Dec 13 2008
When will housing be affordable?
The government is discovering that wishing for housing to be more affordable, as they did for several years, creates an uncomfortable world of negative equity, weak banks and mortgage famine. They by now should have worked out that their theory that you needed to build more houses to bring house prices down was completely wrong. We today have plunging prices at the same time as large cuts in new building.
So when will housing be affordable? There is no single good price level, as it all depends on what price level the mortgage banks will support. They, under strong regulatory influence both ways, have lurched from believing very high prices are affordable, to working with much lower prices. What is affordable when banks will lend 5 times salary is not affordable when they will only lend 3 times salary. What was affordable with a 100% mortgage may not be affordable with an 80% mortgage.
The boom was so overdone in London that even people on good incomes were priced out of the London housing market unless they already owned a property or had some other windfall to help them. Still today, after considerable falls in the market, a new MP on £63,000 a year would be hard pressed to find anything more than a studio flat he or she could afford north of the river near the office. A professional, middle manager or Doctor on around £100,000 would have little choice of anything other than a one bedroom flat in the central districts if they were starting out with a mortgage and not much else. Pity anyone on average wages, they do not have a chance in inner London.
I fear this all means the fall has further to go. The government has not yet found a way to help mend the banks. The mortgage market is still far from happy. Northern Rock is in effective run off, so Northern’s mortgages need refinancing elsewhere as they fall due. On current policies we have not found a base for the property market. That means more losses at the taxpayer financed banks, in line with the deteriorating loan experience revealed by HBOS in their figures yesterday. Taxpayers are currently losing more than £7 billion on the bank shares the government has bought for £37 billion at current prices.
This week I asked the Foreign Secretary why it appears that Northern Rock cannot offer competitive busniess rates in the market owing to EU competition rules, but this constraint does not seem to apply to RBS. He said he would write to me with an answer. I think we need to know, as it seems odd that the smaller bank is prevented from writing much new business, whilst the bigger bank is unaffected.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
The Government has provided billions to the banks in the hope that it would go towards mortgage lending and so keep house prices high. Unfortunately for the Government, the banks have simply kept this cash on the basis that they know house prices are overvalued so they will use the cash to sure up their capital positions as prices fall.
This is the market working, it does not need more Government intervention as delaying the fall will simply delay the recovery. The more money they print the lower the pound will go and the higher non-asset inflation will become. This leads to job losses as firms have to cut costs.
Obviously negative equity doesnt go down too well with voters so Labour will try everything including 0% interest rates and reckless spending to try to avoid it and will end up repeating the same mistakes as the 1970’s. Depressing.
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John I disagree with you here. House prices are not low by historical trends it is merely that they are not quite as overblown as they were. Earlier this year I found that house prices had gone up 4 times compared to the RPI over the last century. This is indeed because of government regulation which prevents new building. Government’s theory that building more houses would bring down the price was absolutely right, it is just that, as usual, they sisn’t actually do it when the bubble was still inflating.
I consider that the long term interest of the country is that houses should be widely available at reasonable prices. It is difficult to think of anything which would improve real standards of living more. This would in turn mean that people would start thinking of houses as simply places to live rather than investments - & would start looking for genuinely productive investments. If this meant a lot of banks finding that even more of the mortgages they held were in negative equity then tough. It is much more important to grow the economy with real production than keep all the pieces of paper in line.
Reply: I did not say homes should be dear! I point out that getting from current levels to lower levels - which I think will happen - is going to be painful.
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Adam- Reply:
December 13th, 2008 at 1:16 pm
Interesting thoughts. From where I see it, what it all comes down to is that the Government, the market and, in fact, everyone has confused inflation caused by a shortage of housing stock with an economic boom. In fact, for a nation that has spent the last fifteen or twenty years essentially reliant on housing and lending money for said housing, we’ve actually built staggeringly little new housing stock in that period. Now the market is correcting to more realistic valuations as economic conditions undermine demand (deflation), which would increase the money supply available for other things, resulting in substantial non-asset inflation.
So, worst case, if Gordon Brown’s (re)inflation plan flops, which is very possible, we could end up with a worthless currency, worthless assets and a shell of an economy.
Right?
The penny drops.
After you with the worry balls, sir!
