Yesterday I looked at the current views of the Bank of England which seem if its official Minutes are any guide to be shifting towards some of its members voting for a Bank Rate increase. However the mention of house price growth as shown below is very neutral and is not used as a grounds for a tightening of policy.
House price inflation had picked up in the second quarter of 2015 with the average of the lenders’ house price indices rising by 0.7% per month.
I note also that they used 0.7% per month which they no doubt felt would look more palatable than putting an annualised rate of 8.4%! I have regularly pointed out that the rate of house price growth far exceed wages and this is continuing.
In the three months to April, whole economy total pay had increased by 2.7% compared with a year earlier,
Thus we see that house prices in real terms were increasing by 5/6% more than wages in annualised terms meaning that real wages in this area are falling considerably. Here we come to a very difficult area for the Bank of England as it was its Funding for (Mortgage) Lending Scheme or FLS which put a light under house prices via lower mortgage rates. This began in July 2012 so the majority of the current Monetary Policy Committee have skin in this particular game which is perhaps why house price rises are not at the forefront of their thinking at least according to the official records!
I have never understood why making houses more expensive for first time buyers is regularly reported as “Help” for them. I am also reminded of the generational war that I discussed again only on Tuesday as the relatively young not only face ever higher house prices but also find that their wages were often disproportionately affected by the credit crunch.
More More More
Price Waterhouse have crunched some numbers and have emerged as cheerleaders for UK house prices.
In our baseline scenario, the average UK house could be worth around £360,000 in cash terms by 2020.
They are forecasting that UK house prices will rise by an average of 5% per annum between now and then. Accordingly unless UK wages growth surges to levels which were extremely rare even before the credit crunch hit then house prices will become ever more unaffordable to the ordinary person. No wonder the UK establishment do not want to put house prices into the official consumer inflation measure! Remember house price growth according to the official mantra is an increase in wealth rather than a sign of inflation. This ignores the fact that whilst for some who downsize or sell up there is a gain but new buyers face higher prices or inflation. Putting it another way we have another feature of the generational economic war as the mostly older have gains whilst the mostly younger face higher prices especially relative to their wages.
Tucked away in the report was another feature of the generational war.
a greater number of people than ever before own their own home outright. This now accounts for 8.4 million households or 32% of the total. We expect this to rise to 10.6 million households, 35% of the total, by 2025. A key driver is the rising proportion of over 60 year olds in the UK, who are far more likely to have paid off their mortgages.
So the over 60s are benefitting from the house price rises as their mortgage debt is inflated away in relative terms and then usually ends. On the other hand the young face a grim seeming future of ever more mortgage debt to add to their student debt. Of course from time to time they will get a helping hand from the bank of Mum and Dad but that cannot bailout everyone.
There aint nothing going on but the rent
It would appear that the lyrics of Gwen Guthrie’s song are becoming ever more apposite. Here is the opening salvo from Price Waterhouse.
For younger generations, renting privately is now the norm and many will only become home owners quite late in their adult lives.
They state that a ” significant rise in the supply of affordable housing might change this” but I note that even such a rose-tinted view ( as we have failed to do this for decades now) does not feel that the period to 2025 would be affected much. They also note that contrary to political rhetoric matters are in fact deteriorating.
The last 5 years have seen an intensification of this shortfall as average numbers of completions have fallen markedly,
Thus it is no great surprise that we see that renting is increasing in scale.
the proportion of people living in private rented accommodation had doubled from around 10% to 20% overall since 2000, but for those in the 20-39 age bracket it has jumped from 20% to 50%.
So more are renting and this is predominantly being driven by the young. Why? Well we get quite a damning critique if you read between the lines of the policy of the Bank of England as it drove house prices higher post July 2012.
The steep increase in house prices in the early 2000s led to a doubling of the house price to earnings ratio, from around 4 in the 1990s to just under 8 now.
Also the situation for deposits which post credit crunch are required more frequently by lenders is in fact even worse.
This means that average first time buyer deposits have increased almost five-fold since the late 1990s, from £10,000 to almost £50,000
Average earnings have risen by only a tenth of that over the same period or 50%.
The cost of renting is increasing
Back on April 27th I quoted some troubling research from Your Move and Reeds Rain.
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 (CPI) inflation.
Thus rents had increased faster than consumer inflation which we now had increased faster than wages. Well this situation is getting worse as the latest data shows.
Annual rent rises hit 5.6% across England and Wales – the fastest increase since records began in 2009.
We can skip the fastest rise since 2009 I think but we cannot skip the fact that as wage growth has risen rents have risen even faster. So even in what you might think would be a good time for renters the situation is in fact continuing to get worse. Perhaps landlords are noting the better wages numbers and are taking the opportunity to raise their rental income. Or to put it another way.
rental costs are primarily driven by the amount tenants are capable of paying.
In case you are wondering what this means in actual amounts per month here are the numbers.
Rents across England and Wales reached a new record high at £789 in June.
There must be many reading this who feel that the property ladder has been pulled up out of their reach, or perhaps that the lower rungs are now missing. Even if they rent the situation is even worse than when I wrote this back on April 27th.
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?!
Landlords or the rentier class are the winners on both fronts as they see capital gains being added too by rising rental income. Another outbreak in the generational war?
Meanwhile I note that the initial push in the UK housing market from July 2012 is only now really impacting on private rents. I argued that this feature of the behaviour of UK rents ( a very slow response to changes) would make them inappropriate for an inflation measure ( CPIH ) back when the choice between it and house prices was being made and have been proven to be correct. Meanwhile the UK establishment has learned nothing from that error and in fact the latest review by Paul Johnson of the IFS has suggested this failing and flawed measure should be our main consumer inflation index.
Also if Mark Carney continues to talk the UK Pound £ higher with his promises of Bank Rate rises which is likely to affect exporters and we note that the Bank of England has pushed both house prices and now rents higher can you see the catch? The “rebalancing” we were promised is in fact being pushed in the opposite direction.