Affordability in the UK housing market has got worse and worse

Yesterday I watched the UK Prime Minister David Cameron on BBC television as he made various claims about “affordable housing”.  The BBC itself summarised it thus.

There should be both affordable housing for rent and to buy, Mr Cameron said, but “a shift towards more affordable housing to buy” was needed.

If this is to be the new government policy then it will represent an even larger U-Turn than the recent one on tax credits. This is because as I have covered frequently on here it has been government and Bank of England policy to drive house prices higher for quite some time now. Also along the way the Prime Minister contradicted the speech given by Chancellor George Osborne on Friday and which I analysed then.

I believe we are in the middle of a turnaround decade for Britain.

Mortgage terms are lengthening

This morning has seen a rather awkward development for the Prime Minister and it has been provided by research from the Halifax Building Society today which shows that mortgage terms are lengthening. From the Financial Times.

Lending figures from the Halifax on Monday showed that 26 per cent of first time buyers across the mortgage market took out a 35-year mortgage in 2015, compared with 30 per cent who had a mortgage term between 20 and 25 years. As recently as 2007, the shorter mortgage dominated with 48 per cent of loans. Only 15 per cent were for 35 years.

We have discussed before the trend towards longer mortgage terms and this is some more evidence of it. The catch for the “affordable housing” theme is two-fold from this. Firstly we have in the background the influence of the fact that we have not only record low official interest-rates or Bank Rate but we have been seeing record low mortgage-rates too. So if terms are lengthening with what are ultra-low mortgage rates we are seeing evidence of the opposite of affordable homes.

Another way of putting this has been shown by Neal Hudson of Savills.

As you can see such a change turns out to be very expensive. Or as it is put in modern official documentation for student and nursing loans an opportunity albeit one with a Orwellian falvour.

How much have mortgage interest-rates fallen?

Unfortunately the Bank of England has not kept up many of its time series on the subject but we do have the 2 year fix data for those with a 25% deposit. That entered the credit crunch at what now seems an unseemly 6%. The Bank Rate cuts (to 0.5%) took it to 4% but the QE era (£375 billion) had very little impact especially when we consider the size of it. The problem was that when we saw lots of it this mortgage rate fell to just below 3% but as it reduced and then moved towards Operation Twist we saw our mortgage-rate rise to 3.7%. So the net QE effect at this point on our mortgage rate was a minor -0.3%.

It is easy to forget now but back in 2012 the UK was facing fears of stagnation going as far as fears of a “triple-dip”. Thus as regular readers will be aware the most bank and house price friendly move appeared on the scene in the summer of 2012  called the Funding for Lending Scheme. It is applied by the Bank of England but is backed by HM Treasury in yet another apparent demonstration of what is called “independence” by many. Our mortgage rate of 3.7% fell by 1% over the next year and in fact continued to fall passing 2% this time last year and is now 1.89%. That is less than a third of what it was pre credit crunch.

There has also been a further change which is that higher risk mortgages have benefited by even more than that in the FLS era. What I mean is that the gap between the 25% equity mortgage quoted above and one with 10% equity has narrowed from over 2% to more like 1%. So higher risk mortgages have benefited by even more.

House price affordability versus wages

The data here is stark if we look at the official series.

In October 2015, the UK mix-adjusted house price index increased by 0.1% from the previous record level witnessed in September 2015 to reach a new record of 220.1 The UK index is 18.7% higher than the pre-economic downturn peak of 185.5 in January 2008.

In this sense the credit crunch was indeed just a blip before what is regarded as normal service was resumed. However real wages are still lower than what they were in spite of the improved performance last year. The peak for this series was 118 where it remained as 2007 moved into 2008, but now we reflect on a much more subdued 111.4 for October 2015. So real wages have fallen by 6% over the credit crunch era. Also we need to note that the official CPI series for consumer inflation will under record the fall in real wages when compared to the various RPI derivatives.

So the 18.7% rise in house prices and the 6% fall in real wages according to the official data poses a very eloquent challenge to concepts of “housing affordability”. It also reminds us of my argument that there is inflation in the UK economy if you bother to look.