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This blind faith in the markets in housing is clearly foolish. If the markets had worked in this fantasy, there would have been a building frenzy with people and businesses fleeing to the north in search of cheap property to buy and rent, especially rent. Wages in London for everyone would have been sky high too
The reality is that people live where they can get good wages, which is where business are at, which often means near to London and Europe and their relatives are too. With the average person and often ‘family’ earning about twenty grand a year. Don’t quote the average wage as its not true for the majority of the population, and with the majority of houses, except in rundown areas costing over a hundred grand, the party could not go on. You cannot exist just paying a mortgage and the ones who do and live on Cornflake Hill just crack and start using credit cards for luxuries like takeaways. The credit card crunch must still be in the pipeline.
A debate about social housing is needed. If you live in subsidised housing and rent. The state is then the landlord/bank and does have some control of you. Non negotiable. Goes down badly with left and right, but not if you have scum neighbors or no house.
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Interesting article in the Telegraph Business section today. Mr Brown has spent out. He has also not declared the full extent of government debt either, which, if you add it all up instead of just bits of it, comes to several times our GDP, about twice as bad as France and a lot worse than Italy.
The international lenders are smelling a rat - so the pound tumbles down. Financiers are, we are told, leaving London in droves.
The IMF is a last resort, but it will be very busy lending to other customers when we have to go begging.
So why not borrow off the national banks, especially the nationalised ones? This is, perhaps, why the rates are being kept so skewed making it impossible for them to lend and so attractive to them to build up capital - to support the government.
I do know that this has been touched on in this blog before, but, put like that, it seems to make a lot of sense.
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What is really annoying me about the policy of shovelling loads of our cash into banks to prop up the property market is that I saw this crash coming and advised our (especially FTB clients) NOT to buy a house. They should rent and save and wait for the crash. Which they have done. Now their ‘prudence’ should be rewarded as they will be able to access reasonably priced houses with a deposit and on a low earnings multiple mortgage. All Crash Gordon is doing is making their lives harder and penalising these client’s ‘prudence’.
You really couldn’t make it up could you?
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John,
The problem does not lie with housing shortage merely with the inefficient use of property.
At present we have the highest room to person ratio since the Dark Ages.
Unfortunately getting our offspring to share a room is viewed as akin to child abuse and marital break down has meant that numerous fathers ‘need’ not only their own room, but their own property.
Our children also no longer live at home until they marry as was the norm not many years ago.
The problem is not housing supply but the fact that we don’t like each other very much.
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If government money is available to help the economy, would it not be widely beneficial to spend it on council housing? The government could make available a pool to which local authorities could apply.
The benefits would be: the money would be spent in the UK; house building and related industries would benefit; the houses would for certain be occupied upon completion because no mortgage is required; the many people waiting for council housing would be helped, the Nation would acquire an asset in return for the money spent; in due course right to buy would move houses into the private sector, something which has been widely popular in the past.
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mikestallard Reply:
December 14th, 2008 at 6:03 pm
When this was tried last, it failed because of the following reason:
The Councils started to give the houses to single mothers who, (occasionally?-ed) (BUT NOT ALWAYS) went on drugs, invited a series of “uncles” into their houses and produced feral children. The Estates became no go areas even for the Police. In Leeds, for instance, people (from one racial group-ed)were segregated onto estates, which, of course, was not racism at all - merely prudent allocation.
A vast underclass was encouraged to develop which ruined many a previously happy city.
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End stamp duty on property deals , bring back MIRAS to benefit homeowners to the tune of say £50 a month and let councils spend monies raised from council house sales on new social housing ! Also stop Housing Benefit being a junket for greedy landlords and build more on brownfield land . How is that for a common-sense housing policy ? Oh and no more eco-towns that have nothing to do with being green !
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yea house prices have much to fall, and fall they should
i can buy a nice big house in brussels for similar to one bed flat in london
i can buy a very nice big house in chicago for less than a 2 bed semi in the suburbs here, even with the exchange rate changes
these house prices make the uk uncompetitive, and stop people like me buying here
if i have 300 K invested I can rent a 300 K house from the interest and still have lots and lots of change, why would i buy a house and take the liability for repairs? even with crazy low interest rates
what we do need to do is allow some security of tenure for tenants in the private sector, the UK being dominated by insecure 6 and 12 months lets is not good for the UK at all
the market is working, the governments will just waste money trying to stop the market doing the levelling which is long overdue
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Donitz Reply:
December 14th, 2008 at 7:28 pm
There is a very , very good reason why security of tenure does not exist in residential tenancies. It genuinely scares me that people have forgotten the consequences of controlling rents and length of tenure with legislation.
