Yesterday I analysed the way that yet more austerity is likely to squeeze the life out of the Greek economy one more time. Today I return to a very British problem and crisis which is the cost of housing which for many people squeezes the life out of the family budget. Of course the conventional and mainstream view is that the price of housing boosts wealth and hooray we are all richer. But of course much of the increase is in fact inflationary and it reduces the wealth and indeed financial position of those looking to buy a house. As I regularly point out “Help To Buy” for first time buyers is an opportunity to buy an overpriced house with real wages which have been falling. What could go wrong? Back on the 16th of March I pointed out (via BBC Womans Hour) that women do fear what might happen next.
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…..
Young people won’t get a chance with landlords snapping up every available property….
However there is another factor in the situation which is to look at the implications of the current situation for those who rent rather than buy. If we look at the last quote above we are reminded of the Buy to Let boom and the fact that more people are either choosing or being forced to rent. They also are having a hard time of it as I pointed out on the 27th of March. From Your Move
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.
I compared that increase to an 8% increase in average wages over the same period or a 7.2% decline. So yet another form of real wage squeeze has been in process for those who rent. Or as Gwen Guthrie so aptly put it.
Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me
Ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me
Friday saw more bad news for both actual and prospective renters from Your Move research.
Rents driven to new all-time record by
divergent south-eastern regions….. Residential rents up 4.5% year-on-year across England and Wales, powered by three southeast regions.
In case you are wondering how much..
As of May 2015, the average residential rent across England and Wales now stands at £778 per month.
As ever London leads with £1207 per month. But it does not lead the annual increases as the leader is the East of England at 13%. Does anybody have any detail or insight to this?
exceptional economic expansion in the Cambridge area,
A rentier society?
The Your Move report goes on to measure returns for landlords.
Total annual returns, on the other hand, have continued to cool. Across England and Wales, returns came to 9.5% in May 2015 – down from 9.8% in April and 11.8% in January.
If you compare that to a Bank Rate of 0.5% or a ten-year Gilt yield of 2% that looks hot hot hot to me rather than cool. There are of course costs (maintenance etc.) but in these times 9% + looks like nectar does it not?
An international perspective
Renters who note that rents are rising at a solid lick when you consider that we are supposed not to have any inflation will not be cheered up by the fact that they are still rising faster than wage growth. Even its recent spurt falls short. But adding to their pain is the fact that the UK is very expensive when compared to its peers as the UK Housing Federation points out.
In fact, private renters in the UK pay the highest price for housing in the entire European Union. With an average monthly rent of 902 Euros per month (the equivalent of around £730), private renters in the UK pay almost double the amount of the European average, which is 481 Euros.
If we look to compare with our peers then we are in fact still considerably more expensive.
Even when compared to other Western European countries with similar income levels, the PRS in the UK remains expensive. For example, private rents in the UK are around 50% higher than in Germany (600 Euros) or the Netherlands (625 Euros), both countries with a large share of privately rented households.
There will have been an effect here from the rise in the UK Pound £ against the Euro especially at the 1.41 it has reached this morning. However that still leaves a fair-sized gap to explain as we mull concepts such as “rip-off Britain” and the fact that our whole economy has been tilted towards the housing sector.
Existing mortgage holders have their problems too
I have written in the past about how big a deal credit rating is on an individual basis and we got a hint of this yesterday from the RBS announcements. From its chairman (h/t Investis)
Around half of all mortgage customers in the UK are still on Standard Variable Rates.
You see that is at 4% which is rather different to the headline rates for new customers.
Martin Weale
Dr.Weale has been quoted in the Financial Times today.
The FT reported that Weale, a member of the BoE’s Monetary Policy Committee who voted for rate rises last year, believed the central bank should be ready to raise rates as soon as August.
Perhaps rather than speaking to newspapers he should actually vote for such a thing. We know he did not in June as the vote was 9-0 against. Of course Dr.Weale was voting for a Bank Rate increase up until January. Actually he now has two sequences of voting for a rise then changing his mind.
Comment
It is increasingly pointed out that the UK has strong elements of a rentier society. Today we see that rents are not only on the rise to record levels but are very high in international terms. We also know that as fewer people can afford to buy and the stock of housing for public-sector renting falls – especially under the new Right To Buy plans – then more will find themselves privately renting. They find themselves doing so just as the terms and costs move against them. How very credit crunch! We live in a world where official claims that there is no inflation clash with the fact that quite a few things are more expensive.
So renters are likely to be mulling the thoughts of Dido.
