Today has seen some rather familiar news on the UK house price situation from Rightmove. Let us get straight to it.
Price of property coming to market up by 1.0% (+£2,748), a more muted rise at this time of year.
This has resulted in a reduction of the year-on-year rate of increase to 5.4%.
So on their measure we continue to see house price growth and in terms of the month just gone some acceleration whilst the year on year increase has been trimmed. This in a way reflects the multitude of official influences on the UK housing and mortgage markets. For example the explicit impact of the Bank of England’s Funding for (Mortgage) Lending Scheme (FLS) is over. Also Rightmove try to trumpet the influence of the Mortgage Market Review but end up in a mass of contradictions.
The MMR introduced in April 2014 laid out a much-needed longer-term framework for responsible lending, but within a year its dampening effects have been muted by high demand outstripping supply.
On the other side of the equation has been the Help To Buy Scheme which has helped over 88,000 households to buy what I consider to be overpriced housing. Added to this came an additional effort earlier this month.
The plans will allow young first time buyers the opportunity to secure a new Starter Home at a 20% discount to the market price.
This begs so many questions. For example in a new estate, what is the market price?! If it is so easy why not 25% or 30% off? Backing this up comes from thinking if as clearly implied prices are too high for first-time buyers then why has the government and Bank of England put so much effort into pushing them higher?
Next we have seen an upwards push on house prices from lower mortgage rates. Back on the 9th of February I discussed what were and indeed remain extraordinary changes. From the Council of Mortgage Lenders.
Last November, the average new tracker mortgage rate fell to 1.96%, according to our regulated mortgage survey – the first time that it has ever dipped below 2%. For fixed-rate borrowers, it’s the same picture, with some lenders offering the lowest long-term rates the market has ever seen.
This has been driven partly by international influences as for example the continuing fall in bond yields in Europe and the fact that Bank of England policy still supports lower mortgage rates just not so explicitly.
What about Buy To Let?
In itself buying a house to rent it out may provide a service for the economy. The catch is that in the UK this morphed into a type of investment/pension plan based around capital gains and “easy money”. Thereby it crowds out investment to other sectors and degrades our economic performance. Well here is Rightmove’s view on the current position.
controls limiting buyer affordability appear not to be restraining the more cash-rich buy-to-let sector. This active area of the market, with mortgage loan numbers up by 23% in 2014 compared to 20131, is set to receive a further injection of investment as the new pension rules come into force next month.
So Buy To Let is booming as we wonder if the other part of FLS is putting money into the property market via companies? Also we do not yet know the full details of the changes but we do know that we expect to see more pension liberalisation and those with lump-sums will if the past is any guide tend to put it into the already overpriced UK property market.
What does this mean?
If we move away from the Rightmove numbers partly because their weakness is that they use asking or selling prices rather than actual trading prices we can look at Friday’s LSL/Acadata report.
At £273,528, home values now £34,192 higher than at height of the housing boom in February 2008
So house prices are now some 14% higher than at the peak which helped to cause the credit crunch many of us are still suffering from. Also whilst we get plenty of hype around the issue of affordability because of the fact that mortgage-rates are as low as they have ever been there is an elephant in the room. This is of course if we compare rising house prices with the level of inflation adjusted or real wages. As real wages have been falling in the credit crunch era any such analysis provokes quite a problem and indicates a strong degree of stress in the system. Back in 2013 the UK Office for National Statistics produced some eye-catching numbers and of course in spite of a recent improvement the situation has seen an overall deterioration.
In real terms, the average earnings of UK employees in 2012 were at roughly 2003 levels, a new article from ONS has shown. After three decades of strong growth, real wages peaked in 2009. Since then inflation has outstripped wage increases in cash terms.
An index which compared house prices to wages would be truly terrifying right now. In a way the UK authorities have confirmed this by the way that they have provided subsidy after subsidy or what they call “help”. Of course it may turn out to be this version of Help.
Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me
Woman’s Hour
With thanks to NicTrades for pointing this out to me I would like to refer to Woman’s Hour on BBC Radio Four. Here is a flavour of the topics discussed by the focus group as we move from the XY to the XX.
I look around at the children who are 19 and 20 and I don’t know how they will ever be able to afford a mortgage?
I would prefer the housing market to halve in all honesty and let people get in on the market even though I would lose money. But I don’t see it as losing money…..
When everybody was talking about house prices going up it made everyone very greedy and led to the sort of conversation I don’t like.
Young people won’t get a chance with landlords snapping up every available property….
I feel insecure for everybody else especially kids as it is much tougher than it was.
Where now you know it is just crazy…
I think that they have pretty much nailed it don’t you? As we wonder if Destinys Child provided something of a template in terms of attitude.
The shoes on my feet
I’ve bought it
The clothes I’m wearing
I’ve bought it
The rock I’m rockin’
‘Cause I depend on me
If I wanted the watch you’re wearin’
I’ll buy it
The house I live in
I’ve bought it
The car I’m driving
I’ve bought it
I depend on me
(I depend on me)
Comment
Well done to Women’s Hour for hosting for what can only in these times be considered something of a subversive discussion. But sadly the presenter Dame Jenni Murray embarrassed herself with this about the woman who wanted house prices to halve.
It seems to me that she is living in Cloud Cuckoo land…
Many of us would prefer what she considers to be Cloud Cuckoo land. On the other side we have official policy so aptly described by the purple one.
Let’s go crazy
Are we gonna let the elevator bring us down
Oh, no let’s go!
Go crazyI said let’s go crazy (Go crazy)
Let’s go, let’s go
Go
Let’s go
Notayesmanseconomics's Blog 
Sorry I will try and read the article later, I work very deeply in this arena so forgive me,, as a response to the headline and a quick scan let me say this
men bring resources and women trade their eggs for these resources in what we call families
men’s resources from a biological perspective can be viewed as territory
housing is expensive now , and out of step with wages , because of land prices , kept high because of Fiat money and taxes on labour and material kept high by looking after old women (old women in this instance includes george osborne)
but much of the territory in the UK is owned, as it was a thousand years ago, by the nobility
Divorce is a huge driver for housing need , and local council regimes are all kept alive now by developer contribs which are derived from new household debt, which will pay interest to government owned banks
it’s fascinating to watch , in the same way a train wreck is fascinating to watch !
Hi the Rigel
Your views are in some respects similar to one of my tutors Willem Buiter back from my days at the LSE. One factor particularly made me think “Divorce is a huge driver for housing need”. I am sure i am not the only person wondering How much?!
“This begs so many questions. For example in a new estate, what is the market price?! If it is so easy why not 25% or 30% off?”
Because the housing market is unlikely to dip by more that 20% when the correction does come, (we’ve seen the level of support when the market is bouyant) and so, even if all these first-time buyers lose their homes, the banks have their investment covered.
Surely you didn’t think it was concern for young people’s property difficulties?
Hi therrawbuzzin
No I did not! I thought it was probably a convenient round number that would be hard to prove after all if an estate is different, what is the “market-price?”. If nothing else the market-price is likely to be what they have just been sold for but such logic no doubt will be ignored.
As to house price falls well the credit crunch has broken new ground in many areas has it not? “The higher you climb, the further you fall (Tamsin Archer)?”
Woman’s Hour have turned to economics big-time. Today was an economist (forget her name) talking about her book “Who made Adam Smith’s lunch?” and talking about how unpaid caring roles are not taken into account anywhere but if properly costed would make a huge difference to GDP etc.
“….would make a huge difference to GDP…..”
Well no , not really , sure the imputed head line rate will ofcourse fly away
but really has anything changed ?
GDP or profit or return on investment did not change one iota
just we guessed better ? will “creative accounting ” be the new UK industry like in Banking ……. well they did well didn’t they ……
remember this is dangerous , many items of HMG are fixed to GDP and not tax take . ……. you could end up bankrupting the country with a “creative ” GDP change ( Euro contributions anyone? )
hehe
Forbin
Shaun,
Is it just me or has the idea of the so called “free market forces ” died ?
