The UK government has one last throw of the housing market dice

Yesterday saw the Autumn Statement given to parliament by the Chancellor of the Exchequer. I had a wry smile as I noted he confirmed my analysis of yesterday by opening his presentation by saying that he was planning a fiscal tightening overall which of course is not the norm for a pre-election statement!

So the measures I announce today are not a net giveaway but actually tighten the public finances a little.

However as I pointed out yesterday the UK National Debt has risen over the course of this parliament by some £208 billion more than originally planned. So I will leave readers to judge the next part of the statement for themselves.

I could have eased up on our determination to deal with our debts. I do not.

On that subject we plan to have a fiscal surplus in around four years time. As that is the same fiscal surplus promised four years ago it looks like a mirage in a desert.

What about house prices?

The efforts of the UK’s political class and this government in particular to “pump up the volume” in the UK housing market have been a recurring theme of this blog. Actually the song lyrics could exchange the price for volume as it we have seen a major effort to push house prices higher. It seems to have bothered no-one in authority that house prices rising and rising had been a substantial contributor to the credit crunch and that they had mostly been vociferous critics of this in opposition. A type of collective amnesia has been in play as we have seen measure after measure defend and then boost UK house prices.

The initial response of the Bank of England to the credit crunch was to cut Base Rates to 0.5% which had mortgage rates tumbling. This was backed up by some £375 billion of Quantitative Easing to reduce longer-term interest-rates (bond yields) which had a knock-on effect on fixed-rate mortgages. On the 13th of July 2012 the Bank of England decided that even this was not enough and launched its Funding for Lending Scheme. This was badged as a scheme to help small and medium-sized businesses but in fact lending to them has continued to decline. Whereas banks found themselves about to reduce mortgage-rates by approximately 0.9% on average which lit the house price burners “One More Time as Daft Punk might say. Then we had the Help to Buy Scheme from the government which meant that it was easy to think that they were fully deployed.

Readers may note that the Bank of England has been pretty much hand in glove with the government through this period as we mull the meaning of the word independence.

There’s No Other Way

It seems that George Osborne sings along to Blur as he decides what to do about the UK economy. We had been discussing on this blog that UK house price growth was definitely slowing and that the leaders of the pack in central London were now seeing falls in price. This was at least six months too early for the electoral timetable. What could he do next?

Stamp duty is charged at a single slab rate on the whole purchase price of a home. It means big jumps in tax when house values tip into a new band.The distortions can be particularly damaging at the lower end.

Okay George so where are we going with this line of thought?

As a result stamp duty will be cut for the 98% of homebuyers who pay it. If you buy an averagely priced home of £275,000, you will pay £4,500 less in tax.

The average home in London will see a similar reduction.

As I say, 98% pay less – and the whole reform represents a tax cut of £800 million per year.

Ah another boost to the housing market via higher house prices then? The Office for Budget Responsibility (OBR) certainly thinks so and the emphasis is mine.

The immediate reforms to stamp duty land tax announced in the Autumn Statement are likely to have significant effects on the UK housing market. The main effect is likely to be distributional – house prices and transactions will be lifted at lower prices (where the effective tax rate has been reduced) and will be depressed at higher prices (where the effective tax rate has risen).

What the OBR does not spell out is that in terms of numbers 98% will rise and 2% (which may well be beyond hope anyway…) will fall. So we do indeed have one more throw of the dice for UK house prices and as the move was to start at midnight obviously the plan is to have it in play in the run-up to May’s General Election.

What are house prices doing?

The Halifax Building Society has weighed in with its view on developments this morning and its view is that it is slowing down.

House prices in the three months to November were 0.7% higher than in the preceding three months. The quarterly rate of increase has now declined for four consecutive months. Annual price growth in the three months to November slowed further, to 8.2% from 8.8% in October.

Home sales fell below 100,000 in October – to 98,490 – for the first time in 2014

Numbers such as this must have upset Chancellor Osborne as he sang along to Yazz in his bath.

