Wow! What a response to my questions on housing. As a good number of you say, it is a crucial issue for many. There are two nations, the haves and the have nots, when it comes to home ownership.
As many of you also rightly say, homes are very expensive for people starting out on average or below average salaries. Now the banks require a much larger deposit it is doubly difficult.
That produces a paradox. If the government follows policies to cut house prices more and more quickly, that entails rationing mortgage credit even more strictly That makes it in the short term even more difficult for people to buy their first home. If the government relaxes mortgage credit too much more people can start out, but the homes absorb an ever bigger proportion of people’s incomes. Ultimately it is self defeating. The main driver of high house prices in the period from 2002 to 2007 was excess credit flowing from weak regulation of the banks and the low interest rate environment. That leaves first time buyers today in great difficulty.
We need to work towards a better relationship between average income and home prices, without a violent shake out which will damage existing owners too much and will put off or prevent first time buyers from starting out on ownership. Ideal would be a period of no rises in house prices coupled with a resumption of real income growth, leading to a better balance over a few years. That is easier said than achieved.
One of the main drivers of high or sustained house prices in the last eighteen months has been the big fall in the pound. This has meant that central London property prices which are very high for any normal tax paying UK earner have become a lot cheaper for overseas buyers buying from a stronger currency base. This in turn has enabled more UK central London residents to sell at good prices and then pay higher prices than otherwise for alternative property elsewhere in the UK. The continued strong flow of migrants into the UK has also created a strong demand for housing of all kinds, against a background of relatively low build rates.
So, to get prices and incomes into better balance we need a number of measures, each inadequate in itself but together helping to move the balance:
1. Lower Stamp duty tax on purchases
2. Aboliton of Seller’s packs, which act as a deterrent to putting your home on the market
3. Deficit reduction and monetary policies designed to stop further falls in the pound
4. Re balancing of the credit available to private and public sectors through the banks – credit for mortgages has lurched from being far too easy to being too tight
5. Incentives for local homeowners and their Councils to accept new development – compensation for affected neighrbours, developer contributions for infrastructure and extra Council tax receipts for Councils
6. A Simplified planning system capable of giving quicker answers – whether Yes or No – without the cumbersome regional level interfering. Local people need to feel more in control of whether and where new development should go.
7. Proper controls on borders and migration rates.
April 6, 2010
It seems to me there are two fundamental drivers of the housing market: the supply of houses and the supply of money to buy them with. With a constant supply of houses, their price will depend on the size of mortgage available. If someone with a £40k salary can get a mortgage of £100k, house prices will adjust. If he/she can get a mortgage of £150, likewise. Because of this, making bigger mortgages more easily available isn't the answer.
The real problem must be supply of houses. Only when there are significantly more of them will prices come down.
Most proposals for new development are strongly resisted, but I don't believe this is a necessary problem. In my town, there is a proposal to develop a fairly large site with new houses and flats. I'm not in favour of it and neither are many other residents. But this is because it is hugely out of proportion with the town as a whole and will include an eight storey tower, when no other building in the town goes above three.
We need fast planning decisions for developments that are proportionate and lengthy ones when developers are obviously going for maximum return at all costs. Easier said than done but perhaps a site could be assessed on maximum potential house densiity and any proposal for, say, 40% of that, would be very likely to go through on the nod. The rules would need to be thought through but the prospect of not having planning enquiries drag on for years should be some sort of incentive.
April 6, 2010
Control over migration is small.
The real issue is what are you going to do about migrants already here.
(Cites figures for large numbers of illegal immigrants.)
So why are the (illegals-ed) here? If you free up living spaces (used by illegals), you reduce demand, and that frees up places for people to live.
Not going to happen is it.
April 6, 2010
Best of luck in the election, Mr Redwood. Parliament is only as good as the MPs in it, and without your knowledge, wisdom and independent mind it would be a diminished place indeed. DV, there seems small chance of that.
Is it heresy to suggest that home-ownership is not suited to all? Wouldn’t many be better off renting? There is considerable social pressure to own, as lenders persist in equating credit-worthiness with home ownership even though that happy state may really mean no more than owning the duty to pay a socking great mortgage. Perhaps this merits government attention too.
April 6, 2010
Whilst I agree with most of the points and proposals you make I disagree that a period of no rises will do much. Most ordinary people (i.e not in public sector management or banking) will not be seeing any rises in wages for some time to come so a temporary halt in house prices increases will not change the situation very much. Houses are still over valued by 40% and the costs in buying and owning are very high. I’m afraid the only way that it will change in the near future is for a very steep fall in prices.
April 6, 2010
Your 7 should be 1,2,3,4,5 & 6. When we are building 70k homes a year but adding to our population in the order of 200k+ a year its not a surpise to anybody living out side the Westminster village that this will cause a housing problem.
April 6, 2010
I’ve noticed in run down parts of town many boarded up houses standing idle. It seems madness to build on green belt land instead of regenerating these areas. Sometimes you have whole estates like that.
Maybe we need to outlaw or disincentivise house emptiness? What about somehow giving people these houses very cheaply in exchange for obligations to do them up?
April 6, 2010
You forgot to mention the reduction of immigration. As long as we have a net inflow of immigrants there will always be a housing shortage. With an inflow of 150,000 persons last year, at four to a house, we need 37500 homes just to house them.
April 6, 2010
John I think you’re in political denial, just like Labour is in political denial about the size of its expenditure. There needs to a structural change in political spending (Government pensions, benefits, health) it simply cannot keep expanding like this.
The up and coming generation don’t watch TV anymore, they surf the web, they have short concentration spans. The TV industry is in denial that they are going the same way as radio. Th middle agedresidents are in the same mind set. Only 1/3 of graduates last year got jobs, only 6% got graduate jobs. All these people have student debts and are competing with qualified and experienced graduates from else where in Europe and Asia.
These are the people who are supposed to support the ONE TRILLION public sector debt and ONE TRILLION private sector debt and ONE TRILLION public sector pensions.
You have completely failed to grasp the depth and the length of the problems we are facing. Structural changes are going to happen in the UK, they are beyond politicans control. If you think I’m a doom merchant think again, I built the credit derivative systems for the one global investment bank who came through the credit crunch relatively unscathed. My job is to predict problems and I predict the UK economy will go the same way as radio.
April 6, 2010
"My job is to predict problems and I predict the UK economy will go the same way as radio."
My experience of banking doesn't go beyond a part time job I had as a student selling payment protection insurance to people who had taken out credit cards.
I agree with you about the debt issue though. Never mind the radio, the UK is more like a broken record, repeating the same old tired mantras and lame excuses.
April 6, 2010
I agree with all your suggestions, with the proviso that we must not concrete over the whole of the South East and leave that as a legacy to our grandchildren. You are spot on with the banks and their over-cautious lending policy.
It seems to me that we have replaced the old class system with a different and equally unattractive social divide.
The ‘haves’ consist largely of those who are home owners and doing well out private and public sector bureaucracies and businesses they have started.
The ‘have-nots’ are locked in a cycle of rented housing, poor education, and low wages.
One of the most stunning social reforms was Margaret Thatcher’s initiative to allow council house tenants to buy their own properties. It transformed many people’s lives.
The big challenge to the political class is to find ways for the ‘have-nots’ to join the haves. We need to reform the comprehensive schools to ensure that bright children of ‘have-nots’ can make it to the next stage of their education and, eventually, become sufficiently prosperous to buy their own property.
April 6, 2010
Please stop peddling this 'concrete over the whole of the South East' nonsense. I mean, come on, if you can't get out of your home, have a look at our country using Google Earth.
It's way over 90% green. I think it's either 6% or 8% of our land that is built on.
Are you local? At the end of Wokingham is Finchampstead. Go past the roundabout at California Crossroads out towards Eversley and LOOK. Green fields as far as the eye can see. Keep going – nothing much between there and Hartley Wintney apart from green fields. Keep going … keep going … nothing much between there and the South Coast. The whole place is fields for heaven's sake with the whole population living like sardines crammed into a tiny area we have built on.
WE COULD DOUBLE THE ROADS AND HOUSES WE ALREADY HAVE AND STILL HAVE ONLY BUILT ON ABOUT 15% OF THE COUNTRY.
April 6, 2010
Concreting over greenbelt is pretty much a one way process. Before making such a decision why not use existing stock more effectively? There seem to be houses boarded up around Reading and older large properties being replaced by apartments. In fact there are lots of apartments that have gone up in Reading in recent years.
As to the fields, well we are likely to need those pretty soon to ensure food security so it wouldn't be very bright to destroy their growing capacity. If you must build on greenbelt, do it on land that isn't useful for growing stuff, though I suspect much of this kind of land is not in the South East.
April 6, 2010
Thanks Mike. Saved me the typing.
Apparently, residential area is just 1.3% of the UK.
Planning laws were put in to protect the food supply. Now those same laws are "protecting" set-aside grass. Which covers 2.5%.
April 7, 2010
Richard
Brings a new meaning to "I rather watch the grass grow"
So would I, if I was getting a payment (set aside) for doing so.
Just like many other things we have lost the plot with a lot of Planning policies and decisions. They start off with the right intentions, but then get hijacked by some self interested group or power junky.
April 7, 2010
"Please stop peddling this ‘concrete over the whole of the South East’ nonsense."
