous house build cost of £55,000 on local authority owned land, the £7.5 Billion going to private landlords could fund around 140000 new homes per annum. However, like most others my local authority (Oxford) is currently struggling in the current economic depression to negotiate the private funding of new homes on public land for private sale.
(post edited 27/9/11)
Data from DWP/ONS
The plot also shows that rent payments to social land lords (council and housing association) has increased significantly although the growth appears linear rather than exponential. You might also like to consider this escalation in cost to the tax-payer in light of the collapse in number of new houses built in the UK in the past few years. If you were so inclined, assuming a generous house build cost of £55,000 on local authority owned land, the £7.5 Billion going to private landlords could fund around 140000 new homes per annum. However, like most others my local authority (Oxford) is currently struggling in the current economic depression to negotiate the private funding of new homes on public land for private sale.
(post edited 27/9/11)
Wednesday, 21 September 2011
Is driving a human right?
The Independent reported that approximately 40% of GB driving licence holders who had amassed 12 or more points over three years, and were thus liable for a ban, successfully argued that they would suffer "exceptional hardship" if their licence to drive were to be temporarily removed. I wonder how the approximately 10 million adults in Great Britain without a diving licence survive in the face of this, perhaps action should be taken to help them?
Sunday, 18 September 2011
Housing Crisis (revisited)
I was asked to add wage information in comparison to UK house prices. I couldn't find good historical wage data from ONS but I picked up this unverified dataset from the FT. For added interest I have included UK average rent data. House price and wages have been normalised to 100 at 1952, rent data is normalised to house prices at 1994. So the vertical scale is arbitrary, the plot compares relative changes in variables over time.
Perhaps not surprisingly wages track the general trend of house prices since the majority of house purchases are funded out of wages (albeit with mortgage gearing). However house prices in more recent years display a violent boom-bust pattern and we are currently experiencing the largest deviation of house prices above wage level. In contrast, rents rises are far more consistent and match wages well, although rents appear to be increasing slightly faster than wages over the 13 years of data. In the period of 2002-2007 it is suggested that first-time buyers in the housing market were replaced, to some extent, by buy-to-let purchases. Funding for these purchases was, in many cases, not linked to wage levels but to equity in existing housing, thus potentially exaggerating the boom. I will revisit this hypothesis at a later data.
Perhaps not surprisingly wages track the general trend of house prices since the majority of house purchases are funded out of wages (albeit with mortgage gearing). However house prices in more recent years display a violent boom-bust pattern and we are currently experiencing the largest deviation of house prices above wage level. In contrast, rents rises are far more consistent and match wages well, although rents appear to be increasing slightly faster than wages over the 13 years of data. In the period of 2002-2007 it is suggested that first-time buyers in the housing market were replaced, to some extent, by buy-to-let purchases. Funding for these purchases was, in many cases, not linked to wage levels but to equity in existing housing, thus potentially exaggerating the boom. I will revisit this hypothesis at a later data.
Tax doesn't have to be taxing
The LibDems have announced 2000 new tax inspectors to clamp down on tax evasion.
Given that it is claimed the UK has one of the most complicated tax systems in the world, as a more efficient (and liberal) alternative, why not make the tax system simpler?
Given that it is claimed the UK has one of the most complicated tax systems in the world, as a more efficient (and liberal) alternative, why not make the tax system simpler?
Thursday, 15 September 2011
Housing Crisis
Numerous reports recently have highlighted the issue of affordable housing the UK, the most recent coming vociferously from the National Housing Federation.
The most obvious indicator for a lack affordability is the rate that house prices have gone up over the past half century.
House price data from Nationwide, RPI data from ONS
This plot shows UK average house price since 1952 with data from Nationwide. The lower line shows the 1952 price adjusted for inflation (RPI). So if house prices had increased in line with other typical goods then the average price now would be around £40000. An emerging boom-bust pattern can also be seen in the plot.
Perhaps the best way to measure the affordability of housing is to present the average house price as a function of average wages.
Data from ONS
This plot shows the ratio of average earnings to average house price oscillating between 2.5 and 3.5 until the mid 1990s from where it shoots up to around 5. Despite recent falls in house prices these data show little impact on the ratio, presumably since wages have also been hit in the current economic climate. One obvious change from long term patterns was the level of mortgage lending between 2001-2008 which increased increased significantly, with mortgages of 100% loan-to-"value" and 5x earnings not uncommon. I will return to this later.
