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?!
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?