England as the most densly populated country in Europe, and the SE probably rated as one of the most densely populated areas in the world, I think you should rethink that statement, and admit we have a over-population problem. Has it slipped your mind that we have a water shortage in the SE, London is building desalination plants, and politicans in general are looking to ration resources from food, water, public transport ,roads etc. Is this not a sign that we are over-populated?
April 7, 2010
I don't disagree for a second that we are over populated. GOD YES. We must stop that population increasing and ideally reduce it over time:
x Paying parents to have 3, 4, 5+ children has to stop. They should pay us if they want to have that many.
x We must find a way (like most other EU countries) of not allowing uncontrolled migration from Eastern Europe.
x Industries should be encouraged to concentrate anywhere but the SE, move Government departments out of the SE, a TAX free zone in Norfolk or Wales would get populations moving.
But refusing to properly house those of us already here is like treating the symptoms not the cause.
April 7, 2010
Mike Willson,
You're the one talking nonsense.
The 'concrete over the South East' is a figure of speech and you know it.
Where is the infrastructure to cope with these new homes ? The schools, hospitals, transport, power ? More to the point where is the commerce to pay for it ? Where's the money coming from ?
And by the way. Who voted for this massive increase in immigration ?
April 8, 2010
Well, I don't know – when I used to be in the building industry and we built large housing estates – the people who bought the houses paid for the infrastructure – the roads and sewage connections or sewage treatment plants (many housing estates have these).
Power? We have a national grid to tap into and we used to pay for our connections.
Hospitals? Building more houses doesn't mean building more people. It means lowering the price of the housing stock because there are too few houses.
Schools, well if you stick up an estate to house 1500 families – they'll all be council tax payers.
How do you think the infrastructure we've got now came into being. Magic? No, it was built and paid for as needed.
There is no reason not to build more houses for people. And to use more land. Then maybe people wouldn't have to live in tiny little boxes with patios for gardens.
Funny how for hundreds of years a house, any house, had a 100 foot back garden. Even labourer's cottages. Now you need to pay a million pounds to buy a new house with a 100' back garden.
The 'concrete over the South East' is an emotive expression used by NIMBYs who don't want other people to live anywhere nice – like them. It is based on the ludicrous idea that we have already concreted over half the country – and needs to be challenged every time it is used.
April 6, 2010
I think ultimately we will need to build more towns. People rightly complain when more housing is packed into smaller and smaller spaces in existing towns, leading to over stretched public services and infrastructure.
Planning standards should ensure a low environmental impact of new developments, but not mean that we all have to live in shoe box flats. They should provide open and transparent rules that are positively biased (i.e. you can build here as long as… ) rather than the planning lottery that we currently have. If the rules were simple to apply it would encourage much more investment in housing.
Most of us aspire to live in a detached house and surely the gardens that come with these are better for bio-diversity than the tarmac car parks of a block of flats, or even the single crop agricultural land that they could be built on. Even if we doubled the amount of urban areas in the UK we’d still only be approaching the level of urbanisation of the Netherlands. There is definitely not a shortage of land in the UK!
As a nation we are perfectly capable of building larger, more affordable, higher quality, more sustainable, lower emission houses. We just need to sort out the planning system!
April 6, 2010
England's population density has now overtaken Holland's. The average Dutch newbuild property is 110 sq m: in England, it's just 56 sq m.
April 7, 2010
Mark
Are you sure about this area of 56 sq m (as an average), or does this figure represent the recent policy of a massive build of one and two bedroom flats, (instead of houses) many of which will be the slums of the future.
The other problem is Planners refusing to allow more than one car park space for a property as policy, indeed, in some inner city/town areas only a handfull of car parking spaces are allowed "to encourage people to use public transport".
The result, surrounding streets where orderly parking used to be the norm are now jammed up with parked cars with the pavement now used as standard.
April 6, 2010
I am, in a way, a home owner. Also I have the savings (rapidly disappearing) from my parents selling and buying homes in time of inflation.
On the other hand, the lad next door has just left school with no qualifications, a good, steady girl friend, the prospect of being at “College” for ages and then what? The idea of a family, based on marriage, like his mum and dad is laughable. He is an unusual boy in that he despises druggism and doesn’t get drunk much. He wants to be a professional footballer.
Immigrants seem to cope. They usually seem to be mums and dads and children. They seem to get houses eventually too. And jobs.
Then there are the barracks where the workers live. They tear up the floor boards because they cannot afford fuel and share beds. Some turn to crime and drunkenness.
Cope with that!
April 6, 2010
John, thank you for returning to this.
I broadly agree with your points except number 2 – I think the HIPS packs are a benefit to buyers, especially first time buyers who may not know what to look for. And it ensures that only sellers who are actually looking to sell are on the market – rather than those looking for a speculative return (which drives up asking prices as they ask for unrealistic levels)
However you miss out the only solution that will actually work – forcing banks to mark to market all the housing stock and toxic CDOs and other ridiculous financial weapons of mass destruction they hold on their books at inflated prices allowing them to record record profits and bonuses. That they insist on 25% deposits is ample evidence that they know the game is up.
Allowing the market to function properly is the correct answer. As a Conservative you should be pushing for it! Of course in the minds of politicos the short pain that that this would cause would outweigh the long term benefits and so a gradual deflation of the type you suggest is the most likely outcome.
April 6, 2010
I have clients in the estate agency business – ask them how many people have ever asked to see a HIP. Most will answer 'none'. They have piles of HIPs in their cupboards that no-one has EVER asked to see. Utter waste of time and money and a drag on the market.
Typical Labour meddling in things they don't understand. They were told by the WHOLE INDUSTRY they were a bad idea, but no, the professional politicians, who have never run anything in their lives, knew best.
April 8, 2010
Why don't we just show buyers the last years gas and electricity bills.
And tell them how many people lived there and there age group.
April 8, 2010
That would be too easy and does not allow the government to interfere in your life.
April 6, 2010
Way O/T but the Labour government ends as it began with the election announcement ~ ignoring parliament and leaking to the media
April 6, 2010
“Ideal would be a period of no rises in house prices coupled with a resumption of real income growth, leading to a better balance over a few years.”
Which would mean for someone starting out on the property ladder now, with, for the sake of argument, no deposit (just to keep the sums simple) buying a flat in Wokingham for £180k, who hopes to move up to a 300k family house over the next 10 years – that, in 10 years time (ignoring capital repayment on any mortgage – always low in the first few years and destroyed by the cost of moving if someone moves say 3 times in total before buying their family home) – they will have a 300k mortgage in 10 years time.
Or, 15 times average earnings to buy an average family home.
Can’t see how it works myself. A sharp drop in house prices is, I think, inevitable unless, of course, the next goverment carries on with the money printing and is willing to let the inflation cat out of the bag. In which case, in a globalized economy, you can kiss our competitiveness goodbye.
We had a sharp house price crash in the late 80s and we emerged from it stronger and more competitive – and handed the economy in pretty fine fettle to Labour in 1997.
For the sake of the country, we need the same again. It won’t be pretty, it will hurt a lot of people but it’s essential medicene we must take.
It’s time (well not quite time, in about 4 weeks time) to start telling people that high house prices = high wages = less competitiveness = less jobs.
And to make it emotive and resonate with more people – ‘less jobs for our children’
i.e. High house prices mean high levels of debt for our children and less jobs for them too. Houses are homes, not investments, and people should look to invest in businesses and pensions for the future, not houses.
April 6, 2010
The planning systen also creates other massive distortions by zoning certain areas for types of hiousing. F'rinstance in my provincial town there has been massive over-development of one and two bedroom flats. A lot of these were built to satify the Buy to Let buyers but as homes they are not really very good for young couples starting out together, being small with very poor general storage and if you are wanting to start a family, inadequate and isolating. Somehow we have to be able to build and sell a 'three bed semi' for 1st time buyers.
Discuss.
April 6, 2010
I have a problem with the view that a FTB "must" be able to afford a 3 bed semi. When we decided to start a family we had to move away from London and a flat with poor storage, out to new jobs in Reading to be able to afford such a house and that was after several years of us both working to save a large deposit and taking on a large mortgage. This was in the early 80's, so how is it different now?
I don't deny there is a problem but I'm having a hard time understanding what is "want" versus "need" and the true scale of the problem.
April 7, 2010
Who on earth has said a First Time Buyer should be able to afford a 3 bed semi?
I think the argument is that someone on an average income ought to be able to afford an average family home – which most would agree for a husband, wife and two children – is a 3 bed semi.
3 bed semi in Wokingham – about 300k.
Average wage – 25k
Average family home is 15 times average wage.
Whichever way you look at it, if there is no house price inflation, a First Time Buyer buying now without (for the same of easy numbers) no deposit will, when the time comes in maybe 15 years for him to need an average family home – need a mortgage of 300k.
If there is house price inflation, he will need a mortgage of more than 300k – depending on how much house price inflation there has been. He will have some equity in this case, but he'll also have a mortgage which will strangle him and his wife will have to work too.
High house prices are madness. They destroy an economy by causing so much money to be paid all the time in debt interest.
April 6, 2010
Dear John
A small start, however you need to address the BTL and the weekend home owners.
April 6, 2010
The population of the UK has increased from roughly 56m to between 61m and 63m over the last 25 years . A limit has to be established as Frank Field and Nicholas Soames of the Balanced Immigration Group are trying .
