The UK relies heavily on the increase in property prices to create the impression of a growing economy. It is fair to say that some inflation in property prices is not necessarily a bad thing. As a property increases in value, the debt taken out to purchase the property is reduced as a percentage of the market value, which helps the owner of an asset offsets some of the interest payments made on the mortgage. The intrinsic problem with house price inflation is that the value bears no relation whatsoever to its actual physical bricks and mortar cost. There is something fundamentally wrong with a society that marketises that which is integral to quality of life and even to survival. It is so ingrained in our society we have stopped seeing the madness.
Once the increase in house prices outstrips most buyers ability to buy and where the demand outstrips supply, the market will tend towards a rental market where those with large amounts of capital can exploit those with little or no capital. A rental market is not a bad thing in itself, but it must be guaranteed by a good supply of properties and legislation that ensures reasonable protection of the tenant.
This section covers the domestic property market and how house inflation has become so integral to our economy that government policy defends the speculators to ensure the economy doesn't crash. The cost of keeping an overheating economy from collapse is a growth in substandard housing conditions, unmanageable personal debt and a market that threatens to bring the economy crashing down.
House price inflation
Figure 1 shows house price inflation by area 2010-18. The average for the UK is 27%, but this varies widely across the UK regions. Greater London has seen the highest house price inflation (61.53), as would be expected, while Scotland has seen the smallest increases at just 2.82%. The graph also includes where wages should have been by 2018, or rather how far they are behind where they would be if the economy had carried on growing. Residents of London are the hardest hit in terms of getting on the housing ladder as their wages have not kept up with general inflation while house prices have soared. Areas around Greater London have also seen fairly high house price inflation, which could be partly explained by increasing house prices in Greater London pushing more buyers further out from London.
In theory, under normal circumstances, there should be a natural house price correction. Once house prices reach an unattainable level there should be a slowing down in growth. This has not be seen due to a number of factors. Firstly the government through Quantatitive Easing has made vast sums of money available to the financial markets. It is in the interest of the financial sector to make mortgage loans with this money. While the money is made available to them at zero interest rates, they can loan the money out at much higher interest rates. This tends to lead to banks and building societies offering far higher multiples of salary to lenders to keep the money rolling. These loans then end up in the money markets where they multiple, based on the logic that prices will keep rising. Higher multiples, rather than helping lenders onto the housing market, tends to push up prices beyond what can be afforded. As the multiples increase the percentage of a lenders salary spent on mortgage repayments increases (see figure 3 for more details). Under the section Government purposely Inflating prices you can see how, when the government have detected a slowing of housing market, they have introduced measures to ensure continued inflation.
The other factor that has played a large part in house inflation has been a national shortage of housing stock. As demand has outstripped supply this had led to an increase in prices. This has been exacerbated by the buy to rent market where the wealthier can afford to buy up properties and there is a need to rent by the younger generation as houses prices have gone beyond their means. The buy to rent market has a place, but the investment by rich landlords and the lack of controls regarding the quality of that housing has led to an unbalancing of the market.
Figure 2 shows the actual real drop in wages if inflation is taken into account.  This shows a more realistic view of where wages are compared with 2010. The figure represents an average across all age groups and the figure is skewed by the older population seeing small drops in income. The loss in real income amongst the 30 to 49 year olds is much higher at over 7%. This amounts to £2100 reduction in salary. So in this respect the figure 2 graph understates the growing gap between wages and house prices. In the 30 to 49 age group though it may well be that they have managed to put savings aside to pay for a deposit. Also those in the 30 to 39 age group are more likely to be on or above the national average wage. Historically somebody buying a house at 30 would have expected wage growth over the following 10 years. This often meant that a couple would buy house prior to having a family and as their family grew so would their wage to ensure that the mortgage payments formed a smaller and smaller percentage of their income. With wage contraction this is no longer the case. A couple buying a house will find their income reducing as their costs rise. If there is any upward movement in interest rates, the markets are now heavily exposed to mortgage defaults. It is difficult to envisage that the UK housing market could weather a hard brexit. Any downturn in the UK economy where families are mortgaged up to the hilt could create a cliff edge collapse in housing prices.