If my life is for rent and I don’t learn to buy
Well I deserve nothing more than I get
Cos nothing I have is truly mine
Notayesmanseconomics's Blog 
Yes rents are at very high levels indeed. My son shares a tiny flat in Bristol and they pay £950 per month whilst my daughter is looking for a three bed in Cheltenham and has been advised that the min will be £1050 but more likely £1200. Low by London standards but very high for here – and very few properties available. These are very high rents for young people to fork out and it prevents them saving capital to buy their own. The problem is of course the two fold effect of low interest rates which makes mortgages unusually cheap for the buy to let crowd and at the same time is a disincentive to put money elsewhere. BTL is one of the few places where an investor can make a reasonable return. Add mass immigration, high divorce rate and you have a perfect recipe for high rents. The question is : why hasn’t this occured in other countries where these factors apply? I don’t know the answer to that.
Out of interest, I’d be interested to know what countries do have the same factors at play. Genuine question. 🙂
Germany springs to mind but Shaun will probably be able to answer your question better than I.
But doesn’t Germany have strict rent controls, and a highly regulated rental sector…
Yes and there’s more more to rent than just price. I’ve heard opinions from German acquaintances that many English rental properties would be declared “unfit for habitation” in Germany.
Hi Pavlaki
It is a good question as to what is different,so what is?
London has been affected more than other capital cities
The Green Belt
UK monetary policy has been more expansionary allowing for more mortgages (sadly often Buy 2 Let).
UK housing culture.
However it falls somewhat short of a full explanation I think.
just another issue of infinite population growth in a finite space
go ahead build everywhere
back of a fag packet calculations ( good as any BoE forcast )
500 million in the SE England and East Anglia using HK/Central London population densities
then what ?
Well I garantee you the top 0.1% will profit from it !
forbin
“go ahead build everywhere”
Was driving to pick up a second hand sofa (trickle down theory?) and it took me up towards Oxfordshire, and between the M25 and Wallingford, there was SO MUCH GODDAMN SPACE, and a lot of it, was far from that green and/or that pleasant. Yes, it may have a role within the natural ecosystem, but population density within the M25 isn’t doing much good either.
I’m sure there are political issues beyond ‘greedy landowners’ and ‘bureaucratic busybodies’ such as why would the government invest in subsidised house building in the South East, when other regions are crying out for development etc…
There’s space. There’s builders. There’s people who want homes. Housing market is over-valued. Interest rates cannot be raised.
A builder’s cooperative or union of independent/smaller companies should band together and get this done, with some kind of performance related bonus based on the short and long term success of the new community. None of the big building companies seem to give two genuine sh**s about the UK, and only look to profit.
There’s seems to be some very intresting stuff going on in the the US right now,
Or a New Town building government bond investment programme, where a portion of the GDP of a newly built town is given back to investors over the next 50-100 years, transferable to others on death… an inter generational bond that encourages the support and success of these new towns.
There’s a city in my mind
Come along and take that ride
And it’s all right,
baby, it’s all right
And it’s very far away
But it’s growing day by day
And it’s all right,
baby, it’s all right
But, these are probably terrible ideas, but I’m seeing zero strategy on the part of the PTB. Instead, we continue with:
They can tell you what to do
But they’ll make a fool of you
And it’s all right,
baby, it’s all right
We’re on a road to nowhere
rantrantrant
yes it is most vexing
the pollies will keep pushing the houseing boom button because they have little left on the shelf themselves
afterall doesnt tony blair and cammorroons get better off
let alone the Duc of westminster !
the answer is simple – anyone owning a house that they rent out can be subject to the Right to Buy process
The point I was making is that I have seen the green land below me in Surrey as I fly over it – so tarmac it and build build build
so as to keep the law of supply and demand operating profitably , we’ll import 25% more people than needed to meet that supply
This sounds like a joke but for all practical purposes thats what we have been doing for the past 30 odd years
The real solution is less people or atleast a stable population but that’s just heresy , so lets plan to build then 125million new homes over the next 30 years …. with the roads and infrastructure as well
but we’re not doing that either !
so just sit back grab some popcorn and watch the show
Forbin
Hi Shaun, Having two houses seems a normal and accepted way of ‘investing’ your money these days. Anyone fortunate enough to have enough savings gets a much higher return on their investment than having it sat in a deposit account. I have observed in recent years when an elderly family member passes away, often their property usually stays in the family to be rented out and not finding it’s way back onto the market. It’s seen as an increasingly attractive investment and judging by the last 20 or 30 years that has definitely been the case. You could use taxation to discourage multiple home ownership but there’s no evidence of any political will for this, so sadly we will become more increasingly a land of haves and have nots.