The only way is up, baby
For you and me, baby
The only way is up
For you and me


Regular readers will be aware that I have been very critical of the UK economic strategy of pumping up the UK economy via house price rises. It is too entwined with past problems two of which, our fiscal deficit and trade deficit, are presently in full force. I have never understood the help bit in “Help To Buy” as it encourages first-time buyers to purchase what are by pretty much any measure you choose over-valued properties. Indeed they are suffering even faster house price inflation if the official numbers are any guide.

In September 2014, prices paid by first-time buyers were 13.3% higher on average than in September 2013

As we put the word help into my financial lexicon for these times I am reminded that the price/earnings ratio of the Halifax has reached a post-credit crunch peak of 5.02. Whilst that may seem high I have pointed out in the past that they use “convenient” definitions for this series. Martin Whitlock has replied to my mentions of this on Twitter.

Based on standardised prices. @notayesmansecon ONS simple average (what people actually pay) gives a ratio of 7.47 (per person)

So it is in fact a Boeing Jumbo Jet rather than 5.02? What was that about statistics again?

Accordingly we move on with the frankly somewhat depressing view that can only generate some economic growth by inflation of view of our wealth by house prices. Actually we can throw in equity prices there too as so much official policy around the world operates to boost them too.

What about house builders?

It was rather symbolic that such moves took place on a day that this was announced.

Barratt Developments and Taylor Wimpey join FTSE 100

Okay why?

The companies’ shares have gained 30% and 20% respectively this year on the back of Britain’s rising property market.

Of the top ten risers in the UK FTSE 100 today as I type this some five are house builders as we wonder if they are as protected a class as our banks.

Fiscal Incredibility

We were told yesterday in the Autumn Statement that our low Gilt (bond) yields were due to our fiscal credibility. Actually by chance our ten -year Gilt yield is 2% which is the same as the apparently fiscally credible Italy?

The OBR Club

On Share Radio yesterday I established this rule which you might like to bear in mind as the OBR is quoted pretty much everywhere today.

“If there is an OBR Club. First rule of the OBR club. The OBR is always wrong”-

I did qualify that with the fact that occasionally they can see what is right under their noses which is why I have quoted their view on the immediate impact of the Stamp Duty changes.

However I did note that on their risks to UK growth all six points were a downwards influence. So maybe 2015 will surprise us via lower oil prices after all…..


19 thoughts on “The UK government has one last throw of the housing market dice

  1. A cynic might think that support for house prices was timed to gain electoral advantage, but he’d be wrong.

    Real cynics know that house prices are supported wherever we are in the electoral cycle, because it isn’t home-owners who are being supported, but banks’ balance sheets.

    • hah – beat me to it !

      governance of the people by the Banks for the Banks

      for without this inflated assets boom they would all be bust

      well that was the plan , apparently even with inflated assets they’re still bust !

  2. Shaun,
    What did I say last week, some kind of housing wheeze or filip and there you are, my advice given freely to the Chancellor, via your blog, has been read and followed. 🙂 Now I reckon there is one last tweak he can make, around about March he needs to admit that his calculations were wrong and he needs to lower the thresholds across the board by an April deadline to cause a flurry of transactions and folk will feel gooood about our buoyant property market for the day of voting.

    As you very religiously point out each week, our Govt is about smoke and mirrors, incomes are falling, taxes are rising and they speak of cuts whilst spending more money. I reckon there will be another credit bust cycle within the timescales of their next 5 year plan, indigenous or exogenous.

    Paul C.

    • Hi Paul C

      Yes you were right. What does your crystal ball say this week….?

      Actually it has a whiff of desperation about it don’t you think? The plan was presumably that Bank of England FLS and Help to Buy would have created enough house price momentum to reach the General Election. If these measures continue to have ever shorter half-lives you may yet be right about the spring of 2015.

      • Shaun,
        You have a new economic theory there! the…. “Shaun pump-it-up half-life cycle”….maybe someone else can do better than me in naming it.

