Yesterday saw a development we have been expecting for a while now. After all the weaker outlook for UK house prices with London seeing house price falls and the country as a whole seeing slower house prices growth was always going to unsettle an establishment that wants them higher. The trouble is of course that after all the credit easing from the Bank of England and the “Help” from the government there was a shortage of extra things which could be done. Well on Sunday the Housing Finance Institute and Radian shouted “Hold my beer”
The paper is instead calling for more of the £44 billion housing budget to be prioritised in favour of helping young people get on the housing ladder and in delivering a larger, more flexible social rented sector.
Okay how? The emphasis is mine.
The Government should significantly extend home ownership support schemes at the end of the current Help-To-Buy programme in 2021. There are a range of different schemes that could be implemented from providing direct deposits, to tax breaks, to mortgage finance guarantees. These should be fully considered by the national housing delivery commission and set out in the national housing delivery plan.
That is a pretty comprehensive list of the sort even the Bank of Japan might be proud of. So more “Help” with the unwritten implication that it will in fact be permanent under such a policy operation. Also the return of tax breaks which we spent quite some years removing ( as they were a distortion on the market) followed by mortgage finance guarantees. It is only a short step from the latter to getting your mortgage from a state bank although of course the Bank of England would much prefer even more aid being funnelled to the “precious” banking sector. Indeed the banks would be delighted to see this.
A direct loan by government of up to 10%
per property could double the number of
people that can be helped.
Of course there was an ersatz version of this in the run-up to the credit crunch as banks used personal loans and the like as a way of funding deposits. Of course that was not supposed to happen and this new plan would take us into a new era of 100% mortgages. The next issue comes from wondering how would this be repaid? On this road we discover a can of worms or two. Again the emphasis is mine.
A home deposit loan could be recovered through the tax
system from deductions and could allow a
difference between repayment trigger dates
and amounts for higher and lower paid
salaries, and/or deferring final repayment
to the sale of the property.
The initial suggestion looks alone the lines of the student loan system which is not entirely reassuring as we note that many such loans may never be repaid. If we now look at the highlighted suggestion then the can is potentially being kicked a long way into the future. This offers security on the asset but of course unless house prices rise yet again will leave the individual(s) concerned yet again lacking funds for house purchase unless they move somewhere smaller. Then again the plan is simply to kick the can into the future and hope for the best.
Why?
In essence this report has been driven by this.
Over the period from 2002 over 2.5 million
extra private rented households were
formed; more than the total number
of all extra households in that period.
This is the flip-side in the boom in the buy-to let sector as the houses bought will come onto the market to be rented out. Whilst I am no fan of the buy-to-let boom I am also sure that many and maybe much of the private-rented sector provides decent homes so I think we have a fair degree of overkill here. No doubt some are poor quality but the social sector is not perfect either and the boundaries can be blurred lines as the Grenfell fire disaster showed.
Anything else?
Well just in case converting deposits from savings to loan finance is not enough there is also this.
A housing allowance tax scheme
could be introduced where young home
owners’ mortgage interest can be deducted
from tax.
We used to have something like that called MIRAS ( Mortgage Interest Relief At Source ) which was scrapped some years back. The only difference is that the tax relief is for younger buyers and some of you may be pleased to note that at one part of the document 44 seems to be regarded as an age threshold!
Comment
If we step back for a moment and imagine a situation where the policies suggested above are implemented then the first consequence would be higher house prices. This of course would start the bandwagon rolling again as the new higher house prices would be even more unaffordable and thus the cry would yet again go up for more “Help”
My independence seems to vanish in the haze
(But) but every now and then (now and then) I feel so insecure (I know that I)
I know that I just need you like I never done before ( The Beatles)
It is a bit like putting your I-Pod or MP3 player on repeat and listening to the same old song again and again on this particular road to nowhere. These higher house prices will be on the back of the ones driven higher by the previous “Help (To Buy)” and the 0.5% Bank Rate and credit easing of the Bank of England.
On this particular road we then find that a new group needs help as if we change the rules to help millennials then it will be the post millennials who will face an even bigger problem at which point there may be nothing left apart from the government buying the house for them.
