UK house prices and rents are becoming ever more unaffordable

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.

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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.

Comment

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.

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33 thoughts on “UK house prices and rents are becoming ever more unaffordable

      • That is the purpose of fixing your mortgage rate for the first however-long.
        It masks the fact that people are in mortgages that they really cannot afford to service at market rates, but these loans must not fail, or the bubble is pricked.

  1. Hi Shaun

    You note that in almost every “official” discussion of this issue or for that matter, discussion in the MSM, the elephant in the room (house prices that are far too high) is never mentioned. The remedies are always: relax the planning system, HTB et al, all of which not only do not address the issue but actually exacerbate it.

    The reason is, of course, obvious; house prices are driven by credit and if you pull back on this and prices fall the banks are immediately undermined in two ways: their security is reduced and their profitability is hit and the second bailout (or bail in – I’m not sure which is worse!) moves up the agenda. And of course, as house prices are emblematic, it gives a lie to the notion of rent seeking, that seems now to be the main basis of our economy, not that most would admit it.

    However, there has to be a “peak debt” somewhere and I just do not believe reports like the PwC one you quote. You cannot lever the whole system up ever more out of the sight of wage rises, as you say, without both borrowers and lenders pausing at some point at the egregious multiples of earnings reached. And when this point is reached the whole system will fall apart.

    • Hi BobJ

      I agree with you that PwC are unlikely to forecast doom and gloom however to their credit they did report x8 as a house prices to earnings ratio. So many places (Halifax for example) have shifted the goal posts to keep the number around 5 and give a false impression.

      You are entirely correct that it is another form of bank bailout and as I note the banking deleveraging going on they remain in a parlous state. Also we are told it is a wealth gain. Using a marginal price to calculate wealth, what could go wrong?

  2. The UK is collapsing. It’s two speed:

    1. boomers+
    2. the rest

    What is the difference between a young person in the UK and a young person living in a poor country? They are going to be working forever, never achieve financial independence, have poor public services, be working for a landed class.

    Rise up.

    • It’s generational wealth transfer, and the people responsible for deficits that burden the young should hang their heads in shame.

      The modest amount of austerity needed to balance the budget by the boomer generation is a walk in the park compared to rationing, bloodshed and war that their parents generation went through.

        • Britain tried high taxation in the 1970s. 95% tax, brain drain and sterling crisis. Repeat the high tax experiment if you want, Einstein’s quote on insanity comes to mind …..

      • Couple of problems there. Firstly boomers have no shame. Second para also impossible as boomer+ lifestyle has to increase year-on-year or the world will implode into a black hole.

        • Expat: I didn’t say, “High.” I said, “Progressive.”
          There are ways and means to tax wealth generated in this country which don’t make paying optional.
          “Brain Drain?” If you wish to prove that there was indeed a brain drain, and it wasn’t a wheeze dreamed up by/for the wealthy to discredit the tax regime, you have to show that seriously large numbers repatriated when rates came down.
          Floor is yours…

          Every penny earned in this country, whether it be private individuals, companies, or financial institutions, could be subject to different forms of PAYE if the will was there.

        • Work in London @ 60K, pay 19K income tax. + 3.5K trains + 1.5K council tax. remaining 36K which becomes 30K after VAT, Fuel duty, air passenger tax, bbc license fee, insurance premium taxes etc. In England I lose over half my gross income in unavoidable costs before I start paying for accomodation.

          Houses 400K+ or rent 1500PCM and HIGHER. A comparative house in Bulgaria can cost less than 3 times NETT income !

          In short, I’m better off outside Britain and as a skilled educated and productive individual I have the choice of many countries.

          Britain has a significant IT inductry, and these jobs are simple to relocate. IT staff are welcome in many countries. Britain, whether you like it or not, is competing to have these jobs onshore – and the tax revenue they bring in. When considering raising taxes, be careful not to kill the goose who laid the golden egg.

      • Hallo Expat, unfortunately, I am one of those higher rate tax payers and everything you say makes sound financial sense to me as an individual if my only consideration was mammon. However, there are other reasons why I stay relating to family, shared culture and language and so it will be for many others in my position who may stay because they like the National Parks or public places, or museums or (god forbid!) the weather!

        People who leave because it’s no longer financially advantageous for them to stay were likely draining the economy any way, where is Fred Goodwin these days?

        The other point is revolving around whether you have a social conscience and are comfortable with lower paid people paying a higher percentage of their income in tax via VAT, energy tax, insurance premium tax etc resulting in their lifestyles being a grim drudge.

      • One other thing I forgot to mention. The current system could be redesigned to abolish VAT/insurance and energy tax with slightly increased rates of income tax for lower paid workers and even higher rates for higher paid workers. In order for a higher paid worker to be worse off than currently they would have to be paying at least 20% more of their income in tax than presently, this is very unlikely. Lower paid workers would benefit and likely spend the extra money in the economy, thereby driving it forward into expansion, unlike higher paid individuals who will tend to with hold money preferring to invest instead (inflated assets anyone??).