Who’s next for a wedge from HMG from borrowed monies ?
Is the house construction industry the new British Leyland ?
Is there really a black hole at the treasury that sucks in money with no end ?
Is it true Mark Carney uses an Abacus because his fingers are sore ?
Confused ? you will be !
bruce springsteen – Dancing in the Dark
Forbin ,
PS: House prices are at historic highs compared to wages , this is planned , this is the out come of keeping asset prices high to avoid the 1930’s repeat and keep the dammed bloody Banks solvent ……..
more or less like a 1870’s depression .
Hi Forbin
Isn’t that the video where Courteney Cox of Friends began her claim to fame? Meanwhile younger are readers are probably asking themselves, what’s a free market?
Illustrating my point is the way that West Texas Intermediate oil has just hit a new low for this phase at US $43.27 whilst Brent Crude is falling but some US $10 higher.
There is no free market, the game is rigged. You’ll see another act in the play on Wednesday when the Fed high priests gather to tinker with words and phrases to tantalize about rate rises. And that all seems sillier than ever when you look at the gloomy stats coming out of the US this week. Do you think it’s possible that QE has killed the business cycle and in some grotesque new-normal twist it will end up suppressing and finally killing world economic growth? I suppose, in their defence the central bakers might say that the situation in 2008 had gone beyond any crash/recovery normal cycle of things, with productivity, wages and GDP improving after a year or two of pain? Perhaps the game really was over, and they made the right call, and to let several banks fail would have been like the Shins lyric:
But I learned fast how to keep my head up ’cause I
Know I got this side of me that
Wants to grab the yoke from the pilot and just
Fly the whole mess into the sea.
p.s. I applaud you, Sean, for posting the comments from the radio show. HPI fuelled by cheap money, BTL greed and government wheezes is reducing the standard of living for the young/future generations and the sooner the whole grubby enterprise stalls and reverses the better. In my view.
Bad is good. Everything is rigged, but rigged by a tiny few with the power to give the system endless QE. They create the money, it has become their stock in trade, it enriches them and their club members, it is infinite.
Hence bad economic news = more QE = rocket propelled stocks = rising confidence = stratospheric house prices. How can this reverse while there’s a central bank near you ready to push out more QE?
Is there any event or scenario that can/will stop this game even while that small handful of power players are still hard at it?
my fear is that there never is a reversal , no tipping point ever occurs people, just pay more and more on debt until there is no middle class, and no political backlash because people are too tired working 16hrs a day , houses get smaller , roads more congested , trains more expensive , suicide and divorce rates higher , children stupider until it really is like the matrix and anyone who gave a shit is in new zealand,
perhaps we should impute all the sunshine into ‘yet to be harnessed solar power’ , wind the same ,and the rain into as yet un-calculated free water , then put some gdp hedonics and some taxes on gravity.
All the dog hair that ends up in the hoover , really that is a unquantified output….
When people give their old shit to charity shops they gift aid the tax back , which is so funny considering these same people moan about the NHS not being funded – I wouldn’t be surprised if this is added to gdp, dump a bin bag of paperbacks and worn out shirts at the charity shop and you improve GDP
HI from New Zealand;
The level of household debt (both as a percentage of GDP and disposable income) is higher than the UK. (RBNZ: Oct 2014)
Try driving through Auckland in weekday daylight hours (a quarter of the country regularly gives it a try).
What trains?
But the blue pills work really well here. It’s Paradise.
HI Shaun
It just so happens that my current MP is presently the housing minister.
As builders usually work on a cost basis of 1/3 land, 1/3 materials and
labour and the final 1/3 their profit margin. Presumably fhe government
is waiving the tax element on the builders margin which is quite a
chunk off the 20% is it not? If he knocks on my door, which is possible,
I will ask him where the rest of the 20% will come from and if he can
confirm that no buy to let purchasers will be allowed in the scheme
at any time.
