The central bankers are creating a housing crisis especially in the UK

A major theme of this website has been that what used to be regarded as economic stimulus now has so many side-effects that it no longer is. Otherwise we would not be where we are. An example of this is the way that we keep being told we are in an economic recovery and yet things like this keep happening.

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.50 per cent, effective 3 August 2016.

That was from a land down under or if you prefer the Reserve Bank of Australia. We do not have to look much further down the statement for them to be considering collateral damage from this and previous interest-rate cuts which in the credit crunch era total some 5.75% now.

All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.

Food for thought when we consider that the commodity price boom cushioned the economy of resource rich Australia. However the theme today is of the impact of all this monetary easing on the housing sector and let us switch to the UK.

Home Ownership

The Resolution Foundation has produced some new data on the ch-ch-changes in home ownership in the UK.

English home ownership has fallen to levels last seen in 1986, with Greater Manchester, South and West Yorkshire and the West Midlands Metropolitan area experiencing double-digit falls since their early 2000s peak, according to new RF analysis published today (Tuesday).

So an example of what might be called back to the future. Let us plunge deeper into the analysis.

The analysis shows that having peaked at 71 per cent in 2003, the proportion of people owning their own home across England has fallen steadily over the last decade by eight percentage points. It suggests that the widely reported increase in home ownership in 2014 was likely a blip to correct a sharp fall the year before, rather than a welcome reversal of a long-standing trend.

There are obvious and reported issues for the London area but it found another conurbation pushing past it.

Back in 2003, 72 per cent households living in Greater Manchester were owners – slightly above the average across England as a whole. However, home ownership has since plummeted by 14 percentage points – almost twice as fast as it has in England – so that by last year just 58 per cent of households living in Manchester owned their own home.

Whilst the rate of change is slower the absolute level of home ownership sees its nadir in Inner London at 36.4%.

Also the report keeps saying England whereas the numbers at the bottom include Scotland, Wales and Northern Ireland each of whom have seen falls as well.

The growth of the private renter

A familiar theme on here.

This fall in home ownership has corresponded with a near doubling in the proportion of private renters across England, up from 11 per cent in 2003 to 19 per cent in 2015. The proportion of households renting privately in Greater Manchester has more than trebled over that period – from 6 per cent to 20 per cent – while Outer London and West Yorkshire have also reported double-digit growth.

I am trying to think of why Manchester has seen this move and have two thoughts. There is the football boom at City and United and I wonder if that has had an impact and there is the move of the BBC to Salford. Has some combination of those events driven this?

Anyway for an increase number it would appear that Gwen Guthrie was right.

Ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me

Putting it in more detail.

It notes that households in the private rented sector spend a far higher share of their income on housing than those who own with a mortgage (30 per cent compared to 23 per cent), helping to explain the fact that the share of income that households spend on housing across the UK has increased by around a quarter since 2003 (and by around a third in the North West).

There is also another clear economic effect from this according to the Resolution Foundation.

Renters are also more likely to face the greater insecurity associated with short-term contracts, while the struggle to buy property makes it harder for people to accumulate wealth that they may rely on in later life.

Life’s Not Been Good for Renters

Here is what happened in the period between 2003 and 2015.

Real average private renter household income has grown by £8 a week (2 per cent) over the period while real housing costs have grown by £19 a week (16 per cent). This means that the income gains made by this group have been absorbed by rising housing costs more than twice over.

You might like to make sure you are sitting down before reading what has happened in London.

Real average London household income has reduced by £29 (minus 4 per cent) over the period while real housing costs have grown by £36 (29 per cent).

The consequence of this can be looked at as an age range in that many renters are in the group below.

Real average household income for those headed by someone aged 25-44 has grown by £12 a week (2 per cent) over the period while housing costs have grown by £25 a week (25 per cent). Consequently rising housing costs have absorbed the income gains of this group more than twice over.

Care is needed

The numbers are headline grabbing but as ever depend on assumptions and choices. For example how you treat Housing Benefit and Capital Gains both of which are ignored. The latter brings us back to my theme that capital gains are the new income or in many cases all the income we will get in a world seeing ever more negative readings! But let us move on.


