Housing Market: Difference between revisions

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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.

 

 

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.

 

 

'''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<ref>Wages growth https://www.bbc.co.uk/news/business-45487695</ref><ref>Institute for Fiscal Studies - 10 years on, had we recovered from the crash - https://www.ifs.org.uk/publications/13302</ref>, 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.

 

 

 

 

'''Figure 2''' shows the 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.

 

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<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 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.

 

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|'''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.

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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.

 

 

 

 

 

 

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.

 

==First time buyers==

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