Housing Market: Difference between revisions

'''Figure 2''' shows actual real drop in wages if inflation is taken into account.<ref>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</ref> 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 [[Brexit - Hard Brexit the Reality| 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.

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<ref>UK House Price Index - https://www.gov.uk/government/news/uk-house-price-index-for-january-2018</ref> and in some areas it will be worse than others. It is difficult to see that there is 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.

|'''Percentage of Wage''' || The percentage of wage that is consumed in mortgage payments. This is calculated on a single mortgage payer, while in many cases a property will be bought by a couple. However it is based on gross income before stoppages, so even with two people buying a property a very large percentage of their income would be spent on the mortgage. The level of mortgage payment leaves no leewway 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.

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 come 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 specualtion 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.<ref>HM UK Land Registry House Price Index - https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/june2018</ref> This is historically unheard of for a market to collapse and then almost immediately recover to previous levels. This was due to the financial sector pretty much carrying on as before with large swathes of cash 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 that 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 prices rises since its recovery in 2009/10. It must be born in mind that the dip of 2011 only saw house prices shrink for a short period. Since 2010 house prices have typically been in growth while wages have been in decline. When there has been a indication that house 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 how price inflation was still recovering from the 2011/12 deflation.