Housing Market

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 value, which helps the own an asset that offsets some of the interest payments made on the mortgage.

However once the increase in house prices outstrips most buyers ability to buy and where the demand outstrips demand, 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 in keeping an over heating economy from collaspe is a growth in substandard housing conditions, un-manageable personal debt and a market that threatens to bring the economy crashing down around our ears at any given time.

House price inflation

Figure 1 shows house price inflation by area. 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 there should be a natural house price correction in normal circumstances. Once house prices reaches a 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 Quantitative 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 sites 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 to what can be afforded. As they 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 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, the lack of controls of the quality of that housing has led to an unbalancing of the market.

Figure 2 shows 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 form 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 typcial 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 indivual to purchase on 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 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 opportunites 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 be the salary received by somebody who has been working 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 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 salary. This was a good thing as it restricted house 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 payments on the base mortgage. For those living in leashold 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 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.

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 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. 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.

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 right to buy the house builders so a significant increase in profits due to them adding the 20% into the price of the house. The reality being that the right to buy 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 above 5% until late 2016 when houses prices began to fall away again. It is a normal reaction of the market for prices 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 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 substained. A reduction of foreign investors into the new build market in London would see the whole structure tumble.

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 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 growth. A 5% inflation rate on a house valued at £200,000 will see the house rise to £210,000 in a year, while the same increase on a house valued at £300,000 will increase 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 change their house to 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 the income.

Extracting the asset

One of the ways the first time buyers could move up the ladder 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 valuable asset to pass on to family members.

The government has began to target this asset with:

• 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.

References

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