        Might I enquire about the Bulgarian education, health and social care system along with condition of roads, pavements, disabled access(dropped kerbs etc) water and air quality?

    • “They are going to be working forever, never achieve financial independence, have poor public services, be working for a landed class.” That argument applied 10, 20, 30, 40, 50 and even 60 years ago….

  3. I agree with everything you say but I would be interested to hear your thoughts on what you think is the effect on the wider economy of making rent/mortgage a higher percentage of income than was formerly the case? Back in the Thirties the joke was which to choose, a baby or a Baby Austin. Is it now to be a baby or a house? With increasing rents probably neither! I have a tenant with a wife and two children in a one bed flat, they have been on the Housing List for several years but no prospect of anything in the way of social housing.

    • Hi Peter

      You ask a question which Mark Carney and the Bank of England must be mulling right now! In the PwC report was this.

      ” But unprecedentedly low mortgage rates have meant that some aspects of affordability have been improving, despite house price increases: mortgage payments as a proportion of income are well below their 2007 levels and have followed a general downward trend since then”

      It drove that via Bank Rate cuts, QE and then FLS. Now having tried to expand the economy that way it faces the prospect of going the other way should it raise Bank Rate. This will be contractionary for the economy as funds are diverted to pay the mortgage and is a reason why the Bank of England continues to balk about raising rates

      With the plans for a new Right To Buy there is likely to be even less social housing going forwards.

      • And a new rung added to the bottom of the property ladder, which is the motivation for confiscation of publicly owned housing, because that’s what it is.

  4. Also multi occupation

    Until I die my kids will never move out , even then they ill not get my house because of inheritance taxes

    what good is it for me to have a gazzion priced house if I cannot move – too old for another mortgage , even making mine collateral for them is really doing what ?

    Well it doesnt make then richer !

    just the Banks , again , cant people see this any more , has it become to obvious ? debt servitude to the Banks and the banking classes

    I’ve got that idea again , let the private renters suffer the “right to buy” schemes just like Housing associations

    And lets not build lots of flats as the market will provide – well it hasn’t for 30 years but we’ve kept up demand by allowing unlimited immigration ( before the illiberals and loony lefties get on the blower with their versions of “Angry from Mayfair” , I dont care who we let in , but plan for that increase instead of the current blind eyed , sitting on yer thumbs, whistle in dark , clueless brigades that we have now )

    (www.youtube.com/watch?v=cMq3VLQc1MU)

    ( RIP Kenny , we miss you )

    That’s the trouble with the current bunch of pollies , they’ve taken mediocrity and utter hopeless failure and turned them into art form !

    Forbin

    • Hi Forbin

      The housebuilding numbers provided by PwC in their report were rather grim.

      ” Decades of declining housebuilding continue to bite, whilst
      population growth has increased markedly. Over the last five years only
      around 140,000 homes a year have been completed, well below average rates
      over the last four decades.”

      In a way that says it all. Our response to net immigration is to build a lot less houses (1970s saw 314,000 as a comparison). It is a bit like our power supply industry. Who is in charge? Ah yes the UK establishment…

  5. Competition exists between countries and their systems. It’s not restricted to companies. FDI and US companies investing jobs overseas are often criticised by workers rights organisations, yet the Economist magazine reports that the US & Foreign employers usually offer better conditions and pay than local firms.

    I see & hear many people from across Europe working in Sofia for various foreign firms. I’d call Sofia’s job market buoyant, especially for skilled private sector jobs but unskilled jobs are poorly paid. The young are doing better than the old. This is in stark contrast to Greece, Portugal, Spain & Italy. The latter 4 suffer high emigration. It also has to be said that many Bulgarians & Romanians have emigrated to do the dirty jobs in Western Europe, maybe excluding France.

    So the UK’s excessive housing costs is a competitive brake on growth and jobs, one which may lead toward a brain drain of the skilled and productive young.

  6. “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.” Which is also accompanied by a halving of interest rate scompared to what I was paying in the late 80’s so in terms of monthly payments no difference and the young of today have it every bit as hard (but not harder) as the young of the 80’s……

    • This is clearly not the case as can be seen via the collapsing rates of home ownership compared to similar aged people in previous decades.

      How do you explain this well-established trend?.

      Housing is, on average, unaffordable. That is why we have a £25Bn+ housing benefit spend every year. It allows people to avoid confronting the obvious truth.

      • The trends of which you speak established themselves in the early 90’s – the credit crunch simply amplified them – http://visual.ons.gov.uk/uk-perspectives-housing-and-home-ownership-in-the-uk/.