The Halifax house price to earnings chart

You may not be surprised to learn that this has been rising inexorably higher in response to the developments above. It is now at 5.31 compared to 4.4 as FLS began. Rather chillingly for Londoners like me the Greater London number is 7.96.

For newer readers care needs to be taken with the exact numbers as the definitions have been chosen to keep the number as low as possible but the pattern is clear even if it is hard not to have a wry smile at the claim we are not yet at the pre credit crunch peak. However we can learn something from the ch-ch-changes.

What about those who rent?

These are of course an increasing number which poses its own critique for housing affordability! Your Move put it this way last week as it noted a rise in rent arrears.

Over the last decade the private rented sector has expanded at an unprecedented pace, providing homes for millions of households.

Back on April 27th last year I looked at the state of play using some Your Move data.

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.

If we bring their data up to date we see this.

Across England & Wales annual rent rises stand at 4.0%, comparing November 2015 with November 2014. Taking into account CPI inflation of 0.1%, this leaves real-terms annual rent rises of 3.9%.

The recent numbers are not as bad against wages ( up 2.4% in the year to October) but there is still a continuing affordability decline.

Landlords are doing rather well

The most recent Your Move report covers off this angle and for these times of low interest-rates and returns these are stellar numbers.

Taking into account both rental income and such capital growth, the average landlord in England and Wales has seen total returns of 10.9% over the twelve months ending November 2015 – up from 10.4% in October 2015. In absolute terms this means that the average landlord in England and Wales has seen a return of £19,668, before any deductions such as property maintenance and mortgage payments. Of this, the average capital gain contributed £11,057 while rental income made up £8,611 over the twelve months to November.

Comment

Of course you do not need to take my word for all of this because government policy confesses to it. After all if we had housing affordability why is Help To Buy necessary? This is currently being displayed in the form of two types of bribe as show below.

With a Help to Buy: equity loan the Government lends you up to 20% of the cost of your new-build home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. You won’t be charged loan fees on the 20% loan for the first five years of owning your home.

So we have bribe number one which with other schemes has had people speculating as to how much support you might get. Next we have bribe number two.

The new Help to Buy: ISA pays first-time buyers a government bonus. For example, save £200 a month and we’ll add £50, up to a maximum of £3,000, boosting your ISA savings of £12,000 to £15,000.

Those who have an ordinary ISA may mull an interest-rate of up to 4% also (Halifax) which compares to this reported by the BBC.

The average rate on Individual Savings Accounts (Isas) fell to 0.85% in December, down from 0.99% in November.

Ordinary savers may reasonably be wondering if they are cross-subsidisng this as will those seeing rises in bank fees too. Meanwhile first-time buyers see that apparently affordability means higher house prices and lower wages.

As to the destruction of high-rise blocks then as someone who has seen their impact in London I welcome that. Except the problem with new housing is that it is on average smaller a particular irony as we have got larger both in height and weight. I also wonder how it works that we can build more on a plot of land with a high-rise block.

RIP David Bowie

As someone who has frequently quoted his lyrics and enjoyed his music it was very sad to see that he has died this morning and to note that he took Ziggy Stardust and Aladdin Sane with him. RIP to them and my condolences to his friends and family.

Ashes to Ashes seems the most appropriate although two of the lines are wrong as he did plenty of good things and was often out of the blue.

I never done good things (I never done good things)
I never done bad things (I never done bad things)
I never did anything out of the blue, woh-o-oh
Want an axe to break the ice
Wanna come down right now

 

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31 thoughts on “Affordability in the UK housing market has got worse and worse

  1. So, we will now have low rise chicken coops, instead of high rise, larger, damp, “flats”! And presumably there will have to be compensation to those who bought their flats under Right to Buy, and also presumably that will be at full market value. There will be huge potential for disagreement on this.. valuers must be cheering to the rafters ( sorry, unintended allusion….)

    The costs are going to be huge before a brick is laid! Yes, the city skyline will be improved (although more mega office blocks will detract from the benefit in London…), but I question the cost/benefit ratio. That will depend on the planners, of course, so all will be well…..because they have a great track record!

