Is the true crisis in the UK housing market a rental one?

Analysis of the UK housing market often begins and ends with a consideration of house prices. There has been plenty to discuss in that area since the Bank of England pushed the start button for rises back in July 2012 with its Funding for (Mortgage) Lending Scheme which conveniently for the UK establishment provided a subsidy for the banking-sector too. Indeed the coalition government joined in with various policies under the Help To Buy banner which claimed to help first time buyers. This morning has seen another part of the UK political establishment join this particular party as Labour have announced this. From the BBC.

First-time buyers would be exempt from stamp duty when buying homes for less than £300,000 under a Labour government, Ed Miliband will say.

This concept of “helping” first time buyers has troubled me all along because we are “helping” them to buy what are in my opinion over-priced houses. What other area would regard paying too much as helping someone?Should there be a future housing bust these first time buyers will be dreadfully exposed in financial terms. One impact of such policies can be seen in the house price data where prices for first time buyers have risen even faster than for others. If we take the start date for Help To Buy as April 2013 then (mix-adjusted) house prices have risen by 16.6% since then. Accordingly “help” makes its way into my financial lexicon for these times as we wonder if first time buyers will be singing along to Lennon-McCartney.

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, help me, help me, ooh

What about rental sector then?

If we step back for a moment and consider the broad trends sweeping the UK economy then it is hard to escape the thought that it is growing. If we look at the other side of the balance sheet so to speak we see that buy-to- let lending is seeing something of a boom again. If MoneyFacts are correct then that looks likely to be encouraged by the data below.

Average buy-to-let fixed rates have fallen by up to 50 basis points over the past year, according to Moneyfacts.co.uk.

Data shows the average buy-to-let two-year fixed rate has fallen from 3.94 per cent a year ago to 3.45 per cent now. Two years ago the average was 4.44 per cent.

Apparently it is not only price (via lower mortgage rates) which has improved.

Buy-to-let mortgages are experiencing a renaissance, becoming not only more widely available but cheaper, too.

Oh and ahem, UK pension reform……

With more five-year fixed rate deals charging below 5 per cent than ever before, it is little wonder that the newly emancipated pensioners are genuinely considering buy-to-let as a retirement option.

Indeed a MoneyFacts review back in March pointed out how good that last couple of years has been for this sector.

Buy-to-let lending has grown by 32 per cent in each of the last two years, rising from £15.7bn to £20.7bn between 2012 and 2013 and to £27.4bn last year.

They expect £30 billion this year and if we move back to the other side of the balance sheet here is the forecast impact.

The panel were unanimous that the private rented sector will account for one in four properties by 2020, up from 19.4 per cent now.

The mainstream media has caught onto this and this from the Guardian from Saturday reads rather like cheerleading.

Buy-to-let looks tempting as rates tumble

Should you be thinking about putting your pension savings into property?

For now I will move on except to point out a social consequence pointed out by MoneyFacts.

Whereas in the 1970s as a lower-income family you were likely to find social housing – those people now are being forced into private renting.

What about rents?

If we go back to the last election then last weeks data release from Your Move and Reeds Rains was eye-catching.

Rents across England and Wales are now 15.2% higher than at the time of the last General Election in May 2010……This is faster than inflation. Over the same period since
May 2010, consumer price inflation (CPI) has amounted to
11.6%. This leaves a 3.6% increase in rents after the
effects of inflation – or the equivalent of a 0.7% real terms
increase each year over the last Parliament.

Now we know that wages have grown more slowly than inflation in the UK since the last General Election. So the consequence is that renters have been increasingly squeezed.

If we do the number crunching then the official data for average wages tells us that they have risen by 8% over the course of this Parliament from £449 a week in May 2010 to £485 a week in February this year. So we have a familiar decline compared to official inflation of 3.6% but one of double that or 7.2% if we look at rents alone. The real wage squeeze has seen another turn of the screw for those who rent.

These trends do seem to be continuing as the official inflation measure is conveniently at 0% but on Friday we were told this about rents.

Private rental prices paid by tenants in Great Britain rose by 2.1% in the 12 months to March 2015.

Total wages in the year to February rose by 1.3% so it would appear that even the current economic boom has done little or nothing about this relationship.

Comparing the UK to the Euro area

The total numbers hide quite a bit of variation as Wales saw rises of 0.8% and London of 3.2%. For a true comparison we would need to investigate wage growth numbers we do not have but imagine this was the Euro area and the debate which would ensue…..

Existing renters and home owners

We find today that the credit crunch era has seen another exchange of wealth and indeed income. Those who rent have found themselves paying not only higher nominal rents but ones higher than inflation adjusted ones and indeed higher than wage growth. Accordingly in real terms they have seen a drain on their finances.

