I have long been interested in housing although we have generally rejected the idea of building a property portfolio as a means of generating passive income. I was therefore very keen when the Money Principle was invited as a well-informed blog to participate in a seminar for first time house buyers.
This is one of a series of posts planned on housing.
Why is UK property so expensive?
We are a relatively small island with a large population so you may expect a premium price but that isn’t the whole story.
I think there are three additional reasons:
- In the 1980s, people who were renting their house from the municipal authority – a perfectly respectable option – were allowed to buy it at a heavily discounted price.
Many did and I don’t have a problem with that.
Except money from the sales was not ploughed into building more houses – it went to the government.
- At the same time, retail banks were allowed to lend more freely.
Again I don’t have a problem with that.
It is better for lending to be driven by responsibly policed demand than have the government or central bank decide now much can be lent.
- We are not building enough houses.
House completions have fallen from about 200,000 a year in the 1980’s, to between 130,000 to 160,000 in the years before the financial crisis to fewer than 100,000 a year since then.
This compares with 300,000 to over 400,000 a year between the 50s and 70s, the difference entirely due to a collapse in municipal building.
The market response to demand has not been to build more houses but to elevate the price, which is much easier to do and therefore almost inevitable.
In a country with 23 million housing units each lasting maybe 100 years, we clearly need to be building 230,000 houses a year just to stand still.
But with a growing population – up from 56 million in 1970 to 64 million now (about 180,000 a year increase requiring perhaps 50,000 housing units) – we clearly need rather more.
We have survived so far on the generous house building of the 1930s and the post-war housing boom but we must be at least a million homes short.
We are seeing the result of at least 30 years of political neglect.
Low wage inflation
These three have generated a property price boom with inflation sometimes in the 10s of percent per year.
For a time, this was not a problem because wages also rose and there was general inflation in the economy.
But since the late ‘80s, wage rises have been steadily reduced so that in many cases today they are non-existent and inflation is a distant memory.
We are sitting on a time bomb.
House prices have climbed so much with stagnant wages that values now approach 6 times income rather than the 3 times of 20 years ago.
As rents rise with house prices, people are spending an unhealthy amount on housing whether they are buying or renting.
For those at the bottom of the pile, the bill for support for those low waged or unemployed in private rented accommodation, Housing Benefit, has ballooned out of all proportion.
And for the young, maybe burdened with student loans and facing uncertainty in the jobs market, the combination is very difficult.
Housing is the toxic part of the British economy.
Not only does it divert our attention from building profitable businesses but it diverts lending from more useful parts of the economy.
A bank will lend to someone who will move heaven and earth to pay their mortgage because it is a roof over their head rather than to a business that needs investment to keep ahead.
You can’t blame them.
You cannot cut the price of houses.
The stock market, pension funds, mortgage providers and the economy in general would collapse so it is both politically and practically impossible.
But no effort should be spared to stabilise house building at a level where prices don’t grow out of proportion, and boost the economy so that wages eventually catch up.
This will take time – perhaps another 30 years – but it must be started now.
So where does this leave young people today requiring many times income multiples just to ‘get on the ladder’?
How can first-time buyers save for a deposit when rents are so high?
Some can take advantage of the Bank or Hotel of Mum and Dad but what about the rest?
If you only have a deposit of 5% of the house price, the interest rate is as much as 5%; if you can find 25% as a deposit, you can get promotional rates as low as 1.88%.
This makes a big difference. In England, the government has stepped in with various schemes to help people to buy a home, under the general banner of Help to Buy. There are similar schemes in Scotland, Wales and Northern Ireland.
The main two schemes are an equity share scheme for new houses – as long as you have the 5% deposit the government will own up to 20% interest-free for 5 years then you start paying for it – or for all houses, the government will guarantee up to 15% of the mortgage.
These allow people to get the lowest interest mortgages and they are designed for owner occupation, not for Buy to Let.
With this background, the seminar was an opportunity to meet and discuss the issues confronting first time buyers with the panel of property experts.
The event was hosted by Lloyds Bank but don’t be alarmed.
Recall that Lloyds took over HBOS, which includes the Halifax. So Lloyds is the UK’s largest mortgage provider and they know what they are talking about, particularly to do with first time buyers. There was no promoting of Lloyds or Halifax products at all.
The seminar was chaired by Sarah Smith from Channel 4 TV.
Taking part were Miles Shipside of rightmove.co.uk and a former estate agent, George Clarke, presenter of Amazing Spaces and Restoration Man on Channel 4, Holly Thomas, financial journalist on the Sunday Times and Craig McKinlay, Director of Mortgages for Lloyds Bank.
About 50 members of the public came and many interesting questions were asked to which the panel gave extensive responses.
A lot of tips emerged from the discussions which I will discuss these in a post next weekend.
The whole proceedings were videoed and we will also post a link to that once it is available.