    • Hi mickc

      I hope that things are improved but the scale of the project seems small.

      “A total of £140m will be made available to community groups, councils and housing associations for the scheme.”

      That doesn’t seem to tally with the 100 housing estates quoted. Still knocking down a few tower blocks in London at least would be a start.

  2. Hi Shaun

    I actually think DC is right that we are in the middle of a turnaround decade: the turnaround from bad to a good deal worse!

    I think the government is aware of the problem of house prices and will do anything to keep them high; to let them fall means electoral oblivion and they know it. I think that if the housing market did run into difficulties (odds on in my view) the they would do anything to prop it up, even directly subsidizing buyers to a far greater extent than hitherto via HTB etc.

    However, I’m afraid that this beast has gotten far too big even for the government and if they try this it will take place in the context of wider economic difficulties which will render any action ever more egregiously irresponsible and the PSBR will explode. The accusation against Labour of irresponsible spending made a few years ago may come back to haunt them with a vengeance as they have already received criticism of the HTB scheme.

    Let’s face it the housing market is just one subset of the Ponzi system that is most likely to blow up and longer term mortgages may be just one of a litany of problems that people have to deal with.

    • PSBR will explode.?

      well its only paper after all

      and paper is good for somethings , esp if its nice an soft 😉

      yes your right – housing falls- MSM will tell everyone how poor they are ( despite the fact they are already poor and will remain poor afterwards – its the illusion that counts ! )

      The Banks will default

      Bail ins will occur ( hitting the illusion again )

      and the pollies who got caught doing it will loose the next election and not be employed in cushy Banking jobs in the City

      Forbin

      PS : here have some popcorn !

    • ‘I actually think DC is right that we are in the middle of a turnaround decade: the turnaround from bad to a good deal worse!

      I think the government is aware of the problem of house prices and will do anything to keep them high; to let them fall means electoral oblivion and they know it.’

      A couple of very pertinent comments there Bob.

      Due to the vagaries of our electoral system,certain demographics in certain constituencies receive a disproportionate amount of the attentions of the politicians at election time.Commonly referred to in political parlance by terms like ‘Worcester woman’ and ‘Essex man’.

  3. House price affordability – that line always makes me angry !!!

    affordability id not what is needed – its good housing thats cheap to buy !

    Flats were built because they were cheap and we needed to maximize space – as you say we knocked them down and build lo-rise ( but office space is still Hi-rise )

    It comes down to economics of the TBTF Banks that will go bust if the price drops , the loans forced on buyers( student loans for one ) and the lower wages that means they cannot afford a 3.5 x average salary rabbit hutch ,

    the increase in population – which is never talked about except in that we “need” more people

    lack of land on an ISLAND ( yah go ahead folks with London pop density we can get 500 million in the SE & Norfolk rip up that Green belt , golf courses , football fields, etc etc, build and tarmac the lot! – and when you’ve done that – then what ? eh ? – no room to plant trees or grow food on – not needed – we print more paper that the world is gagging for ( yah right)

    What could go wrong ? )

    Multi generation mortgages are on the cards , as mooted I think by Charlie “the Chalk ” Bean about a decade ago ( the “spend , spend ,spend ” adviser )

    and what 4% on a ISA mortgage saver ?? ahaha ha – arent houses going up by 9%

    For one more time I ‘ll give the advice on what “we” as a nation need to do

    1, BTL becomes right to buy , with discounts just like the LG ones Thatcher used

    2, houses on all those “brown field site ” called golf courses

    3, Right to emigrate for everyone to become pay-to-leave ( for EVERYONE that is )

    4, Glass -Steagall or the very same type of laws enacted at once

    5, Re-enact the minimal room size requirements and build , build build , flats . We certainly have learned WHY the old 1960’s hi rise failed and if the Dutch can do it right – lets learn from them.