When I noted that we had in home ownership terms returned to 1986 levels I had a wry smile. Why? Well official policy has been to “Help” the home owner particularly since the introduction of Right To Buy in 1980 and has been added to by falls in interest-rates. The peak for the UK official interest-rate was 17% back in 1979 – apologies if I have frightened younger readers – and now it is 0.5% and likely to go lower. The fact that it now sets decisions rather than the Chancellor actually makes no difference when you look at it like that is the former and newer period looks little different.

Also post credit crunch we have seen other policies to boost asset prices such as house prices. For example £375 billion of Quantitative Easing or QE bit more crucially the advent of the Funding for Lending Scheme of the summer of 2012. It rose to £69 billion and on the Bank of England’s own estimates reduced some mortgage rates by 2%. It was then added to by the worldwide trend to lower interest-rates and yields some of which have gone below zero into negative territory.

However whilst any central banker reading this may cheer the numbers below from the Office for National Statistics it has very bad side effects.

The average UK house price was £211,000 in May 2016. This is £16,000 higher than in May 2015, and £2,400 higher than last month.

If we look back to when FLS impacted in early 2013 then the average house price was more like £168,000 you see the impact which is of around 26%. Central bankers will cheer the wealth effects but these only apply to existing home owners what about everybody else?

For them buying a house or flat is an ever more distant dream which is why so much official “Help” is required. Also I note that the Resolution Foundation is clearly suggesting that renters are worse off partly because mortgage-rate cuts do not benefit them. Also renting privately is less secure than the old system of council or social housing style renting Those who rent to them in the private-sector do benefit from both capital gains and those mortgage rate cuts and so here is their view of official policy.

Everyone’s a winner, baby, that’s the truth (yes, the truth)

Or an increasingly rentier society which on the current policy path will only get worse and only disappoint more. To put it another way it is part of the trap I regularly write about where interest-rates keep being forced lower in a type of junkie culture as we chase the next fix.


28 thoughts on “The central bankers are creating a housing crisis especially in the UK

  1. If the Govt. continues to “help” homeowners in similar vein, it is likely that we will eventually have millionaires who cannot afford to eat (because of the illiquidity of their assets)

    • Hi therrawbuzzin

      Yes we might and I would think that some in certain parts of London are not far from that. Yes there is equity release but that does not look that good a deal compared to ordinary mortgages. People could sell but what about someone who has lived in a place all his/her life?

  2. Emigration of the ethnically British probably results in the sale of a home. Immigration of relatively unskilled and poor workers leads to an increase of renters (they cannot afford to buy).
    Large scale nett immigration is increasing the number of households. I wonder how significant these three facts are in the decrease in the proportion of home ownership?

    • Ah, the Brexit falllacy – Schrodinger’s Immigrant, who cannot afford to buy, yet puts up prices! This is only a marginal effect and mostly among young people,as we were all prepared at that age to live in relative squalor, so that we had more money to live for today. It would be just as easy to point out that big cities have huge student populations now, who are living out in the 2nd and 3rd years (this may be a factor in Manchester).
      If it were down to immigration, what were those mass emigration of the early 90s and 2008-10 when prices fell? No, I didn’t notice them either.

      • Manchester has a lot of Universities and Colleges and it tends to keep its students in the local area when they graduate as there are actually jobs. Leeds does the same. Student renters are definitely a factor, more people at Uni and going for longer doing post grad courses.

        I wonder if the Oldham effect is present here as well i.e. ( to the tune of Yellow Submarine ) “We all live in a Robbie Fowler house”. The former Liverpool striker took good advice when he decided to purchase lots of properties to rent out.

      • but if you dont import people then the supply /demand ratio then goes unfavourable – and that will never do


      • You clearly don’t live in places like Northampton,Leicester or Nottingham or have to rent David.I do on both counts and let me tell you,high net immigration impacts rents.
        The reason it does so is that much of the housing stock at the 2 up 2 down level, has moved from being owned by the resident to being rented by the resident.
        It’s not the immigrant that puts up prices per se but rather the buy to let landlord chasing a 4% gross yield.