During my recent stay in hospital I noticed all the porters and cleaners were (recent migrants) . Why are we paying long term unemployment benefit to people who could be filling these….. jobs ?
Instead of looking at the mistakes and successes of the handling of the Great Depression , wouldn’t it be more helpful to look towards Germany post 1945 for inspiration ?
Laws keeping rents reasonable so ensuring a mobile workforce by making renting attractive ?
Housing reform should go hand in hand with a proper national plan for pensions provision .
People need to be saving more for their retirement and for them to do this the price of housing has to come down .
A lot of buy-to-letters appear reluctant about B.T.L. but could not see any other way of providing pensions provision for themselves .
The falling pound and a completely open market is a worry too . Our housing is now prey to foreign “investors” .
In the Phillipines there used to be laws which restricted purchase of houses under a certain price to locals . Now we are not such a rich nation isn’t simmilar protectionism appropriate here ?
April 7, 2010
You get part of the way to seeing the problem, but the solution isn't rent controls, its population control, as you rightly point out the British establishment have completely abdicated their responsibility to our country by their insane mass immigration policy, leading to unsustainable population growth, which has resulted in too much demand for the resources we have, housing being one, a major one . When we are already importing 40% of our food needs its clear we don't have the land resources to build our way out of our housing crisis, so as we are limited in what we can do on the supply side, we have to balance the equation with limits on the demand side.
But there is a further dimension to this problem, by creating too much demand for our resources this has resulted in spiralling increase in prices, which of course gets reflected in the salaries people demand to service their mortgages. Business then complain that they can't get the staff, so call for immigration. This though is a deceit, for in reality they can't get the staff for the money they are paying, but businesses short term solution of further immigration just aggravates the underlying problem that the base cost of living in the UK is far too high, and so we go on this merry- go-round. We have become mass immigration junkies, unfortunately we have no political leaders of vision or integrity to put this country on a treatment of cold turkey, that brings out population into balance, that would inevitably lead to getting us off our addiction of speculating on housing, which may just free up resources to invest in real wealth creation.
April 6, 2010
Surely it is a little more simple than you suggest.
The principal drivers of house prices are: land prices and interest rates.
Increase the stock of building land available and you reduce the price of houses. Planners have for a long time resisted increasing the stock of building land and have fuelled the rapid rise in house prices.
Likewise the politicians control over interest rates and money supply have inflated the housing bubble and QE has had the effect of sustaining it.
An increase in either of these two factors will see a reduction in house prices in the medium term without the need to resort to other measures.
You may make a lot of homeowners very unhappy but you will re-invigorate the demand for houses and help the new generation of buyers into the market
April 6, 2010
I think there is a large stock of building land held speculatively by developers. Just transparency about its existence would be helpful. Better would be anti-hoarding measures.
April 7, 2010
No, the principal driver of house prices is the availability and cost of credit.
The land cost is a function of credit availability too.
Unless someone changes the planning laws, of course.
April 6, 2010
Why assume that prices can only fall through lack of credit? Sure, it was a credit bubble that was largely responsible for the (deeply damaging) "boom", but there are plenty of other ways to bring prices back to sanity.
To add to your list, how about:
"8. Proper balance in the tax system between owner occupiers and landlords (eg on tax deductibility of interest payments).
9. Better incentives to use land efficiently (eg. a genuine property value tax as exists in many other countries, using the money raised to, for example, lower taxes on income)"
April 6, 2010
It is a tricky problem, as you’ve pointed out. I’m glad that you are publically thinking about.
But to be honest, your solutions seem somewhat assymetric. In fact, to me they seem timidly aimed at accepting the current status quo than getting to the bottom of the problem and laying true groundwork for a better 21st Century.
More credit cannot be the answer. And I’m not sure that it’s clear that the current mortgage rules are too tight. Too tight to support high prices perhaps, but that’s cart before horse. Price is the problem. They need to adjust. We need to take our medicine. Deferring the pain will just make it worse later. The banks want high deposits because they recognise prices are too high and may well fall without the current government support. An obvious way to link prices to wages is to cap income multiples, perhaps 3 to 3.5x. But I can practially hear the intake of breath.
We need a public debate, with leadership.
Then we need to take our medicine.
Much of it is out of your hands. You cannot do much about the rise of China and India (and the resulting low inflation in produced goods that enables a low nominal interest rate world).
However, a government is not powerless. Not by a long way.
The first, most important, step is to admit we have a problem. We must publically recognise the damage that high house prices (and resulting high debt) are doing to our society and economy, and how much worse it will get if we don’t make the difficult choices now. We simply cannot have an economy based on housing. It’s a sham. We will face many global challenges in the 21st Century. For the UK to prosper we need to think beyond selling ourselves the same bricks and mortar over and over again in a feel-good debt mirage. People need to recognise that too much gravy today means no roast tomorrow. It won’t be an easy debate, but that’s leadership.
We also need to recognise that we did not simply import the crash from abroad.
Finance reform is urgently needed in the UK, as in the US. We had a warning in the “crash”. Effectively we were an obese patient that had a heart attack. So far we’ve been been stabilised. The answer to a full recovery is not a packetful of dunkin donuts. Mainlining cheap credit is simply an awful solution.
Barry Ritholtz has an excellent US centric blog (the big picture) and has listed suggested themes to fix (http://www.ritholtz.com/blog/2010/03/10-questions-for-finance-reformers/). I recommend his thoughts. The crucial fixes needed here are broad mirrors of the US (we don’t have high prices solely due to being a small island – it was a global issue).
Unfortunately we need regulation of synthetic financial instruments. There can be no more slicing and dicing of toxic debt into squeeky clean AAA tranches. And yet we need to find a way to keeps some of the beneficial instruments. It will be a tricky balancing act, not helped by strong bank lobbying. This is clearly a global issue, but one that the UK can lead.
If it’s too big to fail, it’s too big to exist. Break them up. Check out the thoughts of James Kwak and Simon Johnson (Prof, MIT Sloane) at the Baseline Scenario. http://baselinescenario.com/.
But there’s much more a commited leadership could do.
Consideration of house prices can be a guide to interest rate decisions – witness the recent speeches by Glenn Stevens at the Reserve Bank of Australia. If you know the damage high house prices and high debt can do to future consumption (never mind social mobility), factor them in when thinking about interest rate rises. We need shelter more than we need dvds and ipods.
We really do need financial education in schools. And not one sponsored by Goldman Sachs. Citizens need to know the difference between nominal and real interest rates, they need to know why bidding up prices with falling nominal interest rates will cost them later. They need to know more about the stock market, about inflation, about money.
Those who commit fraud, and those that bring the system to its knees need to be punished, not bailed out. Shareholders in insolvent institutions need to lose their money. That’s capitalism. If everyone gets bailed out every time it’s not just moral hazard, it socialism.
I guess that’s a start. The crucial thing is, as stated at the top, to admit we have a problem. Without that we’re going nowhere.
Unfortunately we need to think long term. I know how hard this is for our current society. We need to ask ourselves the big questions if we truly wish to prosper. It sounds high faluting and airy fairy, but there’s no way around it.
I still think that we should aspire in the UK to a society where somebody born on a sink estate can, through education and hard work, rise up to a high quality of life. A British dream if you like. We need social mobility (which means both ways) to prevent the ghetto-isation and splintering of society.
p.s. if you want to scare yourself, imagine 2050. We can debate the timing ’til the cows come home but without an alternative peak oil will hit eventually. And that’s kryptonite to a high debt economy.
p.p.s. those who come out with the “the young today – they don’t know they’re born mantra might want to check out the facts. House prices are higher today than ever before. “Affordability” measures are snapshots of credit. When you take out a mortgage you buy all of the repayments, not just the 1st year. Check out the three modern myths here: http://grandemotte.wordpress.com/modern-myths-1-houses-have-always-been-expensive/
April 6, 2010
You have my positive suggestions on your previous post. So here are some reactions to your suggestions, avoiding those that are well-covered in the mainstream media.
I have to disagree strongly with your point (2) about HIPs. As a prospective buyer, you invest considerable time and effort into every property you view, especially if you're in a rural area and don't drive. Take it any further and you're committing money too. So it's a huge blow if the vendor turns out to have been a timewaster who isn't serious about selling. The need for a small up-front investment improves the likelihood that your vendor is serious about selling and your journey isn't wasted.
On the subject of new development, we need to drop the immensely damaging "low cost" mantra. Contrast Germany since 1945, where they've built high quality instead (including high rise), and consequently have far lower actual costs than us, as well as far better quality.
I disagree about credit being too tight, too. Look at income multiples going back to Thatcher's time, and bear in mind that you can't support both below-market-value interest rates and the pound. Looser mortgage credit while there's still a bubble is the fast track to Weimar.
April 6, 2010
Can I ask why you would proposed pumping more good money after bad (the UK taxpayer would end up underwriting any losses caused mortgage defaults) trying to maintain house prices at their current levels?
If the market ‘wants’ to correct downwards (driven by the banks deciding to lend more responsibly, although I agree they may have gone too far the other way) why not simply let it? Surely that contradicts convervative ‘free market’ policies? If people have made poor investment decisions in stocks and shares and face losing money do you also propose artifically inflating the price of shares to ensure that they don’t lose out?
April 6, 2010
I agree with you and suspect the desire to compensate people is an effort to appeal to a broader church in an election year and self interest .