    6, Make any polliy who earns more after he’s left office have to pay back his wages as a politician with interest – and for go his pension as well

    7, QE for industry – if it worked for South Korea ( look it up I aint yer internet intern ) it can for us

    which leads to

    8, Build those extra runways at Heathrow and Gatwick – by the time they get finished the oil price would have killed the passenger market ( 25 years to completion ?? ) but we’d kept people in work and have ready made concrete bases for more houses !!

    9, Stop stuffing the horse with oats expecting the sparrows at the other end to get fed !

    Now , who havent I upset 🙂

    Forbin

    PS: Nothing like this will happen , so pull up the comfy chair and have some popcorn , something really bad needs to happen before sleep walkers awake – normally the stairs !

      • ‘It comes down to economics of the TBTF Banks that will go bust if the price drops , the loans forced on buyers( student loans for one ) and the lower wages that means they cannot afford a 3.5 x average salary rabbit hutch ,

        the increase in population – which is never talked about except in that we “need” more people’

        You highlight two issues that are the key to it all Forbin.
        1) The way bank balance sheets work,the loan sits as an asset on their balance sheet until it is repaid or defaulted on.All ZIRP,QE etc have done is to maintain the illusion of solvency.RBS-let’s remember,hasn’t had a profitable year since 2007!!!!! Despite all the govt help,the dyke is still leaking.Naturally,this meant round after round of bonuses to ‘retain the talent’

        2) Immigration.Not only has GDP per capita being going down alongside wages but inversely demand has been going up.A lot of renters get housing benefit which has the effect of pushing up rents for everyone else to the upper limits the govt will pay.

        As rants go Forbin,it was an excellent effort.

  4. I can’t remember how much DC said he was putting aside for pulling down and replacing poor housing but it was in the millions not billions and as I heard it I thought it might be enough for about one housing estate if we’re lucky.

    The favourable tax regime on BTL is altering soon and highly leveraged LLs will see their empires go up in smoke. I understand many are thinking of putting the rents up! I think I can see trouble ahead there.

    Perhaps the government in its wisdom could remove all the “help” ie schemes to help the banks and their builder chums and allow for a good house price crash to make housing more affordable for the average pleb.

    • ‘Perhaps the government in its wisdom could remove all the “help” ie schemes to help the banks and their builder chums and allow for a good house price crash to make housing more affordable for the average pleb.’

      Absolutely Jan.

      It’s not rocket science is it? But clearly beyond the grasp of most Westminster politicians and their buy to let portfolios.

  5. There is so much artificial, govt.-sponsored house “affordability” at the moment that, if it were any other field, EU Law would declare it illegal.
    As for rental affordable, approx. one third of renters were one month or more in arrears with their rent, according to a recent study:
    http://www.theguardian.com/money/2016/jan/08/tenants-serious-arrears-rises-september-2015
    http://www.midhurstandpetworth.co.uk/news/more-than-1-2-million-people-in-the-south-east-cutting-back-on-winter-essentials-to-pay-their-rent-or-mortgage-1-7139506
    http://www.theguardian.com/society/2016/jan/09/housing-crisis-tenants-shelter-private-rent

    • Hi therrawbuzzin and thanks for the Bowie link.

      As for the others it is one of those iceberg issues I think. The amount above the water as in those who are in rent arrears is likely to be masking a much larger number who are struggling to pay. One might have hoped that the better wages numbers would have helped but rents have outstripped them.

      Of course if you use the official rental series then things are fine but it has plenty of issues.

      • Hi Shaun.
        I think you also have to remember that many of those who are in rented accom. are so because they cannot afford to get a mortgage (I read somewhere, think it was yesterday’s Observer that the average DEPOSIT is now but a few coins short of £33000), because they are on lower wages.
        As you’ve previously pointed out, the lower your wages, the less they are likely to have risen.
        So the differential is bigger, and, as usual, it’s exponential.

  6. I feel sorry for the young people.

    Financing a £50,000 degree with little chance of a job that can clear the debt let alone buy a house at 12 x annual minimum wage whilst paying the pensions and national debts racked up by the generations before.

    Depressing.

      • I’m feeling a little sorry for myself.
        During the time I had a mortgage the base rate never fell below 5% and at one point touched 17%.