The house price move could be very quick. It would not be as fast as exchange rate movements ( for newer readers we have seen those predate expected moves by ~6 months) but if history is any guide will see house prices adjust by the change so say 10% within a year or two. At which point there is a windfall for those who sell their property paid for by new buyers and increasingly financed by the state. Unless you sell the property or raise more finance it is only a paper windfall so only small numbers have a real gain. The catch is that collectively we are back where we started as the younger house buyers face higher prices and will increasingly report that they are unaffordable yet again. That issue is driven by the gap between the house price rises and the official data on real wages as we try to do more with less.
average total pay (including bonuses) for employees in Great Britain was £489 per week before tax and other deductions from pay, £33 lower than the pre-downturn peak of £522 per week recorded for February 2008
Meanwhile I note that we have seen today the numbers for unsecured credit including student loans released this morning. The annual growth rate including them was 11.3% in the year to March whereas it was 8.6% without them. Any thoughts as to why they are usually left out?
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When i saw this, I thought this was just one last desperate ploy to keep prices inflated, so the [projections somewhere must be for quite a steep general fall. https://www.youtube.com/watch?v=w9gOQgfPW4Y seems quite appropriate, especially as housing policy seems to have little connection with this planet these days.
It makes me wonder whether the government is fearing taking a bath on Help to Inflate Prices as I presume that after the buyer deposit, the next to lose out is the government guaranteed part, before the banks take a hit on their 75%.
I am starting on my IEA Housing essay, which wants a free market solution to housing issues – I suggested that the first step was therefore to remove the government from this market.
Hi David
Removing the government from the housing market is easier said than done especially if you include the Bank of England. I hope that they do not use AI to mark your essay as there may be a HAL 9000 style moment as it reads it.
It seems tragic to me that houses have become a sort of investment game, with the following rules:
1. If you bought a long time ago, you are sitting on a big asset and don’t want to see falls;
2. If you are 50 or so, you may have paid off your mortgage, be thinking about retirement savings, can’t find yield, so buy properties to let;
3. If you are young, you see incredible obstacles to buying and have to pay high rents (see 2 above);
4. If you are a bank (or the government), you shudder at the thought of prices dropping as the banks will (again) go bust;
5. While old people voted and young people didn’t, governments could ignore the youth issues in 3 above;
6. Now that young people vote and even people in their 30s cannot afford to buy, something has to be done to increase supply without cratering the existing prices;
7. People still cannot afford the new houses, so all of the suggestions in Shaun’s list pop up to shore the sector up.
The problem is that it shouldn’t be an investment game in the first place. Houses should be somewhere to live, not a speculation. Once it is, it is almost impossible to avoid all the contortions above.
It was the under 50s who voted for Labour at the last election, it is this demographic who are also priced out … not to mention many who got divorced.
We all know that there are not enough houses and they are too expensive, especially for the young. So what do we need to do about it? Meddling at the edges, with badly thought out “Help” policies, as you say only lead to, house price increases that are of benefit to those that don’t need it. Politicians, think they always have the answers – they don’t and usually make it worse.
Lateral thinking is required, do houses have to be so substantially built that they last 100 or 200 years? Why not produce simpler buildings, prefabs and industrialised “pods” Over engineered units cost more, take longer to build and require more skilled labour, which we don’t have.
Housing Associations seem to have stopped building, why? At one time they were in the lead for providing affordable housing, with variable tenancy or ownership schemes.
Planning is time consuming and expensive, with most small house builders leaving the market. Can a simpler system be introduced for small development.
Do we need a land tax, instead the unfair rates system we have at the moment. Is there a way of making it easier to downsize.?
What is needed is a comprehensive rethink on how we use and provide housing – giving some people tax relief on mortgage payments is not an answer.
There are plenty of houses, we have more people owning 2 or more houses than ever before, its a strangest kind of shortage i’ve ever heard of.
Lets call it propaganda instead of a shortage.
I wonder whether there are good regional analyses, as these may show all sorts of anomalies. Where I live, near Wantage/Didcot/Oxford, there is almost zero unemployment and I just don’t see how more houses could be built. In Wantage, there are several complete housing estates being put up at the same time – my question is who on earth is buying them and where did they live before?