Whereas home owners have seen their finances boosted in two separate respects. Firstly we saw a succession of Base Rate cuts followed by further attempts to reduce mortgage rates such as £375 billion of QE (Quantitative Easing) and the FLS scheme I described above. This means that for a mortgage with a 25% deposit the typical mortgage rate according to the Bank of England has fallen from 3.05% at the last General Election to 1.56% now so nearly halved. There are caveats of course around criteria but monthly payments for many have fallen. Since the summer of 2012 the pedal was pushed too on house price rises so in general there are lower funding costs and higher house prices.

Renters must be reading that paragraph between gritted teeth because there has been both an income and a wealth transfer here.

New buyers and renters

Here there is a difference because whilst the monthly or annual cost of renting has risen relative to mortgage costs that is only one aspect. The capital aspect is much tougher for new buyers as lower real wages try to finance higher house prices. Anyway you do not need to take my word for it as otherwise our political establishment would not be promising so much “help” for first time buyers would they?!

Comment

The situation in the UK housing market achieved joke status a long time ago and is now well past that! However reviewing the period since the last General Election gives us a clear set of winners and that is the landlord or rentier sector. They have seen their costs fall as mortgage rates have dropped, they have seen their income rise as rents rise faster than both inflation and wages. They must wonder why work for a living when rents rise faster?! Also they have seen substantial rises in the value of their housing stock since the summer of 2012. No wonder it is seen as a good investment and (perhaps) we are seeing another rush into it via pension freedoms rising. The clear and present danger is that this relies on the UK establishment continuing to regard this sector as being “the precious” which of course it shares in an interrelated way with the banking-sector.

Next come home owners as a group as obviously some individuals did lose out. Lower mortgage costs for many and higher house prices since late 2012.

The losers are a clearly defined group. I have long argued that first time buyers were likely to be in this group and today I add those who rent. Of course some have rented whilst saving up to buy in something of a double-whammy. Who could save enough to merely stand still?! As these are generally younger than house owners we are observing also yet another example of the generation game taking place where the young lose out every time. They must think they live on the planet Giedi Prime from the novel Dune.In such a world it would not be a coincidence that a growing group (renters) found itself being punished economically.

As to our political class well they want to return to the 1980s (Right To Buy) or the 1970s (Rent Controls) it would appear. But as ever they appear to find themselves in a “Westminster Bubble” which has burst before it even travels the 2.6 miles to where I am typing this.

Jobs For Life

Today saw the release of the latest quarterly report on the Bank of England Asset Purchase Facility and it made me wonder if we have found a modern-day example of a job for life?

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36 thoughts on “Is the true crisis in the UK housing market a rental one?

  1. It’s all lies.
    “Help to…” isn’t about helping anyone; it’s about keeping the housing bubble inflated so that banks’ collateral value for their loans doesn’t pop.
    It’s an effort (failed) at making banks solvent.
    It’s a crime to continue trading when your insolvent, you know.
    (Insolvency Act 1986)

    • Hi therrawbuzzin

      I think that the Insolvency Act should be framed and put on the wall of each of the banks board rooms! I wonder how many have broken that one in the credit crunch era? Plenty to keep the Fraud Squad in jobs for life. But of course they only investigate the minor end of the spectrum.

      Economic policy is mostly bank (solvency) policy these days.

  2. You’re right of course and all the evidence points to a huge omission of the cost of housing from the official widely quoted inflation figures which conveniently leave out housing costs (owner and/or renter). However renters do have one advantage over house purchasers both owner occupiers and buy to let landlords and that is they do not hold the risk of a fall in the asset price.

    Just imagine the carnage if/when there is a house price crash especially in London.

    • Hi Jan

      Rather conveniently in timing terms I can hear this playing in the next room as my mum watches TV.

      “Have you seen the old man
      In the closed-down market
      Kicking up the paper,
      with his worn out shoes?
      In his eyes you see no pride
      Hand held loosely at his side
      Yesterday’s paper telling yesterday’s news

      Chorus: So how can you tell me you’re lonely,
      And say for you that the sun don’t shine?
      Let me take you by the hand and lead you through the streets of London
      Show you something to make you change your mind

      Read more: Ralph McTell – Streets Of London Lyrics | MetroLyrics ”

      The future or the past? Very Dune….

      Actually rents are in the CPI but only for the rental sector. In some way that is even more bizarre than excluding housing costs entirely! Eurostat is changing to allow for this yet we do not and the IFS have just rubber-stamped it. Arise Sir Paul Johnson…..

      • but crucially isn’t the rental data used in CPI different to the rental data used when compiling the imputed rents data in GDP?

  3. Jan makes the point so often made on here about the exclusion of housing costs from CPI/RPI.

    Whislt the article rightly points out some of the pitfalls of renting,it’s worth noting the amount of BTL lending being done as IO.Also worth noting that there are still plenty of IO mortgages deep underwater from 2006/7.

