One of the features of that last 3 years or so in the UK has been the way that house prices have accelerated and left wage growth especially real wage growth way behind. The official view is that affordability is fine because mortgage rates have fallen although of course that is something of a trap as if the tactic of raising house prices is to continue then mortgage rates will have to continue to fall. That is not so easy from what are often particularly in the case of fixed-rate mortgages all time lows for rates. Also the idea that affordability is good is undermined by the fact that some much official “Help” is required via Help To Buy and other schemes. The truth is of course that first time buyers are very likely to be humming the words of John Lennon.
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
A Different Perspective
The Resolution Foundation has taken a look at some longer time patterns at they pose another challenge to the its okay crew.
The analysis, which forms part of the Foundation’s forthcoming housing audit, finds that the share of income spent on housing costs was stable for most of the 1990s and early 2000s at around 17 per cent. However, a wedge opened up in the mid-2000s as rising housing costs outstripped income growth. By the eve of the financial crash, the average working age household spent around a fifth of their income on housing.
A 3% income share may not seem much but if one considers where that 3% has to come from then it gets much more difficult for many if not most budgets. Actually the impact of the credit crunch or rather the Bank of England Bank Rate cuts handed it back for a while.
This housing affordability wedge then shrank in the wake of the crash as interest rates were cut to record lows and house prices fell. For many households this fall helped soften the post-crash living standards squeeze by reducing mortgage costs.
Ah house prices fell! What a chill that will send around officialdom and the Bank of England as departmental memos fly around to explain what a house price fall is. In true Question of Sport form you are all probably wondering what happened next?
However with rising housing costs once again outstripping income growth, the Foundation warns that housing risks being a major brake on the UK’s living standards recovery.
The Foundation notes that the extra share of income being spent on housing over the last 20 years – up from 17 per cent in 1995 to 21 per cent in 2015 – is equivalent to a 10p rise in the basic rate of tax (or £1,500 per year) for a typical dual-earning couple with a child.
So we see that in percentage of income terms we are now pretty much back to the 2008 peak which makes you think. It is eye-catching to note that this is equivalent to a 10 pence rise in the basic tax rate. This was 25% back then if we ignore the lower rate of 20% on £3000k or so of income) so we have been given a basic income tax rate 5% lower but house buyers have found twice as much taken away. Oh Well as Fleetwood Mac put it. Of course the personal allowance has changed but even so the theme is clear here.
The Squeezed Middle
Is looking rather squeezed to say the least.
The analysis shows that households on low and middle incomes have been most affected by housing costs growing faster than incomes. Among these households, the share of income spent on housing has increased by almost a half over the last 20 years, from 18 per cent to 26 per cent. A far smaller increase took place for higher income households (up from 14 to 18 per cent) and the poorest households (up from 21 to 25 per cent).
We can perhaps gain a little solace from the fact that at least the poorest have not been hardest hit. But of course that ignores what 25% of their income actually gets them as we mull the pictures of rooms that seem more like cupboards that have done the rounds.
Maybe it’s because I’m a Londoner that these figures resonate but Scots have been hit by a shift here as well. The emphasis is mine.
Londoners currently spend around 28 per cent of the income on housing costs, up a third since the mid-1990s (21 per cent). Recent increases in housing costs have caused typical London households to experience the biggest post-crash fall in disposable incomes anywhere in the UK.
Scotland has seen the second sharpest increase (up from 12 per cent to 18 per cent), followed closely by the North West (up from 15 per cent to 20 per cent).
So the recovery has yet to reach disposable incomes in London? it is something of an antidote to all the “hoorah for house price rises” headlines that the media so love, after all they will be liked by one of the main advertising sectors.
Some Are Even Worse Off
Averages of course give us only some idea of the distribution and can by got by different routs and roads so this helps to nail the picture on the wall.
The Foundation warns that these increases have pushed too many households into spending a perilously high share of their income on housing. Its analysis shows that around 3.3 million households spend at least a third of their income on housing costs – up from 1.6 million in the mid-1990s.
I note that the Resolution Foundation then hammer out a beat that has been familiar to readers of my work for some time to say the least.
The analysis published today shows that private renters spend a greater share of their income on housing (30 per cent) than mortgage owners (23 per cent) or social renters (20 per cent).
Whilst one needs to be careful about generics and stereotypes this is more of a problem for younger people than older ones as we mull the concept of a generational war.
There is much to consider here and let me open with the fact that this has been a deliberate policy driven by the Bank of England. In the summer of 2012 its Funding for Lending Scheme gave banks a subsidy ostensibly for small business lending but the real impact was via an initial impact of a 0.9% fall in mortgage rates. It’s own research suggests a total impact of 2% on mortgage rates. Whilst this did make houses more affordable for a while the subsequent surge in house prices first eroded and then according to the Resolution Foundation eliminated that on the road to making housing costs higher.
I would like to look at disposable income which is being squeezed according to this analysis by a consequence of Bank of England policy. If we go back to 2010/11 then real wages slumped in response to the Bank of England overlooking a rise in consumer inflation to over 5% per annum. Please remember that when the many “experts” tell you that such moves provided a strong stimulus as whilst it did up in the economic models to be found in Ivory Towers if we come back below the clouds it faded away. If we put house prices in our inflation measures then some of the growth would disappear.
The situation was worse around the time of the Lawson boom in the late 1980s when around a quarter of disposable income went on housing but there are two catches. Firstly interest-rates were in double figures and on their way to a 15% peak if I recall correctly with apologies to younger readers for such a mind bending number. Secondly what happened next?