        I remember buying my first house – the solicitor asked me if I could afford to pay 12% interest.

        Of course that was back when inflation was public enemy number one.

    • Perhaps I should start taking my state pension while I can instead of deferring it? Haven’t found 2 able -bodied 20-somethings to support me into the future yet though. Did bread a couple but they have run off to different countries…leaving me with their student debt.

      • Indeed.There are real questions as to whether what they get for £50,000 is worth it at half the price……

        The salaries available for most jobs that graduates go into just don’t justify the outlay,particularly,as you allude,to the ones who end up shelf stacking.

        They’re being conned in my opinion.

        • Ah, but you have to remember it is not actually a loan, its a graduate tax – payable above a certain income and the unpaid balance passed to the taxpayers after 30 years.

          caveat: thats how it is at the moment, no doubt someone is already looking at how to change the loan agreements retrospectively to get a better price when they’re sold on.

  7. Returning to Mr Cameron’s scheme to replace new for old. Perhaps he could ask John Prescott, “onlie begetter” of the Pathfinder Scheme, to help him. He pulled the houses down but somehow didn’t get around to building the new ones. Will history repeat?

    • Hi Peter

      You made me wonder what the John Prescott Pathfinder Scheme was and according to Moneyweek in 2007 there was something that now seems familiar.

      “The plan was to “bring back to life those areas where there is low demand for housing and where, in the worst cases, homes have been abandoned”, said Prescott. And the way to create this nirvana? Bulldoze 90,000 ‘slum’ houses.”

      Seems a good start but

      “And now, four years later, it’s been revealed as the most ill-thought-out policy the Labour government has ever introduced…..Many people have been evicted from their homes with no thought of where they should go, thousands of structurally sound buildings have been demolished and many more derelict estates created as a result of demolitions and renovations being held up in the planning stages. ”

      The £2.2 billion was a lot more than yesterday’s £140 million especially if we allow for housing inflation. Trouble is I am no longer sure if that is good or bad!

      Oh and I was thinking of the Ebbsfleet development as I thought about all this. Promised around the time of Prescott’s Pathfinder Scheme by Ruth Kelly but these days it seems in spite of all the pronouncements by that and subsequent governments we are now going to get fewer homes.

  8. The longer mortgage periods, the help to buy scheme its all about debt enslavement of the population.
    It is destroying the economy as disposable income is continually being reduced as debt to the banksters continually increases.
    The banks lend vast sums of money that they don’t possess in the first place they just type figures in their keyboards and they have created money out of nothing, the borrower then has to pay them the capital sum plus the interest.
    They then somehow contrive to turn a license to print money into a failing business.
    You couldn’t make it up…it is beyond belief.

    • Hi Private Fraser

      The banking model seems to have changed to simply paying large sums to senior bankers. After all they have not made much profit for shareholders in recent times. The rest of us face pressure in many ways from it. Our central banks have expanded and in some cases are still expanding their balance sheets and the heat remains on for negative interest-rates. The latter is the only way the debt circle can be squared if you will forgive the geometry flaw.

  9. Hi Shaun, Great piece as usual. This issue just keeps growing. I am sure the majority of the electorate even most home owners would love to see genuinely affordable housing in the UK and I am surprised there is no effective protest movement. This is a massive issue now and unfortunately in this low inflation environment the debt people are taking on is not being eroded by wage increases in the way it has in the past.
    On the subject of debt I noted the other day stats were released showing the majority of private new car sales were now on finance deals. So that’s another industry dependent on cheap borrowing. There seems no end to the enticements to take on debt.

    • Hi Zummerzetman and thank you

      It is all about the debt these days in’t it with even nurses now having the “opportunity” to have a debt burden. How does that work? Especially if we consider how little of the university student debt burden we expect to be repaid!

      As for car sales the UK SMMT put it like this.

      “Buyers took advantage of attractive finance deals ”

      Whilst I wonder how much of the rise in unsecured debt is due to it.

  10. Pingback: The Affordability of UK Housing: Hello Debt for Life… - Positive Money

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