    This country is in a complete mess in so many ways that are variously highlighted on Shaun’s blog.Depressing but necessary reading

    Thanks as ever Shaun.

      • Ain’t that the truth, Shaun.
        Everybody knows the First Rules of Holes.
        But the reason we don’t stop digging is that those who are digging the holes will not be the ones who end up in them.

        The young, the heavily indebted, the poorest will all suffer more because TPTB (especially the unelected) will make sure they don’t lose. Just look at the recently published Rich List.
        Worryingly, this is the stuff that revolutions are born of; especially when ballot box revolutions fail to make any difference.

        While writing this The Gambler is playing on the radio – ” and every hand’s a loser and the best that you can hope for is to die in your sleep”

  4. For a true comparison we would need to investigate wage growth numbers we do not have but imagine this was the Euro area and the debate which would ensue…..

    No need for all that trouble, Shaun. I believe that standard procedure at times like this is to lick a finger, stick it in the air and whistle ‘Dixie’, thus enabling us to use any bloody figure that suits our purposes.

    And popcorn … always room for popcorn.

    Something like that anyway. 😉

    • Hi Jim M

      I saw a re-run of Yes Prime Minister (The Smoke screen) the other day which nails it.

      Sir Humphrey: Statistics, you can prove anything with statistics.
      Jim: Even the truth.
      Sir Humphrey: Yeah … no.

  5. Ok Shaun

    So to protect the Banks and the wealth of the few…

    Should you be thinking about putting your pension savings into property?

    A: this was the plan all along , wasnt it ? What could go wrong ?

    and

    Whereas in the 1970s as a lower-income family you were likely to find social housing
    – those people now are being forced into private renting.

    Thus the Housing Associations will disapear like the DoDo

    So we’re fed up with modern Britain …. back to Victorian Britain it is then….

    The housing shortage:

    Low wages and the scramble for jobs meant that people needed to live near to where work was available.
    Consequently available housing became scarce and therefore expensive, resulting in extremely overcrowded conditions.

    Overcrowding:

    Many people could not afford the rents that were being charged and so they rented out space in their room to one or two lodgers .

    In our case our adult children

    Entrepreneurship:

    Some children worked as errand boys, crossing sweepers, shoe blacks, and they sold matches, flowers and other cheap goods.

    ( I note theres no lack of entrepreneurship in India either , so obviously entrepreneurship does not make us richer per se )

    jobs for life

    as to be a banker

    money for nothing and your checks for free !!

    and we were all told it those social security scroungers who were to blame …….. oh , sorry , yes , its the banks again …..

    Forbin

    • Hi Forbin

      Well I suppose Victorian Britain was at least better than the rule of the Harkonnens on Giedi Prime. Although there were plenty of scandals such as the women who painted radium on watches and clocks to make them luminous and suffered dreadfully from the radiation poisoning.

      Perhaps the film Back to the Future got its title right..

  6. But house prices are only “overpriced” in free market terms….and it isn’t a free market.

    The supply is extremely limited because of the very restrictive planning rules (pretty countryside which cannot make a profit in agricultural production, but which can’t be used for anything else), but demand is effectively unlimited because of unrestricted immigration.

    The only drag on prices is the growing mortgage “famine” for owner occupiers, but there is no such famine for BTL buyers, who will increase their purchases. After all, demand for housing isn’t going to decrease any time soon, as the population grows.

    Add to this the British mistrust of the financial services industry (oh sorry, your policy hasn’t yielded what we said but that’s life….and we’ve had the management fees throughout! So long and thanks for all the fish…) and their love of tangible assets with no counterparty risk, and I cannot see a downside to residential investment other than political ones.

    Mark Twain said with regard to land “they aren’t making any more”, well, with housing “they ain’t making enough”!

    • true mick ,

      And as I have pointed out before – if you remove all restrictions and pave all the southeast and norfolk/suffolk we can , with London style density , get 500 million people housed ….

      And that still would not be enough if we still have population growth !

      seems we are no smarter than yeast ….

      Forbin

      munches popcorn and looks at Brent increasing in price already , hmmm…..

      • Hong Kong manages a much higher population density than London, and I’ve heard that the water in the Thames gets re-used 7 times , so the sky’s the limit.

        And there’s another side to EU migration, it gives you UK exit options ….

      • I now have two allotments, and although not food secure, that is down to my chosen diet.
        In an emergency, that, and the vegetables I grow, can be adjusted accordingly, and a few chickens added…

    • “with no counterparty risk” – eh? It’s the purchaser who’s the counter party and they bear the risk. Maybe you mean moral hazard? Where the b(w)ankers can’t lose as they conveniently have any losses socialised whilst the purchaser is made homeless and then goes tothe rented sector thereby reinforcing Shaun’s theme which, of itself is flawed as I pointed out elsewhere in the comments section.