But how much of this a supply and demand issue as highlighted by the NHF? The plot below shows housing building over the past 60 years.
Data from ONS
There has clearly been much lower levels of house building since the 1970s (there were also very high levels of house building during the 1930s not shown here). This plot also shows how publicly funded house building (council housing) has declined to nothing. This means that we are now entirely reliant on privately funded house building and hence the business cycle. This is clearly a big problem, with the current economic climate, large scale public funded housing would be a strong counter cyclical force for the economy but we have lost that potential. Supply of new housing has clearly dropped significantly but, given relatively modest increases in population, this on its own cannot account for a trebling of prices in a dozen years.
Another important consideration is the evolution of the division of tenure type across the current stock of housing.
Data from ONS
This plot shows the rise of owner-occupiership in the UK during the last century and the rise of social housing until 1980. Private renting declined as more and more people had the option to leave over-crowded housing conditions and find their own home. In 1980 there was a pivotal political decision to switch to a model of private home-ownership. Since then the proportion of people in social rented accommodation has fallen and owner-occupiership peaked. The past decade has seen the first rise in the proportion of people privately renting for a very long time. It remains to be seen how far this may head back towards patterns of the last century. Another key observation from this plot is a point reached around 1970 where a majority of people are living in a home that they own. At this point there will be less political pressure for new house building, indeed there is the potential for a majority to oppose new housing since it could be seen to adversely effect a personal and costly asset. In addition, increasing house prices can now be promoted politically as a positive action since home-owners get the impression of increasing wealth without obvious effort on their part. Plot one suggests that the significant divergence of house prices from general inflation starts around 1970.
This final plot compares land values and mortgage lending over the past number of years.
residential land value data from ONS, mortgage lending data from the Council of Mortgage Lenders.
The first observation is the spectacular rise in both land values and gross mortgage lending. Over the 12 years to 2008 residential land values increased an incredible 550%. Mortgage lending also increased dramatically doubling in just a few years and rising further before collapsing back to levels of a decade earlier. I would very much like to see more historic data for both mortgage lending and land values to extend this plot but I have not yet found it. It is interesting to note that the drop in land values, to around 60% of their peak, is significantly more than the drop seen to date in house prices (first plot). The second observation is the striking correlation between the two variables. There is a small time lag in land values behind mortgage lending. This may well be an artefact of the data recording but if accurate would demonstrate mortgage lending driving land values up, rather than mortgage lending responding to a increasing "real" value in the land. Either way this plot has "bubble" written all over it.
You can also clearly now see that the cause of the sudden drop in house building in recent years in plot 2 is down to plummeting land values. Developers who bought land between 2002 and 2008 potential now face a loss if they build. Given that we can see that we are now totally reliant on privately funded house building the prospects for an increased supply do not look good. That final plot suggests most recently land values holding above mortgage lending, potentially due to the unprecedented cut in base rates to 0.5% and the drastic drop in the number of property transactions. For them to converge again either mortgage lending would increase, or land (hence house) values drop further. Given the still significant proportion of owner occupiers who had been gifted large "paper wealth", falling house prices are not politically popular, even though in the long run the vast majority will benefit from lower housing costs. On the other hand no mortgage provider is going to back falling or over-valued assets. Equally, already heavily indebted borrowers are not going to take more debt on in the face of falling house prices and terrible job prospects. A quick check confirms that there are plenty of mortgages available at 2.5 or 3.5 times earnings with a reasonable deposit which, up until 2001, was the normal situation. So there appears to be a reality gap between house price expectations and house price values as funded by real earnings.
All this leads to a depressing stale-mate situation, with both economic stagnation and terrible prospects for young, potential home-buyers the most likely outcome.
The most obvious indicator for a lack affordability is the rate that house prices have gone up over the past half century.
This plot shows UK average house price since 1952 with data from Nationwide. The lower line shows the 1952 price adjusted for inflation (RPI). So if house prices had increased in line with other typical goods then the average price now would be around £40000. An emerging boom-bust pattern can also be seen in the plot.