Hi Zummerzetman
Yes and many become landlords because of the time it takes to organise probate and settle estates. Some may then get the taste for it as there is usually income followed by the prospect and at times reality of a capital gain. Beats working doesn’t it?
As I have written before it may be time to take the plunge and stop interest being tax deductible. It has its problems but would help with the problems created by buy 2 let and private equity.
Shaun, a comment on the ongoing Greek saga- I am quite astonished and dismayed that the latest Greek offer has been knocked back. They must know that Tsipras had his head on the block back home with what he had offered and yet they still demand more. I really do think that only total capitulation to the Troika demands will satisfy them and their aim is to crush dissent. Any sensible economist or eurocrat would know that Tsipras is already out on a limb and the differences between the two sides are very small indeed. The Euro has been a triumph of political will over economic reality since its inception however this now appears to have changed to political intervention and domination by the EU elite. It is changing my attitudes to Britains future membership of the EU.
You could substitute political hubris over economic reality as I am sure that the consequences are not always well thought out.
Where the current Greek Government is not the ‘right sort’ for Brussels I suspect the officials smell blood and the prospect of getting a government ‘more’ to their liking. If they ‘get it wrong’ again they can keep going under the normal EU ‘democratic principles’ of having as many elections as they need until the the people have worked out how to vote the ‘right way’.
I’m afraid you are right in your reasoning and that is exactly what they want to achieve. If Tsipras gives in to their demands he’s finished if he doesn’t and Greece leaves the Euro he’s probably a gonner as well. A pity because I think in a stable situation with the time to tackle the problem he (and Varoufakis) may well have made serious inroads into the tax dodging.
I did warn that a deal was impossible and that only the capitulation of one side would do.
There have been lots of laws broken. The previous duopoly haven’t been help accountable for the way the Greek state squandered the borrowed money. The EU have no means of prosecuting the guilty, so they are punishing the Greek people.
But within the Troika, public figures have broken the basic Euro treaty rules about cross border bailouts. The net result is that private banks have benefitted from the opportunity to offload Greek debt (that won’t be repaid) to international public organisations (IE taxpayers money is misappropriated) So I think the Euro leaders & Troika leaders need to be prosecuted for fraud. Draw your own conclusions why the Troika want Greece publicly humiliated and held responsible for defaulting on the ECB, EU taxpayers and the IMF. The plot gets even thicker when you consider how US politicians might react to US IMF losses of an organisation based in the USA …..
Wait until Greece tells German where to go over their TARGET 2 obligations. War have been started and fought over less!
Yes, I thought of that too,heh heh heh heh and I’m looking forward to it!
I think they want Greece out and are now effectively constructively dismissing Greece – they’ve had 5 years to extract the banks from exposure and have been flooding the bond markets with liquidity for the last few months, All preparations are complete. They probably think they’ve introduced enough liquidity to overcome the inevitable squeeze if/when Greece defaults and exits and of course, they have already promised to continue with more liquidity and ramp up if necessary in accordance with Mario’s “anything it takes to save the Eutro” speech a couple of years ago.
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What about the effect of rising rents on the Housing Benefits bill, has anyone in any British government put two and two together on that?
Hi Peter and welcome to my corner of the web.
You make a good point especially as the government is looking to reduce the welfare bill by some £12 billion. According to the Financial Times last August the state of play is shown below.
“British taxpayers are set to pay £10.8bn a year in state support to private landlords by 2018, according to official figures which underline Britain’s acute shortage of low-cost housing.
Housing benefit is one of the fastest-growing elements of the UK’s welfare bill, despite attempts by the coalition to limit it. Current forecasts show it rising from £17bn a year in 2008/09 to £27bn by 2018/19.”
The first comment caught my eye partly because Hotairmail has posted on here but also because of the impact of his opening sentence.
“I believe that in London, supposedly one of the richest cities in the world, some 25% of all households, in work or no, are in receipt of housing benefit.”
HS2.
bless you again !
Housing is a market and if demand outstrips supply, prices will rise until they are in equilibrium. If there was much less interference in the provision, difficulty and cost of getting permission to supply for the levels of demand, the market would work much better.
To their credit the current Government recognised the problem and tried to simplifying the planning system to make it easier to build, so more houses are completed. But they were defeated, by all the nimby homeowners and local councils continuing to pull the drawbridge up after themselves to hinder more houses being build and shock horror, some might even be built near them. Well, yes, thats the idea.
With increasing levels of net migration and the numbers per household decreasing, this pressure particularly in the South East is not going to go away with the current planning restrictions, especially as we are one of the few economies growing in Europe and creating jobs. The EU and Continental Governments seem to like setting conditions enterprise, economic growth and jobs are expensive and difficult things to create in the rest of Europe, so people flock to the UK as we seem to like being better off than most, more enterprising than most and to create more jobs than most, where the Government makes it easier than most European countries for us to get on our bikes and get on with creating wealth.