I refer you to the socialist experiment of the 70’s called the Rent Act 1977 and the disasterous consequences this had on the private rental sector. After this bit of appaling Labour legislation it was no longer economically viable to rent out a property. Luckily, this was overturned by subsequent Tory Housing Acts of the late 80’s and beyond.
More importantly a Landlord lets a house to a Tenant as a contract between two parties. The Tenant is not forced to agree a short term just as he is not forced to pay a sky high rent he can always look elsewhere.
Landlords require short terms because Tenants have legislation stacked in their favour with regard to non payment of rent and breach of covenant within the terms of their lease. If you have a Tenant who refuses to pay rent or who trashes your property its an uphill task to remedy this through the courts. Almost impossible.
It is far easier to serve notice to terminate the tenancy on the expiry of a short term and “take the hit”.
If a Tenant requires a very long term he will be required to pay a very high rent to reflect the risk to the Landlord.
Unlike banks and their secondary lending policies, Landlords are not prepared to entertain high financial risks for low rates of return.
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There are some other curiosities in house prices. Demand/ supply issues could probably be seen at work in the South East of England, where there is an influx of population and a limited supply of space and housing stock. But here in Scotland the recent boom has seen huge price rises in towns and villages which seem to have been based purely on speculation. There are unviable old mill towns for instance, with poor communication links, poor amenities and poor prospects, yet the houses rocketed up in price in recent years ( Kilmarnock and Darvel spring immediately to mind for instance).
The prices of houses in this asset boom has in much of Scotland certainly ( a country with a static population and a declining economy ) had little to do with normal market mechanisms. It looks like the banks have encouraged speculators to buy into a Ponzi scheme and the property investors have obliged.
It is cruel, but perhaps the best thing that can happen is that the market is left to find its own level. No effort should be made to maintain prices. No more than tea and sympathy should be afforded those who get burnt. But I really think despite the systemic risk, the banks should have been allowed to fail. The directors and senior people who have had huge bonus incentives to inflate an irrational bubble are walking away with their careers and their loot intact. The losses are being socialised - I get less interest on my deposits for instance and that idiot in Downing Street is borrowing my future to try to shore up his own. Even the bank shareholders are taking big hits.
There are other banks than the ones in trouble. A series of bank failures would hopefully have resulted in a new banking system being provided by the market system.
I remember holding conversations many years ago about Mrs Thatchers big mistake. We concluded that she didn’t believe the country would accept 3 million unemployed people, and that fear prevented the government from dismantling the overblown state and throwing all the state employees off the gravy train. She didn’t therefor go far enough. Here we are doubting the market system. We are scared that bank collapses will collapse the whole economy. Maybe we should really be bold, and have faith in markets to create the services and the goods we want.
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Bazman Reply:
December 14th, 2008 at 4:11 pm
Like supplying enough houses and jobs? Most people with half a brain have seen through this lie. Read your first three paragraphs and then read the last two. Not one of the people ever likely to be effected by the mantra of not believing enough though are we Dave?
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The plan of the government is to ram Sterling into the Euro. To do that they need to smash confidence in the British property market and prevent house price rallies from requiring higher interest rates. The best way to do that is to limit the availablility of mortgages.
Brown is the servant of Brussels who hold the key to his next job. And they in turn ensure he is presented as an economic genius as long as he promises to bring Britain into the Euro.
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JR wrote:
> They by now should have worked out that their theory that you
> needed to build more houses to bring house prices down was
> completely wrong. We today have plunging prices at the same
> time as large cuts in new building.
I may be wrong, but I think these two statements are in fact unrelated.
The supply of housing is indeed a primary determinant in the cost of housing. Cost fundamentally derives from supply and demand (with, in practise, gross distortions from regulation). If supply is tighter than demand, prices rise; and vis versa.
We today have plunging prices because of the inability of banks to lend. This in turn has induced cuts in the supply of housing because supply, former, was expanding since high housing prices made the work unusually profitable.