Amongst the 22 - 29 age group wages have fallen by an average of 4.6%. In the past this would have been the age group that were first time buyers. However with falling wages and increasing house prices, it is much more difficult for this age group to purchase their first property. This age group tends to be about 25% below the national average wage at £21,408 per year. With rising student fees, this group would also be saddled with a very large debt. For a typical property, somebody in the 22-29 age group would require a loan of 10 times their salary and to find a deposit of £10,000. For an individual to purchase a property this would amount to 80% of their salary in mortgage repayments. This would obviously be reduced for a couple, but would still form a significant percentage of their combined salary, particularly if they have student debts.
In Figure 3 we see the impact on home buyers due to house inflation and declining real term wages. The table is based on national averages and in some areas it will be worse than others. It is difficult to picture a scenario where it will be better. In the regions where house inflation has been lower, this is a reflection of poor job opportunities and well paying jobs are more difficult to come by. The table compares the situation for house buyers in 2010 with 2018.
|Average Salary||This is taken from Monster recruitment measurements of salary. Typically it would reflect the salary received by somebody who has been working for up to 9 years. Average salary would historically have increased by £1000 per year. As we've seen this is not the case under austerity measures, with wage growth being stagnant.|
|Average House Price||This is taken from the Nationwide House Price Index. It is based on the UK wide average results. See figure 1&2 for regional variations. |
|Multiple of Salary||This is the average house price divided by the average salary as used by building societies to determine their loan limit. In the past this was restricted to 2.75 times the applicant's salary. This was a good thing as it restricted house price inflation. In countries where it is worked out on 50% deposit and then a multiple of salary, house prices are much less volatile and more affordable. |
|Deposit||This assumes a 5% deposit|
|Mortgage Year||Typical mortgage repayments on the base mortgage rate. For those living in leasehold properties such as apartments, there will be a £2000 to £3000 annual fee on top of this.|
|Percentage of Wage||The percentage of wage that is consumed in mortgage repayments. This is calculated on a single mortgage payer, whereas in many cases a property will be bought by a couple. However it is based on gross income before stoppages and is over 80% if tax, NI etc is taken into account. Even with two people buying a property a very large percentage of their income would be spent on the mortgage. The level of mortgage repayment leaves no leeway for change of circumstances such as one party of a couple losing employment or their hours being reduced. Our work place environment is highly unstable at the moment, imposing a large risk on lenders.|
- Wages growth https://www.bbc.co.uk/news/business-45487695
- Institute for Fiscal Studies - 10 years on, had we recovered from the crash - https://www.ifs.org.uk/publications/13302
- Wage growth in real terms - https://www.theguardian.com/business/2018/sep/12/uk-wages-have-not-yet-recovered-to-pre-crisis-levels-says-ifs
- UK House Price Index - https://www.gov.uk/government/news/uk-house-price-index-for-january-2018
- Average Salary Information for the UK - https://www.monster.co.uk/career-advice/article/uk-average-salary-graphs
- Nationwide House Price Index - https://www.nationwide.co.uk/about/house-price-index/house-price-calculator
Government purposely Inflating prices
The UK's financial sector is reliant on housing market prices being on a constant upward trajectory. The 2008 financial crisis was primarily caused by deregulation in the financial industry. This permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. The banks increased the amounts that lenders can borrow to purchase a property. As the amount of money increased in the system and the amount extended to lendees house also increased, naturally house prices rose. Due to the nature of the derivatives system they are guaranteed against mortgages. The value of property in theory becomes a tangible asset to support speculation. Put simply, the value of property became the guarantor for the whole speculation bubble. Rather like playing poker and putting your house in the pot.