Now I’m part of the problem as a homeowner and so are all of you if you own or rent. In much the same way as most will complain about traffic congestion as they drive home and have a good moan, where they are in denial that they were part of the congestion and problem! Now we can all moan about the housing problem or we can help those that are in a less fortunate position than ourselves, by pressuring the Government to have a go at simplifying the planning system again.
With my pro-building view, before anybody asks, no I’m not involved in the property development or buy to let market in anyway, I just intensely dislike people that once they have something, they try to pull up the drawbridge and make it much more difficult and expensive than necessary for other people to have the same.
Rods
if you dont stop net migration then your other ideas are just fingers in the dike
houses have go small like mars bars so the new purchasers of houses are NOT getting the same , they get less
the housing issue is that many like myself can borrow more but I have kids who cannot afford even the Barretts rabbit hutches that are for sale if they can find one.
Relaxing planning will only work short term , focus on the real issue – infinite population growth on a finite piece of land
perhaps you’ve not seen this video
or you just dont understand or don’t want to beleive the problem
get on their bike , wot the chinese made one ? sure they will take their expertise abroad . probably to the USA
and forgive youself , you are not part of the problem if you own a home , what do you suggest ? live in a cardboard box under Staines bridge ?
tell you what save effort and give all your money to the top 0.1% unless you are in the top 0.1% 😉
Forbin
Ps: here have some popcorn – if you think your ideas and posting here helps , well sit back and watch the show ………
Yes Forbin and a shake up of the benfits system in required in relation to child payments – means tested and only payable for the first child in each family although you would still require net migartion of people with the skills needed by the Uk and the correct age demographic to start righting the age imbalance in the UK
UK housing. UK planning laws. I wonder if they conflict with EU rights (right to a family life) and whether planning laws could be considered anti-competitive.
Hi ExpatInBG
You may have a point. Except in the Greek saga I returned to yesterday we have seen the Euro area walk somewhat roughshod over its laws and treaties over the the past 5 years. So enforcing rules may be harder than it was.
Great column, Shaun, as usual. Martin Weale’s hawkishness on raising the bank rate is a little mystifying. You would think that if anyone on the MPC would still be inclined to raise the bank rate it would be someone concerned about the surge in house prices not being reflected in the target inflation indicator, the CPI. Unfortunately, there doesn’t seem to be anyone who fits that description on the MPC. And Martin Weale not only reflects the general opinions of the MPC, he actually led the charge for using a rental equivalence approach to measure owner-occupied housing in the CPIH series as a member of the Consumer Prices Advisory Committee. If his index of reference is not the CPI, but CPIH, its annual inflation rate was 0.4% in May, up from 0.2% in April. This is not only a long way from 2%, it’s a long way from the 1% lower bound. What is the man thinking?
Hi Andrew and thank you
I met Martin Weale at one of the Royal Statistical society meetings at which he spoke, as you suggest. in favour of CPIH using rental equivalence for owner-occupied houses (this was when it was being debated). During the meeting one of the ONS people mentioned that according to their data rents lagged house prices by up to three years. I pointed out that if you added the 18/24 months over which monetary policy changes need to take full effect the response time could be 5 years which was simply ridiculous. Martin Weale grinned at me oddly in response but did not reply.
I was left with a low opinion of him which has not improved much with his mental gyrations. Now with house prices having risen in the UK he could have made a logical case for a Bank Rate rise but of course he was party to leaving them out of the housing inflation measure.
Even worse for those of his ilk there was no satisfactory database on rents either at the ONS which led to the embarassing U-Turn not so long ago when in effect they have pretty much accepted the system (Wrigglesworth) I quoted in the article.
Hi Shaun, a couple of things I don’t understand:
1. “Rents across England and Wales are now 15.2% higher than at the time of the last General Election in May 2010” – source Your Move around about March 2015
2. “Residential rents up 4.5% year-on-year across England and Wales, powered by three southeast regions.”- source Your Move June 2015.
Theydo seem rather contradictory don’t they? Are we in fact witnessing a collapse in the pace of rent inflation or are they including commercial rents too in their March 2015 numbers?
Funnily enough I was reading an IMF paper a few weeks ago on the same subject which contradicted this information, saying house prices in the UK had slightly outpaced rents although the chart related to Q4 in 201 The article is here – http://www.imf.org/external/research/housing/index.htm
Sorry Shaun, raed the post too quickly, that’s why I didn’t understand doh! Ignore the 2 points.
No Problem.