Should "free market policies" extend to making our housing stock
a free for all for foreign speculators ?
If not , how would you go about ensuring British Homes for British Citizens ?
April 6, 2010
I thought it already was a free for all for foreign speculators…
April 7, 2010
Regrettably I think you are right .
Still nothing like working your ar** off and bashing your head against a brick wall .
April 6, 2010
Agree, taxpayers have to bail out those that borrowed too much. At least Sterling is transferable, so the ultimate response is to simply switch out of Sterling.
April 6, 2010
Agreed. We're not out of the credit bubble. QE has simply put off the correction until the Autumn. Mortgage rates will rise when banks run out of this cheap credit. Banks may be weaned off the credit but the public aren't.
April 6, 2010
The essence of this problem is one of over taxation.Governments of all persuasions have continually ramped up income tax at source, either through fiscal drag or percentage increase.Saving for a house deposit has now become almost impossible except for a few, and take into account student debt, double if you marry a fellow student, it is a daunting task.In the present political climate so much damage has been done to the basic economy for so many years it is going to be a long road back.There is no quick fix.I seem to remember that mortgage interest was at one time tax deductible, and helped to kickstart the post war building boom.I'm not suggesting this as an answer but something will have to be done or the days of three generations to a house; it's two now, will be back with us.
April 6, 2010
May I observe that the strategic issues you have identified like 'looser credit' are in direct contrast to your recommendations to 'boost' the housing market and loosen credit.
Surely by now, it should be obvious that any 'boost' to the housing market whether it be tax benefits, the removal of regulations or whatever, is entirely absorbed within the pricing mechanism.
So perhaps counter intuitively, policies to tighten regulations or credit can actually make home ownership more affordable (excepting pure initiatives to boost supply of course). I get the feeling you clearly understand this but are still caught in the democratic cleft stick of not wanting to upset existing home owners and their short term considerations.
April 6, 2010
There is another measure which should help. In France, once an offer has been accepted, a sale agreement is drawn up and signed by both parties within a few days and the buyer lodges a substantial deposit. This is a binding agreement – there is a 7 day cooling off period for the buyer – whereby the sale must be concluded on or before the agreed date at the agreed price. If either party does not make the final transaction on or before the agreed date, substantial damages are due to the other party – usually 10% of the agreed price plus agents and legal fees.
Property is bought "as seen" so a subsequent surveyor's report showing defects cannot be used to break the agreement. It can only be broken if: the buyer is unable to get a mortgage; any party to the agreement dies; it is discovered the property is blighted – such as from a road/airport planned nearby.
This avoids price inflation by gazumping as well as giving peace of mind to buyer and seller alike.
It should be easy enough to legislate for and introduce such a system in the UK.
April 7, 2010
In a high percentage property owning society such as ours, such a system is impossible to run.
When people sell their house in this country, in the vast majority of cases they need to move into their next house on the same day.
So, we have property chains. And the system in France would not work unless you created virtual chains. e.g. I accept your offer to buy my house provisionally, and we'll both sit here and wait until your house is sold, or I've found another house to buy, or the person I am buying off has found another house to buy etc.
When this sort of thing happens, people who make offers keep looking in case something better turns up and people selling tell agents to quietly keep the property on the market in case a buyer in a better position turns up.
April 6, 2010
The big worry for house buyers is where are interest rates going and when. The Banks are currently making big margins on the difference in what they are borrowing at and what they are lending at. Courtesy of the Bank of England and the savers of this nation.
As I understand it, mortgage rates are being set by the yields on MBS (mortgage backed securities), rather than the longer government bond yields. The former being bought on a 10% deposit; yielding a very substantial return with high volatility should interest rates get forced up.
With luck, George should get to see the books after May 6. But frankly it is difficult to see what he could change in current monetary policy – never-mind fiscal. The BoE balance sheet is up £100 billion in a year and M4 is dropping. I can see no end to QE for a year or more, or when the BoE will be able to start unwinding all of that QE.
The Labour legacy will be truly horrendous. You must make sure the nation knows it; everyday.
April 6, 2010
Thinking more about this – one of the key issues is a difficult one: low nominal interest rates. This makes the initial monthly cashflow of a mortgage cheaper but makes the later cashflow harder. (i.e. lower consumption later – not good when in aggregate). The problem is, we ignore the long tail of debt payments. Witness this comment in the Telegraph:
“People are willing to spend a more or less constant proportion of their gross earnings on rent or mortgage payments, so if interest rates fall house prices will rise, more or less in proportion.
The LSR affordability index is saying that, at current interest rates, average house prices are almost 20% undervalued…
The Nationwide trend charts are a good guide. The real (inflation adjusted) trend is 2.9% pa, and current prices are slightly above the trend line and moving upwards. But the accompanying chart is the most interesting. The current price to earnings ratio is about 5.2 against a long run average of 4.0.
Many people take this ratio to be affordability (look at the House Price Crash web-site), so they expect average prices to fall in the ratio of 4.0/5.2 from £164,519 to £126,553.
But, if this were to happen, with current interest charges at a standard variable rate of about 3.5%, interest payments would fall from the current 18% of average earnings to 14%, and prices would promptly rise again. The current average interest charge of 18% of average earnings is low by historical standards. So, while mortgage interest charges stay at current levels the equivalent long run norm for the price to earnings ratio will be rather more than 5.2, not the historical level of 4.0. ”
This bakes deflation into the future pie. All that debt has to be paid. Low nominal rates makes it easy to sign up for lots of debt early on, without realising you’re gonna be buying fewer cars and plasma tvs later, never mind trading up (which was an inflationary thing really).
Perhaps the answer is variable mortgage rates. As nominal rates fall (but real rates stay the same due to low inflation) then the mortgage length contracts. This keeps initial payments higher, debt gets paid off quicker, and the “ladder” is kept intact.
http://grandemotte.wordpress.com/modern-myths-2-interest-rates-are-lower-so-buying-an-expensive-house-is-cheap/
Of course, this will never happen. Perhaps education is all we can hope for. Which means (as this will not work either) perhaps we just have to plan for future deflation. Protecting the pound may be impossible. Tin hats anyone?
April 7, 2010
I presume grandemotte is your own site/blog? You may be interested that I did an analysis of the real burden of mortgages using the Nationwide data on nominal house prices, the actual history of Bank Base Rate, and RPI index as a deflator on the payments to give a real burden of the mortgage, as well as the nominal burden. Mortgages were assumed to be 100% repayment over 25 years, with variable rates at 2% premium to Bank Rate (as was the norm over most of the period – although 25 year fixed rates were available early on). If you sum the "real" mortgage payments and compare with the real house price, you get an indication of the lifetime burden of buying via a mortgage. You can also easily recalculate to take account of any size of deposit by taking a proportion. It is also instructive to plot the maximum real mortgage burden (i.e. maximum real payment).
With this analysis (and RPI re-based at 100 for Q2 2007 – just before the market peak), we find that buying a house on a mortgage cost around £50,000 in 2007 money regardless of when it was bought in the period 1952 (start of data) to 1971, although the largest real payment per month over the life of the mortgage rises from about £250 to £450, as a result of exposure to high nominal interest rates during the 1970s. It is interesting to note that in 1971, the first post-War baby boomers were reaching 25 years old. Those born before them indeed "never had it so good", and are the generation who have truly profited most from buying a house.
The Barber Boom greatly inflated house prices, such that by 1973 the lifetime real mortgage cost was around £85,000, and the maximum real payment almost £1,000 p.m. as interest rates rose faster than inflation. Perhaps surprisingly, there was no falloff in lifetime cost which remained stable before surging again in 1978/79, reaching nearly £130,000 – although the peak payment burden did drop back to around £650 before surging again to over £1,100 p.m.
The early Thatcher years saw a slight fall in lifetime mortgage cost to around £115,000, and peak payment burden fell back to £700p.m. The second Thatcher government was marked by the Lawson boom that was amplified by the telegraphed withdrawal of double MIRAS, with lifetime real mortgage cost reaching £195,000 (not exceeded until recently), and peak payments exceeding £1,500 p.m. – still a record. Compare with the inflation adjusted cash price of a house at the time peaking at £110,000 in 2007 money.
The bust that followed saw real monthly payments decline rapidly as interest rates fell back, dropping to under £600p.m. in 1992-1996. Estimates of lifetime real mortgage cost become increasingly conjectural, because these (and later) mortgages have yet to be paid off in full. However, with a 2.5%RPI/7.5% nominal interest rate assumption for the unknown future we find that lifetime mortgage cost fell back to under £115,000 – and the lowest since 1979 – by the market low in 1996. That is about the time that the last Baby Boomers became 25 years old: essentially they had entered the market.
Since then, prices have climbed rapidly under the Labour Uaffordable Housing Ponzi scheme. Monthly payment had escalated to over £1,300 for a fresh purchase by mid 2007.
I disagree with Willets' conclusion that Baby Boomers were the most favoured generation for housing: that privilege was clearly the preserve of their predecessors who enjoyed stable and low real cost of acquisition. Indeed, as might have been expected, the larger population cohort had to pay higher prices than their predecessors. Anyone caught up in the frenzy of 1988/89 buying a first or bigger property could have done so more cheaply at any time over the next decade and more (special case RTB excluded perhaps). The recent boom was not made by Boomers (they were already in the market): rather it was made by Brown's lax regulation.