Figure 4 illustrates how the market crashed in 2008 and how it made a remarkable recovery. It is historically unheard of for a market to collapse and then almost immediately recover to previous levels. In this instance, it was due to the financial sector pretty much carrying on as before with large swathes of cash being pumped into the sector, allowing it to recover and start the whole process again by using rising house prices to provide security for deriviatives. The banks were given public money which saw them survive the crash and then, through the introduction of Quantitative Easing, begin to gamble and to support the gambling by using mortgages as security.
As you will see from the graph, there have been a number of dips in house price rises since its recovery in 2009/10. It must be borne in mind that the dip of 2011 only saw house prices shrink for a short period of time. Since 2010 house prices have typically been in growth while wages have been in decline. When there has been an indication that house price inflation has reduced the government have stepped in to ensure that the prices do not begin to fall. They have always moved quickly to boost the demand side by offering subsidies to first time buyers. The first time this was offered was in 2013. As you will see in figure 4, at the start of 2013 price inflation was still recovering from the 2011/12 deflation.
- Help to buy was first introduced in 2013 by then chancellor George Osbourne. The scheme provided 20% of the house price on new builds for first time buyers. At the time £10 billion was put aside for the scheme.
At the introduction of the help to buy scheme, the house builders saw a significant increase in profits due to them adding the 20% into the price of the house. The reality being that the help to buy scheme was a major success at propping up house price inflation. Duncan Stott of the PricedOut group said at the time “Help to buy should really be called ‘help to sell’, as the main winners will be developers and existing homeowners who will find it easier to sell at inflated prices. Pumping more money into a housing market with chronic undersupply has one surefire outcome: house prices will go up.”
House inflation then increased to a high point in 2014 of 9%. House inflation then held fairly steady at above 5% until late 2016 when houses prices began to fall away again. It is a normal reaction of the market for price growth to steady as the multiples to wage become untenable. In 2017 Philip Hammond extended the help to buy scheme with the injection of a further £10 billion. This was despite warnings from Morgan Stanley that the previous help to buy scheme had done nothing to help house buyers, but had only pushed up new build house prices. However it was particularly important to the government to support house price inflation in 2017 as the London housing market was seeing deflation of prices. It is critical to the house of cards that the confidence in the London housing market is sustained. A reduction in the number of foreign investors in the new build market in London would see the whole structure tumble.
- HM UK Land Registry House Price Index - https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/june2018
- Guardian: Help to Buy mostly helped house builders boost profits 21st October 2017 - https://www.theguardian.com/money/blog/2017/oct/21/help-to-buy-property-new-build-price-rise
First time buyers
Much of the impact on first time buyers has been covered in sections House price inflation and Government purposely Inflating prices. However the trend we will see with the present model of house price inflation is First Time Buyers becoming Last Time Buyers. All properties across the spectrum have seen similar inflation except for flats which have seen a lower level of growth. A 5% inflation rate on a house valued at £200,000 will see the house price rise to £210,000 in a year, while the same percentage increase on a house valued at £300,000 will increase the price to £315,000. This creates an equity gap of £5,000 between the two properties. This has always been the case, but the difference now is that those in the buying window are not seeing the wage increases that allow this gap to be filled. You can see in figure 5 how house prices are running away from first time buyers and those who get on the housing ladder are chasing a larger gap to exchange their house and purchase something larger when they start a family.
The impact of higher and higher demand for starter homes at affordable prices with buyers who cannot move up the housing ladder should be a drop in the price of more expensive homes as demand falls away. As the rental market grows this has taken up the slack, with many larger homes being purchased by investors and converted into rental units. This of course raises the spectre of returning to the early 20th century where families lived in cramped conditions.
The other factor that has a serious negative impact on first time buyers is the level of foreign investors in the UK housing market. Not only does this push up the price of new builds (particularly in the South), it also forces longer commutes which again is a drain on incomes.
Extracting the asset
One of the ways the first time buyers could previously move up the ladder was by family assets becoming available as the older generation died. This wealth staying in the family was very important to those who were not wealthy as it provided a large boost to their financial prospects. One of the biggest assets has always been property. This has been particularly important when a generation could move up the housing ladder and accordingly create a more valuable asset to pass on to family members.