For a long time I have been perplexed by the masses, including
members of my family who seem disinterested in the true dire state
of the planets financial system it seems they can be categorized
as those who are unable to understand,those who bury their
their heads in the sand, or those with busy lives who don’t have
time to care.
All of these people are the reason why politicians leave
serious discussions out of the mainstream media.
Confused no, frustrated YES.
JRH
Hi JRH – “As builders usually work on a cost basis of 1/3 land, 1/3 materials and
labour and the final 1/3 their profit margin” – I worked in civil engineering in the late 70’s and early 80’s so things may have changed since then but our profit calcs back then went (1)13% land (2) 13% materials (3) 25% labour and as for profit, well, the selling price would be double the total of the previous 3 items and then you subtract finance costs- you are too soft to builders certainly as they behaved in the late 70’s and early 80’s. Moreover, after leaving the trade I maintained contacts and remember one ex colleague who went into business for himself telling me (just before the bust) that the houses he had completed were selling too fast so he was increasing their price by £10000 each week until he could slow down the sales and be satisfied he was making as much money as he could from each house. It would seem the attitude now is – “whatever the market will stand”
Hi Noo 2 economics
Unlike you I was never in the building trade and had been qouted these
figures by professionals who might have told me porkies.In sleepy
Norfolk we have fewer noughts on our house prices than most but if
profit margins are on average 50% then the tax element would be very close
to the 20% mark.I bought my first property in 1970 and by 1979 it had
increased sixfold in value so I have seen all the ups and downs and now
we are clearly overdue a correction.
Hi Jrh, it probably depends on your location these days. I’m in Lancashire, prices haven’t recovered here to the 2007 levels and are indeed now drifting down (not that I think there’s anything wrong with that).
Two other things to consider are that the same ex – colleague is now offering 40 year mortgages via a mortgage broker (thereby making monthly payments cheaper again and providing further support to prices) and mortgagees are taking it!!
The other thing is when I bought my house nearly all my friends had help from their parents – a phenomenon I believe continues today. This too will lend support to the market for decades to come. Don’t get me wrong I remain indifferent to rises and falls in the housing market (except insomuch as I believe sustained falls in the housing market nationally indicate and precede falls in markets and the economy) as I have no emotional reaction to the rises and falls, although I disagree with Govt interference at the moment in the introduction of stupidly low interest rates. If rates were higher, selling prices of houses would be cheaper although the total monthly payment would remain broadly the same imo.
Hi Noo2
The man in your story at the end mat finally be someone who behaved like he was in an economics textbook. It has take a while hasn’t it?!
Sorry Shaun you’ve lost me. To my mind he behaved like an economics text book all along – to put it simply all his actions point to him being focussed on maximising profit.
There must be a pressure cooker effect building here. The once fairly unremarkable aspirations of previous generations own a home, have a career and build a decent pension pot for a comfortable retirement have become completely unrealistic expectations for far too many in our society. How will the frustration of a generation eventually manifest itself?
Hi Zummerzetman
It is all part of borrowing from the future. We now have to keep pushing house prices higher to create an illusion of wealth, but it must reduce future gains. The new entrants often start with student debt putting them on the road to being serfs. Increasingly we are liberalising pensions or borrowing money from the future there too!
Will we one day find that the cupboard is bare?
Hi Shaun,
I’m not sure housing is THAT much more expensive than back in ’87 when I bought my house. Sure, it was cheaper in real terms (by about 20%) than today’s prices but then I paid 8% pa increasing to the heady heights of 14% if memory serves which made my monthly payments almost 3 times higher than a 4% mortgage today. I’m thinking if I had the same job today I did then (Quantity Surveyor) then the pay rates of today and the house I could afford today at 4% interest mean I would actually have a bigger house!!
Remember nowadays most new builds come with cavity wall insulation and central heating – considered extras in the 80’s.