  7. Hi Shaun
    Do you expect a continued decline in mortgage rates
    which via increased rents will extend the transference of
    money from the poor to the rich?

    Gwenn Guthrie

    Aint nothin goin on but the rent

    JRH

    • Hi JRH

      I do fear that interest-rates will continue to decline and perhaps the clearest hint of a future in that direction has come from Sweden. It has what would in the past have been regarded as a good economic situation and an official interest-rate of -0.25%!

      Whilst I expect UK inflation to rise and ruin the party for the deflationistas we know that the Bank of England has so far ignored consumer inflation at 5%+. So should the economy slow what would they do………….?

  8. Hi Shaun, an excellent summary of what is an obscene situation. The trouble is that the UK homeowning and BTL public is a complicit agent in this godawful oneway gamble, so many of them actually believe that they are successful entrepreneurs…… it gets up my nose. So I haven’t noticed any party telling us that they are going to up rateable values after the election but since property is the only thing left to tax then I dont see another option.

    Just imagine 5-8 % interest rates, I know that this is an impossiblility now but if it came true what would happen?

    Paul C.

    • Hi Paul C

      Even before the credit crunch hit people worried about this. Now we face a situation where we are making it ever harder to raise interest-rates and accordingly the borrowing/saving balance is all out of kilter. Far from all savers are the rentiers that some modern economic theories describe them as.

      The Pound £ would shoot upwards for a while but then collapse as the consequences hit.

  9. Hi Shaun,
    Of all the manipulation of our markets this inflation of the housing market is the most damaging to society in my view. How many more times do we need to see a scheme to ‘help’ first time buyers that just stokes up prices even further before people realise the only real solution to the housing crisis is to build more houses? Of course as pointed out by some of your regular contributors the priority behind the decision making might not primarily be intended to help the average person buy a reasonably priced home!

  10. also worth considering that 70% of the wealth of this country is it’s housing stock.Ergo the bulk of credit creation is off the back of housing loans.

  11. Great blog as usual, Shaun. I think if you looked to the US you could also find evidence that renters there are having a tough time.

    On a completely unrelated topic, we have started hearing this song again, “Kiss Him Goodbye”, in hockey arenas all over North America, as playoff teams are eliminated:

    Our Ottawa Senators were eliminated last night by the Montreal Canadiens; it is hard to beat a team whose goaltender has an Olympic gold medal around his neck.

    • Hi Andew

      In the US the policy of using rents as the main housing inflation measure works better than in the UK. The shelter component has been running at ~3% and has a high weighting in the numbers. Without it US CPI would no doubt have run negative for a bit. Shows the difference between different institutional structures although I would prefer it still if house prices were used.

      As to the song I had a listen to make sure it was the one I thought it was. By the way does Rock and Roll part 2 by Gary Glitter still get used? Awkward to say the least considering his convictions for child abuse but back in the days when that was not known he put on a great show.

      • Thank you for your reply, Shaun. You are right about the imputed rent estimates keeping the US CPI inflation rate from running negative. The US HICP for the total population, which doesn’t include imputed rents, registered an inflation rate of -1.0% in March 2015.

        Yes, Rock and Roll part 2 is still a staple of North American hockey arenas, as it should be. You only really hear “Kiss Him Goodbye” when a team is about to be eliminated, and then it is only the chant, coming from the crowd, “Na, na, na, na /
        Na, na, na, na, New York, [or whatever the name of the loser team is] goodbye!”

  12. “May 2010, consumer price inflation (CPI) has amounted to
    11.6%. This leaves a 3.6% increase in rents after the
    effects of inflation – or the equivalent of a 0.7% real terms
    increase each year over the last Parliament.” – Only problem with that is that they are talking about housing related rents but using a measure which excludes housing costs (which rents are based on) so, if you use the RPI all items index including housing costs you obtain an inflation rate of 14.98% or 15% rounded, yielding a 0.2% real terms increase over almost 5 years – not so good when reality is applied….

  13. “….they have seen their income rise as rents rise faster than both inflation and wages. They must wonder why work for a living when rents rise faster?! Also they have seen substantial rises in the value of their housing stock since the summer of 2012.”

    Shaun you have assumed that all landlords have owned their properties for at least 5 years to make these statements. The Johnny come lately’s will have a different experience of paying higher purchase prices for their rental properties and than struggling to let them at the higher rents they must demand due to the greater prices they paid whilst existing landlords of 5 years plus will be tardy to increase their rents due to lower purchase prices paid years earlier and therefore lower repayments reduced all the more by falling interest rates. This leaves new rentiers somewhat up sh-t creek without a paddle.

  14. Pingback: UK National Debt and Student Debt are a toxic mix as Rents soar | Notayesmanseconomics's Blog

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