The government has began to target this asset as:
- The structure of care homes means that families are having to fund the elderly family members care
- Services like care in the home being cash strapped causing families to cover the gap
See the section Healthcare - Care Homes for more detail on the structure and subsequent financial failure of care homes.
The Conservative party also intended to make the families of those requiring care to pay from the value of their house. The plan being that the family could retain £100,000 of the value of the property. This would have meant once costs of sale were taken into account, it was likely that families would see the asset stripped. They backed down on this policy due to a negative public reaction. This is a completely unnecessary measure as the pension pot has sufficient funds to set up a decent and caring system. Cynically you could say it was a method of moving houses into the financial investment market to provide properties for their portfolio which would be broken down into smaller units. See the section Pensions to see why elderly needs can be fully funded.
In September 2019 the plan to charge the elderly for their care was re-introduced, again targeting their property to make them pay. In proposals by the Social Market Foundation (SMF) the following was put forward:
- People with assets topping £150,000 when they hit 65 should be charged £30,000 per year to fund social care
- The levy, covering personal care rather than going into a home, would generate £7 billion a year, according to a report by think-tank the Social Market Foundation
- It is thought around 233,000 people – or 41% of 65-year-olds – would have to pay it every year
- Poorer people with houses worth over £150,000 but no cash in the bank would be able to defer the charge until after their deaths
It is also worth noting that once a policy like this is introduced it can easily follow the same route as student marketises fees, with the yearly amount increasing. This policy would in reality asset strip the elderly in our society.
- Social Market Foundation. Think tank proposing extraction of wealth from the elderly - http://www.smf.co.uk/
Who are the Social Market Foundation
The Social Market is just one example amongst a number of think-tanks lobbying the government to change policy to the benefit of the private corporations. They describe themselves as... "The Social Market Foundation (SMF) is a non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. We conduct research and run events looking at a wide range of economic and social policy areas, focusing on economic prosperity, public services and consumer markets. The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this."
And let's look at what their Director, James Kirkup, said:
- "British politics is in flux. The ideas of the radical centre need a champion. People – of all parties and none – who reject the strident extremes that too often dominate political debate today need a home. SMF will be that champion and offer that home."
So not only are they a think tank, of which we unfortunately already have many who are undemocratically influencing government, they clearly state that they are opposed to the policies of the Labour party of removing private companies from the provision of public services. They are described as experts in the media, but describe themselves as "radical centre", which sounds strikingly like an oxymoron. Rather like saying you are a radically wedded to being a couch potato. Maybe the term should be radically anti-radical.
Only a think tank - why should we care what they think? The SMF is not a think tank outside the bubble of Westminster. Its Executive body has a proportion of serving MPs. The very ones that are making the decision to take these policies to parliament sit on their Executive and influence government decision making. Many members are journalists that have access to the Westminster lobby. Most if not all appear to have been involved in denigrating the policies of the Labour party.
Here is their roll call:
|Executive Post||Name||Outside role||Comments|
|Chair||Mary Ann Sieghart||Political Journalist, Presenter|
|Director||James Kirkup||Political Journalist||Political Editor of the Telegraph and then Executive Editor – Politics, overseeing and writing commentary and analysis on politics, policy and economics. Writer for the Spectator|
|Director of research||Nigel Keohane||Supports Marketisation of the NHS. He has a BA and MA in history from Exeter University, and a PhD in Political History from Queen Mary.|
|Professor Tim Bale||Professor of politics at Queen Mary, University of London||
His main research interests are in the fields of British, European and Comparative politics, especially in relation to centre-right and conservative politics.
