One of the features of the UK house market is the way that whilst prices are supposedly affordable so much “help” of one form or another is required by both first time buyers and those looking to trade up. There has been the “Help To Buy” scheme where government assistance is provided. Also many gloss over the fact that the only way that even the establishment can claim that this is “affordable” is because the Bank of England has put an enormous effort into pushing mortgage rates lower. For example it has cut Bank Rate to 0.25% deployed some £435 billion of UK government bond purchases called QE and since last August given banks a new subsidy scheme which already amounts to £57.5 billion.
The problem with these measures are that they are ultimately self-defeating and this is because they just drive house prices even higher. If we look at the Bank of England decision to push mortgage rates lower via its Funding for Lending Scheme in the summer of 2013 we then see according to the official data series that annual house price inflation accelerated to 9.4% in October of 2014. It then returned to that annual rate in June of last year. Moving to actual prices then the average house price in the UK peaked at just over £190,000 pre credit crunch and then fell to just below £155,000 in response to it. But now it is £217,502 as of February. This has led to another more implicit boost to house prices as more and more people believe that the Bank of England will not let house prices fall for more than a short period and will then provide a put option meaning that so many now sing along to Yazz.
Things may be a little hard now
But we’ll find a brighter day……
The only way is up, baby
The essential gap here is between overall house prices which have risen as described above and real wages which have fallen in the credit crunch era. According to the official data the latter are still some 3% lower than the pre credit crunch period and even worse we face a period where they seem more likely to fall than rise.
Step forwards the Bank of Mum and Dad
Legal and General have looked into the situation where parents help their offspring by providing some or all of the deposit. From the Guardian.
The so-called bank of mum and dad will help fund property purchases worth about £75bn in 2017, the report says, including deposits for more than 298,000 mortgages. The £6.5bn figure is similar to the amount lent by the country’s ninth-biggest mortgage lender, Yorkshire Building Society, according to L&G.
Parental assistance is expected to have risen from an average of £17,000 in 2016 to £21,600 this year. Millennials are the biggest recipients, with 79% of the funding going to people under 30.
I suggest taking a pinch of salt with the exact detail as of course some will hand money over and keep the details private and parents have helped their children since time began but hopefully we are getting a broad sweep of scale here. If we continue with this there is more.
This is a 30% increase on the £5bn loaned in 2016, according to research from Legal & General and economics consultancy Cebr, and means parents will be involved in more than 25% of UK property transactions……..
The south-west of England and London will see the largest average parental contribution per transaction, at £30,000 and £29,400, with Wales the lowest at £12,500.
There should be little surprise at the amount of assistance being highest in the areas with a combination of the highest prices and highest rate of increase. This only adds to the problem described below.
Parents want to help their kids get on in life, and the bank of mum and dad is a testament to their generosity, but it is also a symptom of our broken housing market.
Is the mortgage market adjusting to this?
Yesterday there was this news about changes in the level of deposit required to get a mortgage. From Katie Allen in the Guardian.
Easier access to mortgages with a small deposit has offered some glimmers of hope for first-time buyers struggling to get on to Britain’s housing ladder, according to a new report.
Research on the amount of time it takes to save for a down payment on a home suggests buyers have been helped by the greater availability of mortgage loans at higher loan-to-value (LTV) ratios.
Are you thinking what I am thinking? Firstly that the market is accommodating the Bank of Mum and Dad ( BOMAD ) but secondly how loan to values are rising again. Remember when the establishment told us that such a thing would not be allowed to happen again?! From the Hamptons report.
Lenders are increasingly offering higher loan-to-value mortgages and the rates charged on them have come down more than for any other mortgage type.
It seems that Hamptons are not the only body who have spotted this trend.
A separate report from chartered surveyor e.surv found that buyers who put down a small deposit were making up an increasing share of the market.
What could go wrong? Are there any lessons about this we could learn from history.
There is an obvious problem here that has at least some of the features of a ponzi scheme. We see that “mum and dad” have a house and have large gains on it especially if they have been house owners for some time. They feel the “wealth effects” so trumpeted by central bankers and pass some of this wealth to their children to allow them to get a deposit together to buy a house they could not otherwise afford. On an individual level this is pretty much human nature in action but on a collective one it is pushing first time buyers up an inflationary pyramid. Their wages have fallen in real terms and yet they end up buying ever more expensive houses so it is no surprise they need ever more help. Actually the real wage picture has been one which is even worse than the median or average as younger people’s wages were hit hard by the credit crunch. Sadly the numbers are behind the times but there would have needed to have been quite a rise to catch up since. Of course some of the above is a stereotype but the theme is there.
As we look at the situation we see that we are creating another one of “haves” and “have-nots”. Those with parental support will be better off than those without. Indeed as the Guardian pointed out those looking to save a deposit have a long time to wait.
The estate agent Hamptons International said that in the final months of 2016 it would take an average single first-time buyer 11 years and nine months to save a 15% deposit. But reducing the deposit to 10% cut the saving time to eight years and three months. For a deposit of just 5% the time to save was four years.
Meanwhile someone at the Bank of England is probably thinking if we made the deposit 0% they would have to wait at all………