Perhaps the best way to measure the affordability of housing is to present the average house price as a function of average wages.
This plot shows the ratio of average earnings to average house price oscillating between 2.5 and 3.5 until the mid 1990s from where it shoots up to around 5. Despite recent falls in house prices these data show little impact on the ratio, presumably since wages have also been hit in the current economic climate. One obvious change from long term patterns was the level of mortgage lending between 2001-2008 which increased increased significantly, with mortgages of 100% loan-to-"value" and 5x earnings not uncommon. I will return to this later.
But how much of this a supply and demand issue as highlighted by the NHF? The plot below shows housing building over the past 60 years.
There has clearly been much lower levels of house building since the 1970s (there were also very high levels of house building during the 1930s not shown here). This plot also shows how publicly funded house building (council housing) has declined to nothing. This means that we are now entirely reliant on privately funded house building and hence the business cycle. This is clearly a big problem, with the current economic climate, large scale public funded housing would be a strong counter cyclical force for the economy but we have lost that potential. Supply of new housing has clearly dropped significantly but, given relatively modest increases in population, this on its own cannot account for a trebling of prices in a dozen years.
Another important consideration is the evolution of the division of tenure type across the current stock of housing.
This plot shows the rise of owner-occupiership in the UK during the last century and the rise of social housing until 1980. Private renting declined as more and more people had the option to leave over-crowded housing conditions and find their own home. In 1980 there was a pivotal political decision to switch to a model of private home-ownership. Since then the proportion of people in social rented accommodation has fallen and owner-occupiership peaked. The past decade has seen the first rise in the proportion of people privately renting for a very long time. It remains to be seen how far this may head back towards patterns of the last century. Another key observation from this plot is a point reached around 1970 where a majority of people are living in a home that they own. At this point there will be less political pressure for new house building, indeed there is the potential for a majority to oppose new housing since it could be seen to adversely effect a personal and costly asset. In addition, increasing house prices can now be promoted politically as a positive action since home-owners get the impression of increasing wealth without obvious effort on their part. Plot one suggests that the significant divergence of house prices from general inflation starts around 1970.
This final plot compares land values and mortgage lending over the past number of years.
residential land value data from ONS, mortgage lending data from the Council of Mortgage Lenders.
The first observation is the spectacular rise in both land values and gross mortgage lending. Over the 12 years to 2008 residential land values increased an incredible 550%. Mortgage lending also increased dramatically doubling in just a few years and rising further before collapsing back to levels of a decade earlier. I would very much like to see more historic data for both mortgage lending and land values to extend this plot but I have not yet found it. It is interesting to note that the drop in land values, to around 60% of their peak, is significantly more than the drop seen to date in house prices (first plot). The second observation is the striking correlation between the two variables. There is a small time lag in land values behind mortgage lending. This may well be an artefact of the data recording but if accurate would demonstrate mortgage lending driving land values up, rather than mortgage lending responding to a increasing "real" value in the land. Either way this plot has "bubble" written all over it.
You can also clearly now see that the cause of the sudden drop in house building in recent years in plot 2 is down to plummeting land values. Developers who bought land between 2002 and 2008 potential now face a loss if they build. Given that we can see that we are now totally reliant on privately funded house building the prospects for an increased supply do not look good. That final plot suggests most recently land values holding above mortgage lending, potentially due to the unprecedented cut in base rates to 0.5% and the drastic drop in the number of property transactions. For them to converge again either mortgage lending would increase, or land (hence house) values drop further. Given the still significant proportion of owner occupiers who had been gifted large "paper wealth", falling house prices are not politically popular, even though in the long run the vast majority will benefit from lower housing costs. On the other hand no mortgage provider is going to back falling or over-valued assets. Equally, already heavily indebted borrowers are not going to take more debt on in the face of falling house prices and terrible job prospects. A quick check confirms that there are plenty of mortgages available at 2.5 or 3.5 times earnings with a reasonable deposit which, up until 2001, was the normal situation. So there appears to be a reality gap between house price expectations and house price values as funded by real earnings.
All this leads to a depressing stale-mate situation, with both economic stagnation and terrible prospects for young, potential home-buyers the most likely outcome.
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