I know that it is anecdotal, but I wonder whether that picture would be true in other parts of the country – I have just been to Cornwall and saw hardly any new estates being built and quite a number of derelict properties in rural locations.
In Oxford itself they build next to nothing.
Wasnt there an article recently that more houses have been built in Doncaster than Oxford over the last 30 years.
…”Over engineered units…”
ahhahahah very funny – go an buy one of these shrunken excuses for a house
build quality went out of the window decades back
the cost is in the land – that’s not gonna change if the TBTF Banks get their way , like they been
Forbin
“last 100 to 200 years”. At one remove from the horses’s mouth – a major builder told a friend that the current design life of an “estate” house is the same as the mortgage, 25 years.
97% of new money is created by the banks; most is used for financial transactions not productive investment; most of this is used for real estate,predominantly housing. With the implicit guarantee that the banks have from the government this is a structure that guarantees boom and bust with the emphasis on boom. It is a system that is largely about the transfer of ownership rights with no extra production of goods and services, a largely socially useless construct. To buttress a structure by the means shown in the piece is helping a system that should not, in a sensible world, be there in the first place. It is the most egregious nonsense. We should be looking at banning banks from undertaking financial transactions rather than prolonging a system that results in inflation and inequality by bilking taxpayers even more.
I also remain unconvinced that there is a shortage of houses; I believe this is a tale told by vested interests and little more in order to secure more taxpayer help for the totally unsupportable.
Hi Bob J
Yes it would be interesting if we got a proper audit of the UK housing stock which should include quality as well as quantity. We would also need a proper audit of the population which would give benefits in other areas such as planning for schools and hospitals.
Meanwhile the tweet below shows that the house builders could throw their own house warming party as each one is sold especially Persimmon and Berkeley
Simple solution here – just CGT the excess profit to stop landbanking. That is where govt intervention would work.
Well, we’ve been sucking in 300000 people a year for a long time and the population is growing quite quickly.
Either there was a huge oversupply 20 years ago, which has only just been filled, or, at building rates, there is a shortage. The fact that house prices were able to climb so fast around the millennium, suggests that the latter is a better candidate for actualite.
Was there a mass emigration in 1992 or 2009 when prices fell 15%? Tends to be where the argument about Schrodinger’s immigrant falls down. London’s population spread over a larger area is still half a million below 1939.
Hello Shaun,
well in truth it has to end, although I think we still have some more life in the old battered can .
can we even convince our collective selves that even a bumpy plateau of house prices is all right ?
I think the media cannot or would not understand this – sensationalism is their game so doom & gloom will be the headlines …..
So perhaps the UBI will be introduced sooner than we think , starting I’d say with it being called “The Life-Time Pension” , and will be £8500 . This if multiplied by ten gives us a mere £85,000 more but as it’s a gold plated guarantee by HMG , then 20 times = £170.000
There , that will help the Banks, after all nothing else has so far 😉
Anyone got any other ideas on keeping the Banks alive , sorry , house price bubble going ?
Forbin
Hi Forbin
Well the recycling industry could learn a lot from that poor battered can as it has been used so many times and indeed all over the world now. As to the next move they could give us a dose of negative interest-rates but the catch is that they have reduced mortgage rates so much with all the credit easing they may not fall much more ( if the Swedes and Swiss are a guide).
That leaves even wider government guarantees…..
So where do I start?
I think with Thatcher:-
https://www.theguardian.com/society/2015/aug/26/right-to-buy-margaret-thatcher-david-cameron-housing-crisis
Thatcher thought it was a good thing council house tenants buying their own properties, one of the reasons was most tenants didn’t look after their homes, it placed a huge strain on councils, and I think they became costly to maintain, not to mention loss of rents for those dysfunctional families who preferred to spend most of their money in the pub and on fags.
To encourage the tenants to buy their properties they gave discounts depending on how long the tenant had been n a property. fFom memory the long standing tenants got a discount of a maximum of 75%. The argument was the tenant had been paying rent over a long period, so the longer they had rented the bigger the discount.
Well that was the first blunder, no way could a council build another similar property when they had allowed someone such a huge discount and lets face it the council rents were hardly paying any interest on the borrowings never mind the upkeep of the properties.