  3. I thinking more of a 5-6 month bust my self , predictions are of course difficult about the future

    and i hope I’m wrong as well !


    • Hi Forbin

      Remember in the Dune world it can be that the future is certain and it is the past which is unknown. I am reminded of such matters whenever I broadcast for Share Radio as the building they are in is Chapter-House, presumably named by a Dune fan.

      As to 5/6 months that would get the present government to the General Election which from their point of view does the job. It may not be so good for the rest of us….

  4. The good news has to come from somewhere. Wages, interest rates, business investment, productivity, private debt, foreign policy – are all in the mire. Consumer spending and Osborne stoking HPI are the balm. But didn’t we do all this in 2007? Why do they expect the end result to be any different?

    The “book of doom” OBR stuff is only what we all knew was coming and the opposition promise much the same. I know many are living on hire purchase – their phones and cars – taking small loans, living in state subsidized homes though they’re working hard, only getting by thanks to tax credits. All this could be clawed back if politics – and GDP – takes a swing towards the brutal again.

    • Hi Peter

      Actually household spending has had better times too as the Office for National Statistics released this earlier this week.

      “Total average weekly household expenditure was £517.30 in 2013……Average spending decreased between 2006 and 2013, once the figures have been adjusted to allow for changes in prices (inflation).

      Average weekly household spending was £539.80 in 2006, and started declining, just before the economic downturn, in 2007 (when £531.70 per week was recorded). Average spending decreased further to £501.00 in 2012, and then increased to £517.30 in 20131. Between 2001/2 and 2006, average expenditure was at a higher level than that seen since 2006.”

      No wonder we keep needing new measures to keep the pot boiling.

  5. Hello Shaun

    I’d be interested if you think they can cut as much back again as IFS seems to think they need to ……

    Impartial of course , I think we all need a dose of that with all this spin going on…..

    Should we ( or we should have) gone the way of Canada a while back and done just a 10% across the board cut ?

    Is it too late now

    I think , as you know, that we’re in for another recession world wide next year , the OBR thinks we are not .

    more imputed hookers and drugs for GDP 🙂 ??


    • No, next year they’ll convince us all that GDP has been missing one vital component all along… They forgot to add debt to it… After all it’s debt that keeps the wheels turning so it’s inevitable. Every £1 of extra debt must equal £100 on GDP (because we mustn’t forget everything is leveraged these days).
      Problem solved… Forever!

      • Hi Guys

        Canada’s move does seem to address the psychology of the times more than our drip/drip/drip system here. As to the numbers back in 2009/10 the government spent 45% of GDP which has now fallen to 41%. According to the OBR they need to get it to 35% to provide the promised surplus. So the parliament of austerity will be followed by one of even more austerity. What will the “cuts,cuts,cuts” media call that?

  6. Hi Shaun,

    Thanks, once more, for pointing at the obvious. My gut feeling on this was the same as yours, and no doubt many of your readers – a cynical attempt to boost prices pre-election. However, I think it is worth noting that at least the modified structure eliminates the distortions due to the step changes in taxation rates. Please don’t for one minute mistake this for a defence of the timing of the announcement.

    I think you touched on a point that is of particular interest to me: if your measure of the performance of a particular system (be it an economy, or an aircraft) incentivises unintended decisions (e.g. pumping house prices, running a large structural deficit), then it’s time to change the performance measure (e.g. GDP). In the same way that the design of an aircraft would differ if you modified the performance target, I have no doubt that the management of the economy would change if you stripped any direct relationship to housing costs out of GDP and found a robust way to capture future liabilities imposed by a structural deficit. I think it’s difficult to criticise politician’s decisions to maximise GDP in any way possible, when that is, rightly or wrongly, what we seem to judge them on – in fact we should expect them to do just that! Do you consider it a responsibility of the school of economics to point us in a more sustainable direction by re-designing the measure? If not, then where can this come from? In the words of the Stranglers: “Whatever happened to the heroes?”