        • I was actually in Northampton in my short-lived IT-less time at Barclays and many of my colleagues were Romanian. However, they were not earning enough to buy in Northampton, especially not south of the river.
          The letting market is a supply and demand market, but whether it is Northampton or where I am, (we don’t have so much immigration), the small houses are hoovered up by landlords – some Victorian terraces near me used to be BTL homes, but are all rented now. However, when i spoke to a local agent about ten years ago, he did say to me that most of the price movement was to the top and bottom of the market, with the middle advancing more steadily. The reason is still the money (and especially credit) flowing into those sectors and the price of a “safe” return. It is the fall in central London, which is currently cooling the nationwide indices, while BtL landlords can borrow at a rate determined in relation to the rent, giving them a significant advantage over an FTB. I presume your argument is thus that if there were less rental demand, then rents would fall and so would prices as some landlords would be forced or inclined to sell up? There are two problems with that argument – you are ignoring the tax advantage and the rate differentials given to Btls and (just as is the case with Right to Buy), someone has to live there – it will not be the landlord.

      • Immigrants arriving for jobs will rent, because if they can afford a house then a British job is not needed. Even in the 1990s I took years to save a deposit and decide to remain. For the unskilled, immigrants directly compete for jobs and housing. The US industrialists have long used immigration to keep wages down. The rent seeking classes in GB benefit from housing undersupply/ planning cartel. With or without Brexit the real problem is the land owning gentry who do nothing productive and yet live extravagantly off inherited rental property.

  3. High house prices are totemic. If they fall there would be severe political consequences and the banks would have their security undercut.

    Folk might then say; “well at least I have a decent pension even if my house is worth less and that’s important to me” but what happens when they look – oh dear!

    House prices are visible; pensions are largely invisible but both are part of the same system which lets people pretend they are wealthier than they really are.

    We have huge bills for housing benefit – why? Because house prices are high so there is a direct link with the PSBR. Where will this stop?

    I’m afraid it’s a case of choose your crisis. Do you want a housing crisis or a much more wide ranging political crisis? With a housing crisis everyone can wring their hands and natter on about the planning system and the whole thing gets lost. If we have lower housing prices then the whole system is exposed for what it is: a Ponzi scheme.

    It’s really just another day in Ponzi land.

    • you need as much going into your pension scheme as you pay for a mortgage

      but more are joint owenership – rent by any other name ?

      then you need to pay off your student debt

      screw it

      might as well mortgage to the hilt , max out the credit cards and suck dry the pension

      spend spend spend ……. cant take it off me once its gone –

      then throw a brick through a jeweler shop and get banged up at HM pleasure when I’m 80

      good old charley farley bean , he knew what the right advice was


      Ps: on a mountain of popcorn

  4. Hi Shaun
    In 1970 my wife (from Tooting, and I got our
    first home together but by the mid 70’s with two kids
    and one income I managed to get a fixed rate mortgage
    of 6% to avoid the high rates that you mentioned.
    Real world property price report, terraced
    house in need of modernisation (norfolk) sold for !k
    under reserve at auction. Son buying in greater Reading
    area, same number of properties for sale but fewer buyers
    and mid range market has asking price reductions of 5% ish.
    The horror of those with static incomes and
    rising rents with fewer new houses being built cannot feasibly
    continue, can it? Hopefully neo-feudalism won’t last for much

    The tune for many might unfortunately be-

    I started out with nothing and I still got most of it left.(SS)


    • Hi JRH

      Around then my parents bought a 3 bedroom house in Dulwich for £9k and dad took out an interest-only mortgage with an endowment. Different times eh? Oh and back then Tooting was considered very differently to now if I recall correctly, how South London has changed. Sometimes even black cabs are seen in it now.

  5. It is all a cunning plan by the BoE to produce growth out of failed policies! If they force more renting, pressure will grow for more house-building for ownership and construction will raise GDP. It is happening elsewhere, esp in the M&A sector Money is so cheap now that bigger borrowers can borrow some more to buy out smaller rivals and so, raise grow in themselves, but it is of course a mirage – it has just moved production from one point to another, taking value out of the taken-over company, due to the t/o costs – but it then causes more problems, such as stifling the kind of innovation produced by smaller companies without corporate structures and often staff will leave, such as Autonomy when HP took it over. T/os often inflate values of the target companies, but that value is then often written off. .