One could argue a smaller discount of 25% would have been far fairer as a maximum.
Typical government idiocy imo, from what I understand with housing associations they are far more proactive and rigorously controlled than a council, if the tenant doesn’t pay the rent they are given orders to leave and the properties are inspected to ensure they aren’t being trashed.
One has to question if a housing association is able to manage their properties better why couldn’t the council?
Despite all of the above the councils not been building houses, the answer to why not is the foolish way they sold them most of them off in the first place, so the government has had to rely on other methods to get people onto the housing ladder as outlined in Shaun’s blog.
But where do we go form here?
The UK has now got a massive housing shortage and all they are doing is pumping up house prices with one scheme after another.
Sure they may find they get more of the public buying houses, but the houses are becoming far to highly priced.
This can only lead one way, at some juncture its all going to collapse because the maths simply do not work out.
The higher the houses go up the more they will fall in future.
As an addendum to my post although the initial discount under the right to buy was a maximum of 50% of the property, this increased in stages later on.
Between 1997 and 2015 there were various changes and the maximum discount available after 15 years being 70% and not 75% as I stated in my post above.
“New maximum discounts of 70% for houses were introduced in January 2014 and from July 2014 maximum discounts would increase annually, in line with the Consumer Price Index. By 2015 the discount stood at £103,900 in London and up to £77,900 elsewhere in England. Finally, the Deregulation Act 2015 reduced the qualifying tenancy period for the RTB from five to three years. At this stage the discount for houses was 33% after 3 years rising by 1% a year to a maximum 70% after 40 years; and, for flats, 50% after 3-5 years rising thereafter by 2% a year to a maximum 70% after 15 years).”
http://www.historyandpolicy.org/policy-papers/papers/the-right-to-buy-history-and-prospect
Hi Peter
I think you are right that the situation would have been better of the discounts had been capped at say 25%. That still would have left a tidy profit for the prospective buyer or if you look at it the other way given a buffer against house price falls which were permitted back then. Sadly we do not have the TARDIS of Doctor Who and hence cannot jump back in time to Number 10 Downing Street to suggest a change of tack.
Back then there were plenty of rows between national and local government so maybe the large discounts were a reply but as you say it has led to (probably) unintended consequences.
These plans should be no surprise to any regular on here, many have predicted such subsidies, myself included, and I said the crazier the plan, the more outrageous it could be considered, the more likely it will be implemented. The Irish are experiencing the THIRD phase of their housing bubble due to government intervention, formation of NAMA and state guarantees to unsecured(read European Bank bondholders), and continued ZIRP by the ECB as I pointed out on a previous post, and so ours may enter the next phase due to these policies. At present they are only words in a report, but how long before such madness becomes reality???
And as Shaun points out, the more “help” given, the higher prices go and become more unaffordable, requiring ever more subsidies.Short of A. a massive rise in interest rates or B.a revolution, I cannot see anything stopping this madness from entering the next phase, as both the above are never going to happen as A. depends on Carney and B depends on the numbers of people being deprived of housing outnumbering those who profit from house prices going up, as long as first time buyers are outvoted at election time by these owners and BTL’ers, the madness will continue.
Hi Kevin
I was wondering earlier how long is the lead time between suggestions like these and them being implemented? As to Ireland the inflation numbers there do pick up the rent increases but at a weighting of 8.8% it only has a limited impact and they do have mortgage rates but they have been forced lower. So the latter have registered lower inflation as house prices have risen. What could go wrong?
I feel that the prices grow are caused not only by the government (directly) but also by some other reasons we tend to neglect.
Have you thought how much does it cost to maintain a property in UK? About £9,000 a year!!! including minor repairs, mortgage costs, telephone and internet, insurance, council tax and public area maintenance charges.
So, what does influence the prices: Property taxes, Insurance, Management company fees (in case you are using one), Utility bills (Utility bills depend on consumption and houses are equipped with electricity, water and gas meters. Utilities in London cost £1,700 per year in average.) and Repairs.
Just in case you need more info: https://tranio.com/united-kingdom/maintenance/
So, I don’t think we should be snooty and blame just one thing/person etc.