One of the key lessons of the analysis is that even negative real interest rates in a high inflation environment can lead to crippling mortgage payments because the nominal rate is high.
April 9, 2010
Is there a problem with the above post?
April 21, 2010
Interesting – it's a couple of weeks, but do you have links to any of this (with graphics)? Is it published on the web anywhere?
April 21, 2010
I commented at grandmotte, which should allow you to see my email if the site is yours. The data and charts aren't posted (the spreadsheet is quite large) as I have no site where I can do that.
April 6, 2010
Abolition of HIPS would indeed help but unfortunately our Masters in the EU insist on the energy disclosure which makes up the bulk.
Your revered leader "Cast-Iron" Dave has already made it clear that he wishes to remain within the EU so is unlikely to want to upset his superiors in Brussels.
April 6, 2010
A property only needs a new EPC every 10 years, so that needn't be a massive burden.
April 6, 2010
Control on borders and migration rates are also largely dictated by the EU which "Cast-Iron" Dave has stated that he reveres.
In practice, it seems to me, the only immigrants we are allowed to prevent entering the UK are pre 1997 Ghurkas whom have fought for the UK, white Zimbabwean farmers of British ancestry mugged for theirhomes bythat icon of the Left Mugabe and other whites of British ancestry from countries such as Australia, Canada and New Zealand.
April 6, 2010
John, in what circumstances do you see a rise in real incomes coming about. Inflation would appear to be the only way. This would fit in with what the new government, whoever it is, would probably like to do to mitigate the debt problem. Even then, would there upward pressure on wages? Wouldn't the pound have to devalue a whole lot more, for us to be able to enjoy wage rises and remain/become competitive with the rest of the world? If you did succeed in achieving this, you would only underline the point that it is pointless taking sensible economic decisions on a personal basis. If in the long term the prudent will be forced to pay for the fecklessness of others, why should anyone not decide, on a rational basis, that it would be personally better for them to become one of the feckless in future.
Please bear in mind that only a proportion of people with mortgages have very large ones. These mostly will be people who were either silly enough to overpay, or greedy enough to withdraw lots of equity. Many of those will not even have bothered to consider how they will ever pay the principal of their loans. Inflation won't clear their eventual debt problems if they go and withdraw equity again. While it is of course important to assist those who need short term help because of redundancy or illness, is it really sensible for any government to further distort our economy trying to maintain bubble prices.
I struggle to believe that you of all people do not realise this. I can only conclude (with some sympathy) that you think that this would be too difficult for politicians to sell to a general public who at the moment still believe that house prices can only go up. It is however surly, folly of the first order, for a government struggling with huge debts to try to protect speculators from the natural consequences of their actions.
I would be interested to hear your views on what effect a fall in house prices may have on our struggling banks.
April 6, 2010
The only action on housing is to stop printing money in order to prop up the inflated asset boom. Bailing out those that took on too much debt. I rent a house, I think I should (I would pay 50% tax on part of my salary under Labour) be able to afford, but I won’t saddle myself with huge debt. If the next UK government want to bail out the profligate, fine, it will be a long, slow gradual decline in the value of sterling that will bring about the retrenchment. Personally I don’t care, I’m moving my family to Asia. There is no way I want to live in a country where working hard will simply result in my taxes going to bailout those that borrowed too much money.
April 6, 2010
The main driver of high house prices in the period from 2002 to 2007 was excess credit flowing from weak regulation of the banks and the low interest rate environment.
The excess credit wasn’t flowing from “weak regulation”. Weak regulation, whatever that is, doesn’t generate credit. It flowed directly from central banks, pumping up a bubble to create a boom, driven by their own fantasy that this time, they’d mastered the quantity theory of money. I’m sure you’re aware that Austrian School economics predicted the subsequent, inevitable, collapse.
You can’t on the one hand pump money into the marketplace and on the other hand hope some “regulation” can prevent its inevitable effects of inflation and collapse.
House prices are too high. They are ridiculously high. They are because of deliberate inflation of them; people believe that a house should be an “investment” and thus demand that its price rise forever, without limit. The higher the prices get, the more crippling the repayments on the credit, and thus the more pressure for even further increases. And any time prices start to correct downwards, there are squeals of “negative equity” from those buyers chained to absurdly expensive loans, which they had to take out just to get a roof over their heads.
Thought experiment; imagine you abolished all the planning laws- the Town And Country Planning Act and all its children, telling the countryphile nimbys to go take a hike. And suppose you abolished the building regulations. So now anybody who owns a plot of land can build whatever they want, wherever they want. They could spend a couple of thousands (or less!) to build a basic family dwelling- concrete foundation, breeze block walls, simple flat roof, basic sanitaiton and electrical services, and then live in it. What would happen to house prices?
In the market, every buyer is a seller. If you skew the market by regulation to benefit sellers, you penalise them when they are buyers. The man with a property “investment” can make money when he sells, but fewer and fewer people can afford the property in the first place.
So the point is, the property problem is not a matter of fiddling around with a few economic levers. It’s a matter of a market horribly skewed by state interventionism and the twentieth century invention of states trying to “run” the economy. Don’t blame mortgage lenders for lending, when the central banks are stuffing their pockets with cheap money and telling them to lend it out. If your economic policy is predicated on continual forced inflation then, unsurprisingly, that is what you will get.
April 6, 2010
"Ideal would be a period of no rises in house prices coupled with a resumption of real income growth" (JR)
Stop dreaming John! If you give the average Brit more income, they just spend it on making higher mortgage payments, bidding up prices in the process.
Look back at the 80's, the Reagan/Volcker period. A loss of confidence in the greenback, high gold prices etc. Volcker implemented what was then regarded as a sound monetary policy and inflation was broken, gold prices fell and interest rates peaked at 20%.
History will repeat itself, the markets will call time on Obama's print and spend policies and interest rates will have to rise or the dollar will fall. Then what happens in the US will happen here next – just like the 'credit crunch' did.
If governments continue to try and hold interest rates down whilst refusing to face up to unaffordable committments and racking up yet more debts house prices will probably continue to rise across the board, albeit notionally against a currency in terminal decline.
April 6, 2010
StevenL ,
Is the corrolary true that if the average Brit has less income , then house prices would go down ?
The majority of private sector workers/unemployed are not saving enough for their retirement .
If we are going to have a state pension then there is a strong case for compelling people to pay enough towards funding it that it exceeds the subsistence level at which meens tested benefits are paid .
Obviously treasury raids on pensions don't help but the majority of private pensions perform pitifully and have high charges .
April 6, 2010
1) Yes, less income = lower house prices. Lenders can come up with 35 year terms, government can offer shared appreciation schemes, but if incomes can't service mortgage interest payments house prices will fall.
2) No one trusts the 'financial services' industry. This is a key reason why people are not saving for pensions, they are afraid someone in Wall St will come up with a clever way to nick it off them. Solution – grant the right for public and private sector employees to take their employers contribution and save it in a SIPP with whatever they want to add to it and the usual tax break.
3) I can't see anything worse about compelling people to put money into a pension than compelling them to pay NI.
4) I think the pensions industry needs a big reform away from a few big institutions that don't seem to care what they do with your money to more uptake of SIPP's and a much more competitive market of smaller, better quality asset managers.
April 7, 2010
Steven , thanks for taking the time to reply .
It is a great day isn't it , just a pity we had to wait 12 or more months with a dead parliament . Not sure whether John Major informed Westminster that he called an election before declaring it from Mc Claren headquarters or not – knew that the McClaren green belt planning permission was a formality though .
Sorry , on to your points , do people not have the right to SIPP ? I'm of poor health and not expected to make it past 70 . Agree with you it needs reform . No fudge on defined benefits for public sector if private sector has to accept defined contributions . Pay public sector 40% more if neccesary just to make it clear how much they are costing .
My belief is that companies should not be burdened with pensions (especially when the window of a business oppotunity may be less than 10 years) . Therefore if I am understanding you correcltly ( and I might not be) then compulsion towards pensions contribution may have some mileage .
The alternative seems to be to make those of us who try to save and live within our means (including avoiding committing to houses which stretch our abilility to pay) . This has got to be better than disinscentivising savings to pay for the profligate .
April 6, 2010
The major problem is the concentration of population in the South East. This is easily rectified by Government, which employs a considerable part of the population, moving the majority of Civil Servants and Quangos to the more impoverished areas in the North. Thisa would not only improve the standard of living of the residents already there, by enabling them to supply needed services, but even out the house price differentials across the country.
April 6, 2010
you should add to your list:
remove the link between where you can afford to live and the school your kids go to, allow parents who have choice to live in areas where they couldnt entertain currently as it would doom their kids to terrible schools
stop house prices reflecting the quality of the local schools more than the quality of the house or its location in all other regards
many houses are just silly money for the schools they guarantee the kids into
April 7, 2010
That's spot on. In the Northern town where I grew up (good school) a 2 bed house would set you back £140-150k. A few miles down the road (bad school) they are more like £40-50k!
April 6, 2010
Of course you could add housing costs – nominal rent or mortgage repayments back into the RPI. Then rampant housing inflation – such as what has gone on for the past 30 or so years is taken into account rather than being ignored…
April 6, 2010
"As many of you also rightly say, homes are very expensive for people starting out on average or below average salaries."
