A long running theme of this website has been that too much economic effort is put into the housing sector except in the area of building houses. This has been reinforced in the credit crunch era where a litany of economic measures have boosted the housing market. We had a Bank Rate cut to 0.5% ( one of the longest running emergency measures ever) , £375 billion of Quantitative Easing and when they did not work July 2012 saw the Funding for Lending Scheme. The latter saw mortgage rates pushed lower by up to 2% according to the Bank of England and was the trigger for the house prices to rise again. There have also been other measures under the “Help To Buy” banner. But the overall effect has been to create a put option for house prices as we seen a Baron King and then Mark Carney put in play here.
This has reinforced the long running view that investments in housing are “as safe as houses” and lead to the UK economy being tilted that way. Some of this is self-reinforcing in that as house prices rise those who buy them as a business make a profit and of course contrary to the official “Help” theme it becomes more difficult for people to afford to buy and thus more rental customers are created. As long as it lasts it is pretty much self-fulfilling.
As I pointed out on the 7th of this month the situation has gathered pace in recent times.
From 2012 to mid-2013, annual changes in house prices and annual weekly earnings remained similar; since then, house price growth has outstripped earnings growth……Affordability has decreased in recent periods, with annual house price inflation at 8.3% in April 2016, while the annual increase in earnings was 2.5%
You may note the use of the number 8 for house price to earnings ratios. A consequence of this is that there are fewer owner occupiers these days as the numbers have fallen from 18.2 million (2008) to 17.7 million (2014). The slack has been taken up surprise,surprise by the private rented sector where numbers have risen from 3.9 million to 5.3 million over the same time period. We can only suspect and infer that those trends have continued since then.
As to the future well it looks as though it will be a rental one.
In 1991, 67% of the 25 to 34 age group were homeowners. By the financial year ending 2014, this had declined to 36%.There were also reductions in home ownership over the same period for the 16 to 24 age group (from 36% to 9%) and for the 35 to 44 age group (from 78% to 59%).
There is something of an offset from more older people being homeowners but overall the numbers are falling.
Putting this another way I noticed this in a report from the Institute of Fiscal Studies this week.
Twenty years ago over two-thirds of middle-income children lived in owner-occupied housing, compared to 40% of the poorest fifth of kids. Today only half of middle-income children are in owner-occupied housing.
Where have they gone?
But they ( the poor) have shifted away from social housing towards private rented accommodation, which – you’ve guessed it – is where those in the middle are increasingly found as well.
The Bank of England
It has weighed in on the subject this morning as it analyses whether there is a bubble here. At the risk of spoiling the suspense the answer will be no unless somebody actually wants their employment to be terminated today. However we do get more data on the subject.
Since 2008, the number of outstanding buy-to-let mortgages grew by 6.1% per annum on average, while the number of owner-occupier mortgages fell by 1.7%.
This has led to this.
Rapid growth rates in the buy-to-let market have caught the attention of policymakers.
Indeed, they have regularly told us that they are “vigilant”. Anyway let us continue.
The share of the PRS (Private Rental Sector) as a proportion of all properties in the UK has been rising since 2002, financed in part through the expansion of buy-to-let lending.
We get an analysis of why there is more demand to rent.
Demographics matter because there are cohorts of the population, such as students, immigrants and younger people, who are more likely to rent. If these groups expand, all else equal, we expect there to be more demand for PRS properties.
There are one or two sub-plots there as of course much of the increase in students was centrally planned vis the expansion of universities as we note it missed out the implications for housing in another in the long list of central planning failures.
Then we get an enormous swerve as the Bank of England turns a Nelsonian style blind eye to the issue of affordability.
We think of affordability constraints as borrowers’ ability to secure a mortgage given a set of credit conditions…….Our analysis focuses on credit conditions, which we can quantify more readily.
This is really quite poor as we measure something regardless of it being more minor and ignore the bigger issue. However it is not without value as there was a change in credit conditions.
Our estimates suggest that, as a result of the withdrawal of high LTV mortgages, ‘frustrated’ demand for mortgages from prospective home owners meant one million additional households required PRS accommodation, accounting for 66% of the growth in PRS properties during the period
Anyway they cannot completely ignore affordability.
We believe the unexplained growth is related to housing becoming less affordable.
Actually more than that as if it was in from the beginning the whole analysis would change. Oh and I told you so.
Without concrete evidence on the impact of buy-to-let mortgages on house prices, it is not possible to say whether the gap represents a buy-to-let ‘bubble’
The Bank of England suggests there will be a slow down in demand.
Our projection suggests that additional tenant demand for PRS properties could be less than half between 2014 and 2019 compared to the post-crisis period…This translates to an average annual growth for the number of outstanding buy-to-let loans in the range of 2-7%. By comparison, average annual growth for 2014 and 2015 was 7.6%.
The problem is that the elephant in the room returns as we are told this.
The extent to which demand for PRS properties falls primarily rests on whether frustrated prospective first-time buyers from the post-crisis period eventually secure a mortgage.
You see this links us to a past piece of research which did not ignore the elephant.
For first-time buyers, we expect the issue of affordability to persist. Increased availability of low deposit mortgages could help but are easily outweighed by continued house price increases.
There are quite a few factors to consider here. The nation is changing as fewer become owner occupiers and more rent especially from private sources. As I recall my grandparent renting nearly everything ( for younger readers they rented their TV for example) it makes me wonder if we are going back to the future as more and more things are rented rather than owned. If a rentier style culture and economy is a concern well it is getting a bigger concern.
Let me be clear there is no harm in individual examples of buy to letting or renting. My issue is that it has become perceived as a road to easy profits which shifts the economy towards it and weakens other productive sectors as resources are shifted. This road has been backed and supported by government policy and the money made is invariably out of capital gains rather than the rent itself. That does not look stable to me especially as governments are heading towards the limits of what they can do.
In a way it speaks for itself that in its road to concluding that there is no bubble the Bank of England does its best to ignore the biggest issue which is affordability. But they do remind us of an important issue which is that we discuss the availability of cheap credit but that it applies to far from everyone. It is of course another theme of this website that these days there are quite different effects on different economic groups as we become ever more heterogeneous. In a way it would appear that Andy Haldane agrees with me.
So far at least, this has been a recovery for the too few rather than the too many, a recovery delivering a little too little rather than far too much.
Meanwhile regrets already?
Andy Haldane has also said this today.
In my personal view, this means a material easing of monetary policy is likely to be needed,……..And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.
He has been kind enough to help with a new definition of promptly for my financial lexicon for these times.
By promptly I mean next month