This mechanism is unrelated to the argument that expanding the supply of housing acts to ease price pressure.
The current situation is very similar to the Norwegen banking crash. There was a period of about three months where banks simply could not lend. In Oslo, prices for a two bedroom flat in the city center with beautiful views of the fjord fell as low as 15,000 USD.
*You cannot sell something for more wealth than people can obtain to buy with, even if it normally is worth much more*.
This is the process the UK is currently experiencing. Prices inflated to levels where now with restricting lending, people simply *cannot* raise that capital.
Accordingly, prices drop precipitously. Those people who recently purchased housing get totally and utterly shafted. They cannot leave their house. What happens if their job goes? what happens then if they find a job which is an awful commute? how are they *feeling* about the mountain of debt hanging over them? what money do they have spare at Christmas for their child or children? have their wishes for a private education just gone up in smoke? has the rest of their childs life been brought down by that loss now?
They and their situation represent a part of the real human suffering that is being caused by this recession.
And while these people limp from one day to the next, Brown borrows another hundred and twenty billion to spend. Why not just cut Government spending (it is at 45% of GDP after all) and pass the money back in tax cuts.
Reply: the reason housing is different is that most homes for sale are second hand. the main detrminant of prices is loan availability.
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Great time to buy a large house and car these days if you are brave.
I would say that the price of houses is based on the cost of the land they are built on, which is determined by a large part law and regulations. The real price of a car is it’s second hand price. The first owner pays a massive premium to have the prestige of driving a new car. That second hand price also being determined to a large part on running costs and maintenance. fashion and reputation for reliability, true or otherwise, also plays a part too. House prices do not seem to reflect these factors very much.
It’s true that Britain is one of the most urbanised countries in the world, but the physical reality of this is about 6% of the land concreted over. NIMBY’s from across the political spectrum have a lot to answer for. Ultra insulated chap housing in the form of back to back terraces and the now illegal to build blind back terraces could be the answer. Not the future slums being built now. Docklands anyone? I bet todays Rachman’s are interested.
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The last few comments (including JR) have raised the issue of the fact that most houses are 2nd hand. Bazman says that he can’t see any evidence of house prices depreciating as one might expect of a car. Well - for those jurisdictions across the Western world where the data is collected - house prices do actually deprecitate… It is LAND prices that go up. The policies of all parties need to urgently start reflecting this distinction.
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Stuart Fairney Reply:
December 15th, 2008 at 6:11 pm
It is true that land prices increase, but this is only because of the crazy inflexible planning system we seem to insist upon. We have more than enough land; we just seem reluctant to grant sufficient planning consents. As someone who works in house-building, I have to say, I am heartily sick of the site of loud-mouthed fools led by the local rabble-rouser with “No new houses in ” placards every time (yes every single time, even if you have very top quality architects) I go to a planning committee. It’s the pointless and parochial, small-minded fear of change. I’m not by any means saying that modern development is always attractive, but the more you restrict it, and remove choice, the lower design standards can afford to be, because of the lack of choice.
If we granted sufficient planning consents, (and stopped insisting on absurd peripheral, enormously costly but un-costed “green” measures*) then we would at least be on the right road.
* I will spare the council’s blushes, but at one committee meeting where the planning committee were insisting on the “code for sustainable homes ~ Excellent” rating, I asked if anyone knew what this meant or how much CO2 was saved from the lower rating? None did. Then I asked if anyone knew how much this cost? Again, no-one did. So the regional planning body was insisting on something it did not understand, had no clear idea of the alleged benefits and no idea at all of costs! Combine that with placard brandishing buffoons and this may in part explain why houses were a bit pricey until recently.
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Could a 3rd way be introduced ?
Finance with a 50 year bond ~ govt backed ~ low rate
Get the buyer to put up deposit for 50 year lease on flat / house
the difference between deposit and cost is paid off over the duration of the lease
use the deposit monies to fund a rolling 5 year maintainence plan (based on the compound interest)
increase the repayments after 25 years by say 10%
would allow the original deposit to be repaid with a little interest
then after 50 years - the leases have expired. and rebuild / redevelop / renew leases. but basically the original loan is repaid.
the lease can be bought and sold. but defaults if repayments stop ~ and if the flat falls into disrepair.
takes out the leverage for a property buyer
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