Wrong. That statement is true if, as a successful professional earning an above average salary, you are willing to cut your living standards,live in a crappy shoddy 2 bed newbuild, get a mortgage the size of the bismark and pay 3 times the price that someone else paid for the same house 10 years ago.
Thats not affordable in my mind. Thats lunacy, and bloody good reason to emmigrate. I would love to see how the Tories plan to cut the deficit once all your professionals leave to lands of better opportunity.
April 6, 2010
Paul
It depends upon when and where you buy, as to how much you pay.
Agreed house prices have risen to a greater degree than many other things over the past 10 years (in some areas) but not by that much more.
Petrol, food, council tax, rail fares, I would suggest have all more than doubled in the same time.
Not trying to minimise the problems of getting onto the house buying ladder, IF THAT IS WHAT PEOPLE WANT TO DO.
I think we are in for many years of house price stagnation/perhaps even a slight drop, once the Government gets to grips with the real financial crisis we are facing.
So what is wrong with renting (gives perhaps less security, but more flexibility) while rates seem to be going down slightly.
April 8, 2010
Your average food shop would cost £430 if food prices had rose in line with UPI. Your statement is incorrect. You can bet the daily mail and boomers would have something to say about it if they had to put up with hyper inflation in one of their essential living costs.
April 8, 2010
This from shelter "If everything had risen at the same rate as housing our lives would be untenable. A dozen eggs would cost £9.30, a bunch of bananas £7.86 and a pack of button mushrooms £8.49*. You can imagine the cost of a weekly shop.
"
this "house prices have gone up a degree" is nonsense! I would to love to see the reaction if estate agents were filling their 4x4s up at £5.23 a litre!
April 8, 2010
Paul
Thanks for the info but the Shelter web site you outline says the comparison you have used is for a 37 year period of house price rises from 1971- 2008.
Given that 1971 was the start of real house price inflation they (shelter) have chosen the shortest period to show maximum inflation over minimum years.
House price inflation was reasonably steady and low in 1950's 60's.
Your original statement on this site said 3 times the price in 10 years, and that is what I responed to.
I agree with much of what you say elsewhere BUT:
Please make sure you are accurate when you are making comparisons, otherwise people may think you are using Gordon Browns figures.
April 6, 2010
Congratulations on being one of the few politicians willing to recognise that high house prices relative to incomes is a problem that can only be solved by lowering house prices relative to incomes.
It is those who are over-mortgaged (high LTV and/or high income multiple) who have most to fear – but they have made their own mistake in over-valuing their property, perhaps misled by their mortgage broker, surveyor, solicitor or estate agent along the way. Those who have small or no mortgage commitments as home owners or renters have little to fear from falling prices: especially home owners thinking of upgrading. Only those planning to sell to emigrate or downsize or rent can have real regret if prices fall.
If we look at Prof Morgan Kelly’s research I referred to in the other thread, we see (p. 9 of the pdf) a strong correlation between the rate at which real house prices typically correct and the amount of fall in the correction. Given the 40% real terms decrease we “need”, that suggests an average annual real decrease of the order of 8% of peak price can be expected. This forms a useful base round which to plan.
In the initial period of price falls from the peak, it was running somewhat faster than this. If the decrease is to be achieved without falling nominal prices as in you preferred Goldilocks scenario, that would imply inflation at 8-9%, and interest rates at 10%+ which would change the dynamic by causing a sharp increase in repossessions because of unaffordable mortgages.
I recall having mentioned the estimates I made from BoE data of the relationship between house prices and the numbers of mortgages (both re-mortgage and fresh purchase) that would have impaired LTV compared with when-issued. Approximately 1 million bought or re-mortgaged at close to peak prices (£195,000+), and this increases roughly linearly until average prices reach £160,000 (using Halifax index), at which point the total number of “under water” mortgages has climbed to nearly 4 million. There is then a large almost step change jump to 5 million – which perhaps explains stickiness in prices at this level. The total climbs to 6 million at around £143,000. These data suggest that the next lurch downwards could have a dam-burst effect, not least because they will be reflected in the packaged derivatives such as RMBS and the collateralisation of the Credit Guarantee Scheme which might trigger additional haircuts.
You report on interest from well heeled foreigners in property in London. It is good to see them taking the risk of a big hit as “greater fools” – and as I have suggested before, it might be highly beneficial if we could persuade foreign interests to buy our entire stock of “public” housing for £500bn to reduce the debt (not just the deficit), and accept £1-200bn in losses on it before re-selling it back to us when we have the economy straightened out. However, I don’t expect the Chinese to fall for that idea.
Turning to your suggested measures:
1)I agree that Stamp Duty is a bad tax that should be abolished. As an aside, I wonder how much 5% rate will be collected on £1m+ homes – I suspect that many of these manage to avoid it via devices ranging from Islamic mortgages to overseas company ownership.
2)Seller’s packs do not seem to have been a useful innovation, as they are often ignored by conveyancing solicitors. They may deter some kite flyers from putting their houses on the market, but I suspect that estate agents have little time for kite flyers now. Whether the rest of the UK should adopt the Scottish approach is perhaps a useful question. Perhaps some tightening of the law around Estate Agents might be useful to make them more clearly liable for false descriptions and misrepresentation.
3)Arresting the fall in the pound will moderate inflation, and cutting the deficit will also help to keep nominal interest rates in check. A high inflation, high sovereign credit risk premium environment would certainly hasten a repossession tsunami.
4)Mortgage credit should be progressively eased as prices fall – but it should remain very tight until they do. There is no point in encouraging more than the bare minimum of people to pay prices that will soon prove too high now. If we’re expecting 40% falls, then today’s 60% LTV is a 100% mortgage at the end of the fall, and a wiped out deposit for the buyer. Some exception to this should be made for existing mortgages, where it may make sense to be more flexible when someone seeks to move – especially to take up a better paid job, or to have a job where otherwise they lose one.
5,6&7)Housebuilding is not going to solve the crisis, although we clearly need to alter radically the appalling consequences of the current planning system that is giving us the slums of tomorrow often built on floodplains and without infrastructure. Perhaps we should take advantage of our EU membership by buying or renting surplus housing in Eire and Spain to cater for some of our “social housing” needs. It would be cheaper than in Kensington & Chelsea! Immigration control is certainly important. The effects of ghettoisation from out of control migratoin include reducing property values in ghettoes and adjoining areas, while bidding them up elsewhere.
I believe we should be aiming to finance our mortgages within the country, without borrowing abroad. We need to remove any vestige of BoE support. We have a long way down to go yet.
April 6, 2010
1 Introduce a suitable rate of VAT on new construction and get rid of stamp duty altogether – only tax where wealth is created.
2/3/4 Agreed
5/6 In the late eighties, Nick Ridley at DoE had a system where the bias was in favour of development rather than vetos. Virtually the whole of the shire counties, including Berkshire, Hampshire and Surrey were up in arms, often led by Conservative MPs. I can recall Julian Critchley being incandescant with rage. So what are the specifics? I can remember Nick Ridley saying that many hamlets and villages could take a few more houses to make them more economically viable; makes sense to me.
7 Agreed
I believe that the ratio of average house price to average income has fallen from 6.2 at the peak of the boom to about 5. We need it to fall another 20%. During the boom, the average age for first time buyers rose from the mid-twenties to the mid-thirties, and that is socially very unhealthy.
April 6, 2010
One of the other demographic factors that is important is the social atomisation policies pursued by Labour, often with heavy welfare benefits and penalties attached. They include penalising the young with student debt, and the "couple penalty" in all its forms, among many others. Such policies increase demand for housing by segregating people into their individual cells, rather than encouraging family life where more people share a home.
April 6, 2010
I can guarantee one thing..it is all going to end up in tears…anyone can see the market is one the edge again and it will take some big players with it once it crashes….interest rates will have to rise and that is your trigger……..protect yourself…..
April 6, 2010
Dear Mr Redwood
Frankly, I don’t think you really ‘get’ it ie why HPI is bad for the country and the economy.
House prices have been inflated by loose credit controls and are being propped up by the existing government schemes coupled with low interest rates.
Part of the bubble was also fuelled by BTL and the tax breaks they receive, and your party will not address this issue.
Lowering stamp duty and abolishing HIPs is insignificant tinkering when fundamentally house prices are 30 to 40 % overvalued.
Houses are for living in; they should not be an ‘investment’. Every pound that is invested in property is a pound that is not being invested in wealth creating industries.
April 6, 2010
As any economist knows, Ian B is right: the radical fix is to abolish town planning and let anyone build on any land they own so long as they pay for any extra infrastructure (the reason the TCPA was originally passed) and perhaps so long as the houses look pretty (the excuse now offered to retain it). But the main thing is to get rid of the controls on the rate of development and move to social cost pricing instead. The price of houses in the southeast will fall to near the building cost, i.e. a third of what houses cost now in much of the Home Counties.
This would be the policy of a wise social planner. But it will not be supported by our elected politicians, as the opposition from incumbents (who'd lose two-thirds of the value of their main investment) would vastly outweigh the added support from the young people suddenly able to buy houses. Now that 70% of households are homeowners, law reform seems impossible; and the areas of the country where the problem is worst are precisely those with the highest levels of home ownership.
Willetts talks a bit about this, albeit indirectly; but no-one else in any of the Westminster parties seems to have the courage.