So I am unconvinced that monthly housing payment costs are greater than 30 years ago (although prices are higher) due to cheap money. What this ensures though, is the continuation of cheap money as the Govt knows people can’t afford higher interest rates because of the extortionate prices they paid originally and if the Govt increases interest rates then it will have to do something with the homeless it creates which will dwarf the 200,00 plus pa Thatcher created in the late 80’s and early 90’s with her artificially jacked up interest rates and yes I hate the woman – I almost lost my house as a result of her recklessness and un-needed interest rate increases.
So I would ask when looking at the price of a house and the proportion of a house purchasers income taken by the monthly payment (given ridiculously low interest rates) is housing really expensive compared to 30 or 40 years ago??
One other thing here is the Land Registry link showing transaction prices (rather than ask prices) for each region and house type – a bit rough and ready I know but certainly gives flavour of what’s really happening – http://landregistry.data.gov.uk/app/hpi/hpi
Provided mortgage rates remain at their historic lows for the 25+ years of their term it won’t be a problem. How likely is that?
I would take high interest rates and low prices over low interest rates and high prices any day of the week. It should not be a visit to the roulette table with your lifes income just to house yourself.
I would say very likely ZIRP is here to stay. It’s been here 6+ years now with no economic justification. The real deal is Govts can’t afford for rates to go up much otherwise how do they finance their own debt? Try increasing taxes more and see whether they get re-elected, that’s what all politicians want – power. Japan has had a ZIRP for over 2 decades now.
This isn’t wishful thinking on my part as I believe rates should be up about 2 – 3% now, but how could the Govt and private borrowers afford that?? The politicos are aware of this and as I said in a an earlier post they will have to pay to re house all the homeless they made if rates go up too much and where will they find the money for that? Borrow again? And where will the money come from for the interest payments on that? On and on it goes – they’ve endgamed themselves and us when rates should never have gone so low in the first place.
Only a third of households have mortgages, what proportion of those would be negatively affected to the extent of homelessness I couldnt say, but I often hear anecdotal tales of how low mortgage repayments have become for those that can afford to pay much more.
When the situation is relatively young in comparison to a mortgage term Im hesitant to assume this situation simply must continue, assuming it is all under control and can continue, even if desired.
In addition mortgage rates needn’t be tied to the base rate, the powers that be in keeping that particular lever in the down position won’t necessarily keep the cost of borrowing low in any case.
Perhaps you’ve identified their desired outcome, but the uk is a small island in a turbulent financially connected world with other more powerful countries with their own vested interests, what they want and what they get aren’t necessarily the same thing.
As to us poor individuals attempting to navigate this mess, it is hard to know what to do with regard to our getting on that fabled housing ladder for the under 40s among us. It looks a lot like a bear trap to me, but then Ive watched others joyfully jumping up and down on the trigger mechanism for years now with no ill effect. Yet still I am hesitant.
“Who’s the more foolish, the fool or the fool who follows him?” – Obi wan kenobi
Which is my oft-made point about inveigling the population in an economics culture (ZIRP) needed by the banks.
Hi therrawbuzzin
It’s a (liquidity) trap…
Hi Shaun,
BTL has tax advantages excluding evasion – no national insurance on the income, and CGT as you say. There are no tax disadvantages to having a second or 43rd home. People have to pay rent out of post tax income (or government benefits).
What is pernicious about BTL is supply is artificially constrained by planning – all talk of “free market” is spurious. If you lanced the BTL boil with some targeted taxation of those who have benefited most from ZIRP it would probably be a massive boost to the economy. Have you tried to quantify the taxes that could be garnered from say £4k a year on every BTL – if you don’t like it sell up and let the buyer pay the Stamp and you pay the CGT. Would equate to a much cheaper cost of living. Tax raised could be used to support social housing projects such that there wasn’t a massive crash merely a correction.
Could you quantify the expected house prices without the pernicious BTL – am guestimating 40% lower.
Housing seems not to be a big political issue yet though there must be plenty of voters in 20’s or 30’s that could be mobilised, tax raised and the economy improved, not exactly a golden economic bullet though a decent start?
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