    • Hi Danny

      Good song and I also remember the heady days of the album before Rattus Norvegicus. Actually what do we call an album now?

      As to the economics the issue with house prices is the driver behind why I want them to be included in measures of consumer inflation. I argued for this but the UK establishment headed at the time by Chris Giles of the Financial Times were sure that they had it right using rents. That has collapsed like a pack of cards as CPIH was below CPI in a house price boom and then of course their rental series was developing “issues”.

      So to answer your question the answer is yes and I did my best but I was a lone voice. I did much better with the subsequent RPI “improvement” consultation.

  7. It is being reported that household debt as a percentage of income is projected to exceed pre 2008 levels by 2018 at 187%. One of the main drivers of this is people taking on bigger mortgages. We seem to learn nothing……..

    • Hi Zummerzetman

      Our political class criticise this sort of thing when they are in opposition but when they are in power they all push the same pedals. At the moment the Bank of England MMR rules seem to have applied a gentle brake to mortgage lending andso what do we see? Rising unsecured lending which is of course even riskier.

  8. Hi Shaun

    Many thanks for the reference – just to pick up again on the the question of the Halifax p/e – Halifax use male full time national average (mean) earnings, presumably because that was how things were when they started counting, in addition to which this number is a relatively certain one, whereas household incomes can be measured in all sorts of ways. So both the 5.02 and 7.47 figures are per person in a sense, but, as it happens, average household incomes are in the same ball park as male full time earnings. because so many people work part time, or not at all, or are not men (sadly, still a pay issue).

    The big difference arises because of the wide variation in “average” house prices from Halifax, Nationwide, Land Registry and ONS. Mostly they use complex algorithms to arrive at “mix-adjusted” prices, which allow (among other things such as the actual mix of houses sold) for the fact that houses get “better” over time. If a basic house now has more features (better insulation, en suite shower, fancier kitchen) that it did x years ago, then not all the price increase is due to inflation, and the mix adjusted approach is designed to take note of that. Similarly, old houses get done up over time, which increases their value independently of house price inflation. Because the methodologies are different and started in different base years, the cumulative differences in the resulting average prices reported are quite significant. (This is as I understood it when I looked into it for my book – I’d be delighted if someone can provide further insights…)

    Halifax reported a national average price of £187,000 for November, whereas the chancellor referred to “an averagely priced home of £275,000”, which is close to the ONS figure for Q3 2014. The figure I gave of £278,000 is the ONS “simple average”, which I assume to be the average at which houses are actually selling during the period, and therefore broadly speaking the price with which purchasers have to contend. However we look at it, a difference of £100K in the average price of a house using different methodologies is going to produce very different p/e ratios… as you say, statistics are – well, whatever you want them to be, really.

    One thing’s for sure, however – with wages still falling in real terms – and likely to continue to do so for all sorts of reasons that neither the chancellor nor the OBR are keen to acknowledge – houses get less affordable even if prices stay where they are. With the stamp duty give-away certain to boost prices, the housing crisis is with us for the long term.

    Many thanks for your great commentaries, by the way. Insightful and a joy to read…


    • Hi Martin thank you and welcome to my part of the blogosphere

      The Halifax earnings issue is one where they have cherry-picked something out of the data series which gives an answer convenient to them.

      Here is a thought for you. Whilst newer houses should have better technological features ( on my mind as my flat could do with more electrical plug sockets…) many argue that they are often smaller and not as well built as older properties so should we be changing the “mix” criteria? Actually that is a science fiction theme too for those who are fans of the Foundation series by Isaac Asimov.

  9. As we head into 2015, there appears to be little hope against a rising dollar. This will be deflationary in the USA also raising the net real value of the dollar debts to everyone who has issued dollar debt in countless currencies to save interest. The contagion will spread next year and we will see the downturn after 2015.75 will be far more confusing to these people who lack any comprehension of currency and the world economy. Pop goes the UK housing bubble.

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