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.
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.