He was the founding convenor of the Political Studies Association specialist group on Conservatives and Conservatism, which brings together leading scholars with an academic interest in this area.
|Rt Hon Nicky Morgan MP||Conservative MP|
|Baroness Olly Grender MBE||House of Lords||Former Head of Communications for the Liberal Democrats and a party life peer.|
|Rt Hon Dame Margaret Hodge MP||Labour MP!|
|Nicola Horlick||Investment fund manager.|
|Matthew d'Ancona||Journalist||A former deputy editor of The Sunday Telegraph, he was appointed editor of The Spectator in February 2006, a post he retained until August 2009.He is chairman of the liberal Conservative think tank, Bright Blue.|
|Policy Advisory Board|
|Stephen Kinnock MP||Labour MP!|
|Chris Leslie MP||Ex-Labour MP|
|Chuka Umunna MP||Ex-Labour MP|
|Baroness Kramer||Ex Lib Dem MP - HoL||Liberal Democrat politician (Life Peer). She was Member of Parliament (MP) for Richmond Park from 2005 to 2010, prior to that having a career in infrastructure finance.|
|Stephen Dorrell||ex Conservative MP|
|Norman Lamb||Liberal Democrat MP|
|Alison McGovern||Labour MP!|
|Tom Tugendhat MP||Conservative MP|
|John Woodcock MP||Ex-Labour MP! Independent now|
- Mary Ann Sieghart, Chair SMF - https://en.wikipedia.org/wiki/Mary_Ann_Sieghart
- James Kirkup, Director SMF - http://www.smf.co.uk/staff/james-kirkup/
- Nigel Keohane - SMF Deputy Director and Director of Research - http://www.smf.co.uk/staff/nigel-keohane/
- Professor Tim Bale - Board Member SMF - https://en.wikipedia.org/wiki/Tim_Bale
- Nicola Horlick, SMF Board Member - https://en.wikipedia.org/wiki/Nicola_Horlick
- Matthew d'Acona, SMF Policy Advisory Board - https://en.wikipedia.org/wiki/Matthew_d%27Ancona
- Baroness Kramer, SMF Policy Advisory Board - https://en.wikipedia.org/wiki/Susan_Kramer,_Baroness_Kramer
- Stephen Dorrell, SMF Policy Advisory Board - https://en.wikipedia.org/wiki/Stephen_Dorrell
- Norman Lamb, SMF Policy Advisory Board - https://en.wikipedia.org/wiki/Norman_Lamb
- Alison McGovern, SMF Policy Advisory Board - https://en.wikipedia.org/wiki/Alison_McGovern
- Tom Tugendhat, SMF Policy Advisory Board - https://en.wikipedia.org/wiki/Tom_Tugendhat
Private Finance and the extraction of housing assets
It is fair to say that social care comes at a price. The government has for some time stated that it is a price too high not to require additional input from the public. The problem is that the financial sector has long been stripping the money out of the social care sector.
In December 2017 Four Seasons Health Care, the country’s largest care homes operator, was in financial difficulty. The Care Quality Commission had to request creditors to agree to a standstill on debt repayments to prevent the business falling into administration. This happened only six years after the failure of Southern Cross, which at the time was the biggest company in the industry.
One of the causes is the pressure fees are under due to local authorities social care budgets having been cut. Possibly it has been more difficult to recruit due to fears over Brexit. But, in reality, the biggest cause of social care failure is due to the part the private sector plays in the provision. The involvement of private equity has created the situation where many care homes cannot balance their books. In the case of Four Seasons the private equity firm "Terra Firma" bought the care homes operator at such a high price that the interest payments consumed the company finances. It was always seen as a high risk and this exacerbated the situation with Terra Firma borrowing at high interest rates to make the purchase. Nils Pratley stated in the Guardian "The UK is awash with long-term pension fund money that would happily build and own care homes for modest real returns. Instead, we have a high-stakes financial game in which players aim for fatter rewards."
It is easy to see that a cash strapped local authority is giving funds to a dysfunctional service. Funds that are already squeezed. This is the environment in which SMF is suggesting that more funds for social care comes from recipients. An environment where more money into the system would go to boost private company profits and not neccesarily improve care. It is stripping personal assets to build corporate assets. See the section Social Care for more details.
- A shocking way to fund UK care homes, Nils Pratley in the Guardian 12 December 2017 - https://www.theguardian.com/business/nils-pratley-on-finance/2017/dec/12/a-shocking-way-to-fund-uk-care-homes