What will give way? Will officials become corrupt, as in southern Europe, and sell planning permission to builders? Will democracy itself give way? I hope not. Perhaps it will just take a long, slow, hiss of escaping air from the property balloon – as we've seen in Japan since 1989 – to detox people from their current expectations.
April 6, 2010
That is a very good start. Only thing missing is to level the playing field and either make interest payments tax free for everyone, or taxable for everyone.
Regards income – apologies for repeating myself from a previous blog entry, but incomes are not going up, they are going down:
China and India have moved up the “skills ladder” and can do all the same jobs we can do. This means, I can employ a computer programmer in India (with a PhD) for £10k or I can employ someone in the UK for £30K. Any job done on the phone or computer can be done just as well by someone paying £100 a month or £1000 a month. Which one will be more "cost effective"?
April 7, 2010
I've noticed a marked decline in the quality of Indian software developers in the 20 years I've been working with them .
Back then knowledge of the fundamentals of management of data was more widespread . These days it seems vast swathes of programmers are used to program around design deficiencies .
For bespoked/niche software the wage differential will be far outweighed by cost of failure of a project or delivery of software which is not amenable to further enhancement and therefore has a shorter economic life . IMHO the risk is decreased by having business analysts and systems analysts on the ground with users .
I agree with you incomes are going down , mine certainly has .
Nobody wants to pay for quality and surprisingly they rarely get it .
April 7, 2010
I just wondered if anyone could tell me why John Redwood is the No1 trending topic on Twitter this evening? I can't find a decent link to inform me… something about rushing a bill through on copyright piracy?
Reply: because I spoke in the House against Labour's rush to legislate badly on the internet
April 7, 2010
Mr Redwood,
Normally you provide telling insights into financial matters. However, on this matter your main thesis – that a number small measures can stabilse house prices ignores the big issues lurking.
The long-term average house price is around 4 times average earnings. From 2002 to 2007 it was well above trend. House prices bottomed at just below this threshold. The reasons are
low average interest rates, but most importantly the spread of interest rates between long-term existing borrowers and having a new mortgage. I reckon that I would pay about 1% more in interest if I moved house now. Pre-2007 I would have ended up paying less if I had not taken advantage of discount rates in the recent past. When I last looked six months ago my interest rate would have more than doubled. This, along with the high deposit has massively increased the marginal cost of moving to a more expensive property.
This has constrained the supply of houses. Along with low average interest rates, and the new demand oustripping additions to the housing stock has meant some recovery.
We have an unstable situation. A rise in interest rates in the short term could tip the market downwards if there is a double-dip recession. A rise in interest rates, accompanied by an equalisation of interest rates between new and existing mortgages borrowers, could stimulate the housing market, as the marginal cost of moving is reduced. However, if it massively increases supply, then increased activity could cause a downward trend.
My own belief is that the housing market will next move downwards, as interest rates will rise significantly in the next two years. We have yet to see the full profit-taking on the buy-to-let market is one significant reason.
April 7, 2010
"So, to get prices and incomes into better balance we need a number of measures, each inadequate in itself but together helping to move the balance:"
They are out of balance for two reasons
1. mortgages
2. self certified mortgages
2 is the most important to tackle, but it would probably take five years given the chaos it is likely to cause in the housing market and financials.
It is a fraudulent system. People who ask for a mortgage are told they can borrow between 3 to 4 times their earnings, for most people this means they cannot afford the house they want. The reason is that a second system exists called self certified whereby you can make up any income you want and not be checked, then get an appropriate mortgage.
This has obviously driven house prices up significantly so new buyers are forced to go through the same system.
People think they are getting around they system by taking one out but its exploitative, it lumbers them with mortgage payments far higher then they should be paying under financial regulation.
The government must sort out this fraud. If i was chancellor it would be one of my key reforms. The FBI were blocked from prosecuting it in the US so it is definitely something the elite consciously created.
The Liar Party have done nothing about this issue, probably because their Keynesian economics is all about pushing the price of things up and never allowing it to fall. Falls in price are seen as failures of free markets and capitalism. They are also extremely lazy, corrupt, arrogant and criminal, which doesnt help.
1. Mortgages are also a problem if its true the bank can simply create the loan electronically rather than actually have the money. If thats how it really works, it too is fraud and needs to be shut down.
Those two steps would bring house prices into a natural market level.
The prices are not to do with shortage of houses or shortage of land as some will say, the USA has the same problems as us and nobody believes they have as shortage of lebensraum
April 7, 2010
adam
You forgot another area which has retained demand and higher prices, and that is parents giving,lending,underwriting funds to their children, to give them a larger (fantasy) deposit.
Not suggesting parents should not help their own, but it has also helped keep a false market going for longer.
April 7, 2010
Depends where the money came from.
I dont think it distorts the market, its a natural part of the market.
Sounds like a lefty campaign issue to me.
April 7, 2010
adam
Assure you no lefty campain, just stating the facts.
If people who have trouble buying a house at a certain price are then given money so they can, the price stays as it was, and does not reduce with what would be reduced demand for the product.
Rest assured I have no problem with anyone doing what they want with their own money, as long as its legal. Better people spend their own money the way they want, than the government take it and waste it where it wants.
April 7, 2010
No, No, NO.
Stamp duty is a valuable mechanism in letting people know they are becoming irrationally exuberant and spending too much money on an asset they may come to regret.
Increased Stamp duty is the way forward.
Furthermore, allowing prices to stagnate rather than a sharp correction will leave people STILL PRICED OUT for a further decade to come.
WHY are you trying so hard to disenfranchise an entire generation – or two – so as to benefit the very people who have contributed so strongly to the mess? Why punish the prudent and the innocent and reward the foolish and greedy? That is just a sickening approach.
Let the fools who lied and committed fraud to borrow too much money lose their homes. They deserve it for having effectively robbed the rest of us.
Outraged? Yes, I am livid. Labour have made a mockery of social mobility, undermined the entire concept of money, and wrecked society. Now you want to continue their good works.
Fix it. Let us get on with our lives.
April 7, 2010
High real (or even nominal) interest rates are far more effective than Stamp Duty in making people conscious of their folly. For one thing, they bite whether they MEW'd or bought. For another, there are ways of avoiding Stamp Duty that become worthwhile at high enough prices and rates.
April 7, 2010
Very true, however the advantage of SD is that it is an upfront cost, that should be directly related to the 'extravagance' of the purchase.
A normal house should not attract SD – but they are all now so far out of kilter that they almost all do.
I would be much happier with base rates at 7% or better, but SD that is implemented appropriately (ie linked to median wages) and inescapable would be great imo.
April 8, 2010
What might be better is an over-valuation premium. Take the rateable value as a base, index for inflation (RPI only), then charge a percentage of any excess in the price over that – which could be used as an insurance premium against having to bail out the mortgage. Best of all if the tax is not on the sale/purchase, but levied annually until the property is sold again.
Taxes on sales are taxes on moving, which would tend to reduce sales and act as a general impediment to efficient allocation of the housing stock. I agree with JR that abolishing Stamp Duty is the way to go.
April 9, 2010
Rich
Stamp duty is a disaster, why:
Because the same house in different regions is valued differently.
Your average 3 bedroom semi in some parts of the country will have the lowest stamp duty rate, in other parts the highest, yet the persons/buyers aspirations are the same.
Also if stamp duty is to be stepped in rates, then the tax charged should also be graduated, not charged at the highest rate for the whole value as this creates a false level of house prices where rates change.
Last but not least, why should the government benefit with tax when someone buys a HOME, they already get 17.5% tax when you improve it.
The only sensible ways to control house prices is through sensible income multiples (proof of earnings as declared to the inland revenue) and interest rates.
What we need to avoid is a sharp correction, because the taxpayer will be bailing out those people who are evicted.
April 7, 2010
I’m sure I’m not alone in hoping that this blog entry and the previous one “Affordable Housing” are marked for the attention of and read by (among others):
M King/P Tucker/C Bean – Bank of England
G Osborne/G Shapps/C Spelman – Conservative Shadows
CML
CEOs of all institutions providing mortgages in the UK
There have been many excellent comments and analyses and almost no self-interest(-deception) about the idea that high house prices are bad, not good.
April 7, 2010
These steps are at least a start. Far too much weighting is given to homeowners and their desire to hold on to vast amounts of equity. Some recent buyers don't have a lot of equity but they are relatively few and they made a choice to pay top whack. I don't see why everyone in future should suffer because of this. You need to ask what is best for society, one with affordable housing or one with unaffordable housing.
This slow drawn out return to affordability plan does not help those of us who have been sensible and rented and saved and not spent. The whole artificially propping up of the market up is immoral. Labours economy rewards irresponsible behaviour.
I am amazed the Tories haven't made more of Labours economic record, I was emailing MP's years ago, including your leader, warning about the impact of high house prices, lax lending, debt levels and the need for credit restricitions. I was fobbed off and told credit restrictions were not the answer, now the Tories have adopted the idea if I am not mistaken, but long after the horse has bolted. It's time to start listening to us.
Many ordinary people warned for many years on various financial websites of the impending crisis high house prices would bring, yet we've heard the same line from Labour that no one saw it coming and it all started in America, and that its a global crisis. We had the most debt and biggest house price boom. Don't forget who said , "I will not allow house prices to get out of control and put at risk the sustainability of the future" back in 1997.
April 7, 2010
Totally agree, but based on Mr Redwood's proposals it's clear that there'll be no help from the tory party either, sadly it would seem there's too many numpties in this house price obsessed ship of fools.