    So, where is all the money coming from to build these new houses or take over companies? Simples – print it! However, we have reached the point of ZIRP and so, yields will probably have to decline from here – as I mentioned before, the two flats, which are now in my late great aunt’s house probably only have an income yield of 3%, meaning that higher house prices must be expected. If the yields fall further as the renters cannot pay any more and prices do level off when “Help to Inflate” dries up, then the risk of a crash rises quite significantly. As has been pointed out elsewhere, more people paying higher rents stores up trouble in the future as the OAP benefits bill will then have to include significant levels of housing benefit to cover the rent. By pricing the less well paid out of certain areas, it also creates problems with the provision of essential services and those low-paid jobs in that area.

    The falling yields are the next phase of the “Homes under the Hammer” problem. Ten-twelve years ago, they would suggest buying somewhere, doing it up and selling it on for a decent profit. That at least recycled the ownership. Since the crash, the value added margin over the refurbishment + onsale costs means they usually advise people to buy, do up and then rent out, focusing on the rental yield (which does of course conveniently avoid discussion of the refurb costs) with the point about the rising capital value. As yields drift down, so BtLs move out of London, hence the changes in Manchester, but that can only go so far. in the past, buying, renovating and selling on at least left the stock unchanged, while creating some economic activity and buyers had some money left over. Now, the renters are just paying the landlord’s debts, so there is no economic activity and the renters are cutting back on consumption, hence the tanking GDP.

    The solution – it will be cold turkey when the Fed starts raising rates.

  6. Central bankers exist to save regular bankers, that is why they wish to keep the bubble going at all costs. The idea that they exist as mature custodians of the economy diligently planning our future prosperity is complete nonsense.

    Of course the UK housing bubble will end one day but we can see how the bubble feeds itself particularly in an era of zirp and qe. Gross misallocation of resources protected by central bankers creates enormous speculation on land values which leads to difficulties in producing new houses at a reasonable cost. Meanwhile the high cost of housing precludes would be owners from buying, forcing them to support buy to let landlords who can now buy more aggressively. This latter group should have been pummelled in 2009 but were bailed out, thus reinforcing the ‘you can’t lose with property’ mantra. If you consider the return on other UK investments (the yields on bonds and equities are dreadful) it’s not hard to see why property still holds such an allure.

    As far as I can tell it will end with a sterling crisis because this is the only financial market that the BoE cannot rig in the long term. At this point rates will have to rise to protect against ruinous import inflation and bad debts will have to written off instead of cosseted. What’s awful about this situation is that huge amounts of manpower and investment, which could have gone into broadening our economic base instead of mindless property speculation, will have been completely wasted. We will rue how as a nation put all our eggs in one basket despite the obvious need to diversify our economy.

  7. there’s a house shortage because theres a land shortage

    look a the cost of land

    sure let scrap the planning laws – and the green belt

    back of fag packet calculations show if we use London densities we can have 500 million people in the SE and East Anglia , so lets plan for it , in the mean time house inflation is keeping . HMG and the Banks afloat…..

    no chance of a rise in IR , as Shaun points out , more like BIRP -2% anyone?

    if so, why is it I cant borrow at that rate ?


  8. So, overall, am I correct in thinking that low interest rates and QE:
    1. Have trashed pensions and, indeed, any returns on savings?
    2. Have kept high house and share prices?
    If so, the good news is that bankers will still be able to pay reassuringly large bonuses and pretend that their balance sheets are fine. On the other hand, we plebs are in for a real shock when the Ponzi bubble bursts.

  9. I saw a report on this issue on BBC Breakfast this morning and thought I was going to spontaneously combust.
    I think the use of the phrase housing ladder should be punishable by keel hauling in shark infested waters…..ok the channel a 368 lb Thresher was caught in the last few days.
    The ladder that they mindlessly refer to is now a rope ladder dangling from a helicopter at about 500 feet.
    This housing fiasco is like a cancer eating at ever greater amounts of people’s income therefore reducing their disposable income for other goods and services.
    The politicians the banks and the media are all culpable to a greater or lesser degree but successive Governments since 1979 are ultimately responsible for the disastrous debt stricken economy in which we are now living.
    The housing crisis epitomises their criminal incompetence.

    • Hi David

      Thanks for the links. As someone who helps my mum with her financial affairs after she was widowed I do not like stories of widows being treated badly. It was interesting to see more detail on Manchester.

      • It was covered on BBC News Channel and I noted the comments about BtLs moving out of London as property was getting so expensive (and the income yields rather borderline) to buy cheaper properties in Manchester.

        Barclays just proved what I knew!

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