        The real issue is children choosing to stay at home longer because they like their smartphones, net books, tablets etc and their general lifestyle which they aren’t prepared to give up. In the 80’s such things were not available and those that were were prohibitively expensive (£2000 for the first mobiles if memory serves and the whole thing was carried in a brief case where you set up a mini satellite dish before you made your call). I think and hope we could be reaching an inflectioon point where the British lose their property fetish and begin regarding it as I have always regarded my home – a place to live in NOT to make money on (which you can’t any way as Shaun points out unless you leave the country with the proceeds). However, the fact remains that in 1989 I was paying 50% of my monthly take home income on my mortgage (14% interest) and I would be paying 32% of my take home income on mortgae payments for the the same property (5% mortgage interest rate) based on current market value of my old house and assuming 20% deposit (which I had to stump up when I bought my first) and current pay sacle for my pay grade (I was publid sector then and still have friends there who showed me the current pay scales), in fact I’d better off now than I was then!! I will temper this with th efact that I live in the North West, so haven’t been subjected to rocketing house prices of the South East, South West and London. house

        • This sort of comment is totally ill-informed and more suited to the comment pages of the mainstream press rather than this blog. It is a shame you are unwilling to seriously engage with what is a very worrying situation.

      • Something else I forgot. My original house (2 up 2 down street terrace with an extension) now comes with UPVC double glazing and a rendered finish,neither of which mine had in 1989 although it did sport crumbling brick work in need of a render, so in fact nowadays in the North West you get a higher quality house for a lower monthly premium. Get in there!

      • The information has been provided in the link, I suggest you try reading it. My comment has been qualified by the statement that I am talking about the North west where I live – what information do you have about North West house prices and Public Sector pay over the last 26 years?

        As to being “ill- informed” I suggest you inform yourself of the evidence and facts contained here on UK earnings since 1989 – http://www.measuringworth.com/datasets/ukearncpi/result2.php where you need to click “RPI & Earnings – UK” on the left side of the page and then input “1989” in the ”Initial Year” field and “2014” in the “Ending Year” field on the right side of the page and click “Retrieve”. You should then be able to see that UK pay has increased by a factor of 2.59 since 1989, whilst if you then look here – http://www.nationwide.co.uk/about/house-price-index/download-data and click the ”First Time Buyer (Post ’83)” link you should see in the displayed spreadsheet that UK house prices for first time buyers have increased by a factor of 3.37 since Q3 1989 when I purchased my first house. Further information about base rate, (upon which mortgage rates used to be based along with reference to the yield on 10 year gilts, although that relationship decoupled in 2009) is here – http://www.theguardian.com/news/datablog/2011/jan/13/interest-rates-uk-since-1694#data which, if you can be bothered, you need to click the “DATA: download the full spreadsheet” link to see that the base interest rate was 14.79% in the Autumn of 1989 (when I bought my house so I under quoted the price of money there!!). I will leave you to check my, ahem, “totally ill-informed“ assertion that average standard variable rate mortgages are currently about 5% based on 20% deposit but not taking advantage of the lower interest rate FTB deals, so I’m really trying to prove yours and Shaun’s false assertion here that “the young never had it so bad”

        Even you should manage to see that since the Autumn of 1989, which was the starting point of my comment, house prices have outpaced wage rises by 30% BUT interest rates have collapsed over the same period by 66% resulting in a monthly mortgage payment which takes significantly less of a young person’s salary now than it did in 1989. I repeat “Get in there!”.

        You seem to think I am not seriously engaged because I use anecdotal evidence and disagree with your preconceived opinion, for which, I note you have offered no evidence, anecdotal or otherwise in your glibly shallow response. I hope you can now see that I AM seriously engaged with this situation which as I have just amply demonstrated is not worrying in the slightest. The fact is, I already knew this information as I had read it in the past and whilst I could remember it’s contents I could not easily locate it. I didn’t think I would have to fend and prove like this in a forum where I considered readers and contributors to be reasonably well informed.

        Something else for you to ponder on, is that given rents follow house prices in a lagged response of about 2 – 3 years, this “worrying situation” as you call it will transfer to tenants in the private rented sector too where, as they hit an inability to pay higher rents, this will send a reverse correction signal to house prices as Landlords then refuse to pay more for houses (particularly given the recent changes to tax treatment of Landlord expenses in the July 2015 budget). That is, if you consider this situation to be worrying, which I don’t for the reasons outlined above.

        I think it sad that you assume only people agreeing with Shaun’s/your views may be correct as this introduces confirmation bias whereby you always dismiss mainstream views (or any other views or evidence that are at odds with yours for that matter) as incorrect, when sometimes they are correct. Indeed, your limited attitude is equal to mainstream commentators who automatically dismiss blogs like the Notayesmanseconomics blog.

        If you wish to seriously engage with me in this debate Al, by all means reply with FACTS AND EVIDENCE and I will be happy to look at your evidence with an open mind, whether anecdotal or documentary. BUT, please Al, no more aggressive snide sneering comments, because, as you can see, I am capable of the same, which, if you have a problem with that, I would remind you that this is my response to your initiative.

  7. Just a small point, but 0.7% monthly price rise equals 8.73% annually as it is compounded, not 8.4%. ie 1.007 x 1.007 x 1.007, etc.

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