Now then, Canada or Australia?
April 7, 2010
As a prospective first time buyer, I’m very interested in house price policies. As things stand, I am currently in a position where I could afford a house but my lack of a deposit is preventing me from doing so. My partner and I earn reasonable money and the houses we are looking at are in a range of 3 – 3.5 times our combined gross salary. We currently rent – very comfortably so. I have never once been in danger of missing a rent payment and the only reason we currently don’t have a large deposit is that we are young.
I often make the case that we are the kind of people banks should be competing to lend to. I want to borrow money from them and they can be pretty certain they shall see their money again. Unfortunately, this government’s boom-to-bust policies on housing and lending means I now find myself in limbo. I must wait to save up a deposit, all the while burning money renting that I could be using paying down a mortgage. By my calculations, our initial mortgage repayments will not be very much different to our current rent. All that is preventing me buying a home is someone prepared to lend me money that they are certain to get back.
April 8, 2010
You said: "My partner and I earn reasonable money and the houses we are looking at are in a range of 3 – 3.5 times our combined gross salary"
If you both earn 25k – you're looking at a house priced 150k to 175k – which won't buy you much in Wokingham. A modest flat in fact or maybe an ex council house on the (words left out) Norreys estate.
It's become the accepted way of things lately for both parents to work full time. Do you plan a family and envisage this sort of life. I've been lucky enough to avoid it but have known plenty of people who are out of bed at 6.00, kids dropped at nursery by 7.00am and picked up again by one or other harassed parent at 6.00pm. Then it's home to cooking, cleaning, trying to find time for the kids etc etc.
I have to tell you, it's not much of a life. And if you think, as I do, that children of less than school age should be brought up in their homes by one of their parents, then you're mortgage would be 7 times income.
Heaven help you if interest rates go up, even modestly.
April 7, 2010
Mr Redwood,
"We need to work towards a better relationship between average income and home prices, without a violent shake out which will damage existing owners too much and will put off or prevent first time buyers from starting out on ownership."
Why would a violent shake out deter or prevent first time buyers ? The exact opposite surely ?
You seem to be at odds with yourself. Firstly you tell us that house prices are out of reach and that this is a problem (I agree.) Then you tell us that there is a risk of a 'violent shake out of prices' if we're not careful. I'm sorry ?
What you seem to be saying is that house prices are being artificially inflated and that you support that inflation for the good of existing homeowners. (Not my good as a home owner I can assure you of that.)
The solution to the problem of high house prices is within your grasp without laying a brick – you've said as much yourself. But you would choose to keep house prices inflated at bubble proportions.
What I'm concerned about is where the next generation is going to come from. Because, from what I see, the only people breeding in significant numbers are lawless benefit chavs. The rest are putting off parenthood to save for house deposits.
I'd gladly sacrifice ALL of my equity to reverse the damage that high house prices has caused.
April 8, 2010
Good on you, well said.
April 8, 2010
Excellent post. Most homeowners are sat on colossal amounts of unearned equity, but the politicians don't want them to lose any of it – even though it would restore the balance to economy and society.
Most homeowners with kids would probably welcome the fact that their kids could afford to move out and buy their own home and start their own family.
April 9, 2010
Us too. We waited for years, watching teenage mums diligently producing the next generation of tax consumers. Now we've stopped at one, partly due to financial constraints.
Producing more tax consumers than tax payers now will make impending demographic crunch even worse:
http://www.statistics.gov.uk/cci/nugget.asp?ID=6
When the 40-50's reach retirement and require constant NHS maintenance who will have to pay for it?
1) 4/5th generation benefit children?
2) Children of migrants, long returned home to an improved Eastern Europe?
3) Or the children being born (or not born to tax payers) today
The history books will not be kind about the 00's.
April 8, 2010
John Redwood is right to say a period of no house price rises is desirable.But how to do it?
Britain had a period of flat house prices in the Fifties and early Sixties but this was achieved by a tight credit policy,Schedule A taxation and Building societies with very strict lending limits e.g 3 X one income only.I am a land taxer but there may be other methods of taxation which can work the old pre-1963 (abolition of Schedule A) trick.
Mr Redwood must have the courage of his convictions and say how he'd restrain further House Price Inflation.Market forces are n't going to do it for him.And its no use restricting credit by interest rate rises in the worst financial jam since whenever.Leaves LVT or a straight percentage tax of capital values.
April 8, 2010
Market forces will do it for him. Market forces, without being distorted by the government printing money and buying its own debt, and allowing banks to take 'troubled' assets off their balance sheets, would have already seen a fall in price of 30% or more.
Stop interfering and let the market do its work. House prices need to drop 50% for the long term health of the economy.
All the money pouring into bankers' pockets at the moment by way of interest on massive mortgages is doing no-one, apart from the bankers, any good at all.
April 9, 2010
In total agreement with the second half of the above.But have too much loyalty to the old-fashioned mixed economy to have any faith in 100% market forces .
The whole economic mess is pretty much down to the private sector banks and "developers" (Lehmans' bet the business on a a speculative property development outside Bakersfield at the top of the market).
Bank lending (really creating credit) to fuel the people's insatiable appetite for houses and the political parties' pandering to these their worst /economically dysfunctional instincts is market forces at work I'm afraid. It is not a product of public sector action,which as usual has to ameliorate the resulting mess.
There was a ferocious tax on houses throughout the 50's early 60's :Schedule A which reclaimed house price rises out of Income Tax!
Simple pragmatism indicates that a tax solution is worth looking at again ( but something more sophisticated this time,though we had a Land Value Tax Act in 1931.Guess which party (in a coalition !) scuppered that.)
April 8, 2010
Another set of figures out today showing big rises in house prices, we are heading for the same problems all over again with inappropriately low interest rates, reckless quantitative easing, a return to higher loan to value ratios and tax breaks for the property market. Its time to get a grip of this property disease which is ruining society.
For every one of Labours boasts about tax credits for this that and the other, miniumum wage etc. they've been more than wiped out by the cost of housing. I cannot believe the opposition don't point out the obvious when Labour make these boasts.
The other one is the line about low inflation and low interest rates, they forget to mention that people have borrowed far more heavily this time around. Low rates and sky high house prices is a recipe for disaster.
April 8, 2010
John, I'm a bit confused by this measure, perhaps you can explain?:
"3. Deficit reduction and monetary policies designed to stop further falls in the pound"
We all know that to prevent a weak pound we need higher interest rates, but the Conservatives have said we need to get on top of the national debt to prevent interest rates from rising – even though rates are a pathetic 0.5%. Also the Tories have said they want an economy based on savings and not debt. So they don't want rates to rise but want to encourage savings. What's it to be, ultra low interest rates or more normal interest rates of say 5%?
I emailed David and George 5 months ago pointing out this contradiction and asking for an explanation as it will affect my voting decision. I didn't get a response from either which doesn't exactly fill me with confidence.
Unless we get firm details it's just all wishy washy waffle. I don't think the Tories can offer anything to todays prices out buyers. I think the policiticians are expecting the 'lost' generation of younger people to pay for this mess just so the older generation can hoarde their equity.
As for stamp duty, any money saved will just get added to the asking price such is the money sucking nature of the housing market in the UK, so it will make not a jot of difference.
April 8, 2010
If the market was just deregulated with the the whole housing market requiring no planning permission or building standards for any domestic building, the problem would be solved. We could stop all social housing and sell all the council houses and land to the highest bidder for a building frenzy, a housing big bang. More deregulation of the banking system would provide the money Eastern Europe would provide the cheap labour, and self regulation of building standards and site safety would let the house builders in collusion with banks, decide what would be for the best. All letting the rigged market rip and putting a dodgey roof over everyone's head. Let the fake market sort it out. It goes without saying no taxes shall apply to any housing related building and purchasing transactions. If you don't like it just move house, get another job or move abroad.
Simple innit? Let everyone do what they like and don't tax it.
Labour are promising free chips, petrol and good weather too. A blatant theft of the Tory sunshine policy.
April 8, 2010
The restrictions on availability of land with planning permission don't help the situation.
But also we seem to be building a lot of semi and detached houses, but not many new terraces and flats. With a bit of imagination, and design flair, garages could be incorporated, and they could still look smart. With a few common standards for things like window size, there could be further economies of scale.
April 9, 2010
All I've noticed being built over the last few years is blocks of flats – like the ones on the Finchampstead road past Gowrings. Last house on the left before the fields on the left was knocked down and replaced with a block (of about 12) flats. They were £395k!
Likewise Wellington Mansions(!) near East Berks golf course. Same thing – one house knocked down and big blocks of flats put up. Truly daft prices – 395k upwards.
Cities like Manchester, Birmingham and Liverpool have had massive flat building projects on the go, bought by Buy To Let investors in the South leveraging the equity in their own homes to start building 'portfolios'. They had the idea they had the 'right' to 'own' 50 flats that proles could rent off them and pay their mortgages off for them.
April 11, 2010
I think flats/appartments are a nightmare. Slough has seen every possible school field, old buildings etc gone forever with horrendous massive blocks of modern appartments. All of which are still expensive to buy but draw more and more people to the area, and hey more will have to be built. Terrible!
May 7, 2010
Government departments out of the SE, a TAX free zone in Norfolk or Wales would get populations moving.