Is investment in housing a bad thing?

 

It is fashionable now for people with money to spend  to pull  down their homes and build new larger ones on the same plots. That counts as investment in the national accounts. Good luck to most of  them, I say. If that is how they wish to spend their money and enjoy the product of their labours they should be free to do so unless their aims violate planning laws or  upset the neighbours because the new structure is unreasonable. In London it is common for people to tear a house down from behind the terraced front wall, and build as big a new home as the planners will allow.

But is this an investment? Some will say we spend too much on our homes in the UK. Some argue that this type of investment is unproductive. After all, at the end of the rebuilding the same family lives in the same place. In accounting  terms, however, something real has occurred. A less valuable home has been replaced by a more valuable one. Lots of people have earned money out of the process of construction and demolition. The country is a bit richer as a result. The government has collected more tax revenue on the project. The bigger better home is there for future use, and may be used later by a larger family who need the extra space when they buy it off the owner who paid for its construction.

It is difficult to see this is less productive than the state’s investment in a new school building on the site of an existing school. The same considerations apply. The users would like something more modern, with better facilities and maybe more space. The same people may receive the same education after the rebuild as before.  Lots of jobs are created by the process of construction. The state ends up with a building with greater ascribed value, though selling it on might be as difficult as it would be unlikely.

Some commentators and bloggers say the UK invests too much in housing, and should go over to the German  model of many more of us renting.  This could only reduce the amount of investment we make as a country in housing if at the same time people accepted they would live in older, or  cheaper, or  meaner homes. We discussed the fallacy yesterday that moving to renting would prevent us “investing too much” in housing.  Shifting to rent merely changes the ownership, but does not reduce the amount invested. As some of you wrote, what people want in the UK is cheaper housing either to buy or to rent. High prices stem from   past monetary policy, and from  the balance of supply and demand for new homes.

Switching to more rented homes  would  remove much of the impulse of people today to undertake lots of work on their own homes for  no pay, as they seek improvement to their lives and to their property values through DIY. How is that progress?

Buying a home is often the largest financial decision an individual makes. In a free society being able to choose your home and improve it as your resources permit is an important part of the lifestyle on offer. People’s passion for their homes is visible in the media’s enthusiasm for home improvement programmes. It generates big industries in supplying the new kitchens, bathrooms, the tiles and paint, the patios and extensions which proud homeowners want. One of the most obvious signs of London’s current buoyancy and economic success is the endless parked skips outside houses, as the continuous and relentless drive for improvement is undertaken.

There are many cheaper houses and flats around the country. The dear homes are in the employment, business and city high spots, especially in London.  The government is going to have to live with some more upward movement in London prices as it wants the economic recovery to fan out to parts of the country with more depressed housing markets and with much cheaper property prices. London prices getting dearer relative to everywhere else is part of the process of adjustment which should encourage more people to take advantage of the cheaper prices elsewhere, setting up businesses, creating jobs and finding jobs outside the capital.

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99 Comments

  1. nina Andreeva
    Posted August 23, 2013 at 6:23 am | Permalink

    Perhaps Dave should consider doing a working holiday in Malaysia instead? The reason being that most of the activity going on in London at the moment, is due to a load of foreign hot cash coming into the capital. I mention Malaysia because as we speak the real estate touts are hard at work there promoting BTL and the super rich are not just their targets either. Malaysia has one of the highest levels capital flight so ordinary joes are getting sucked in too. So while he is there Dave needs to go out boosting the provincial BTL game as well. Personally I would not buy one around here as only after a few years some of the flats already show signs of flaking paintwork so they were obviously constructed to the highest levels of quality

    • Roy Grainger
      Posted August 23, 2013 at 9:04 am | Permalink

      Correct. And as I have pointed out befeore the reason foreign buyers are attracted to the London property market is that UK levies no capital gains tax on them at all when they sell their properties, unlike domestic buyers who pay tax on second and subsequent houses. If you are in a low-tax country, or a country where tax can be easily avoided, it is a no-brainer of an investment.

  2. David Hope
    Posted August 23, 2013 at 6:24 am | Permalink

    People improving their homes is a good thing and as reasonable investment as public buildings as you say.

    But I think you should give more prominence to the driving factors that you alluded to in one sentence there. i.e. immigration and population increase (couple to more people wanting to live alone), less new housing than ever, easy monetary policy.

    If people buy a home because they want a home and can afford it then it is a fine investment and you can’t argue with it. If people want to improve their home then good luck to them.

    If people buy a home they can’t afford in the hope of an astronomic increase in value that is an issue. If all income is on rent or the mortgage that is a problem. If “investors” are buying up on the housing in the hope that government policy will result in a doubling of value then that is a problem (especially when there is no intention to even rent it)

    Reply That is true of any investment – some people borrow too much, some buy investments after they have gone up too much, some commit their money to an investment which does not pay back. These are not problems unique to housing. Indeed, it is difficult to lose all your money by buying a house, whereas it is easy to lose all your money by buying into a business. You would need to buy a “cheap” house by a cliff, and see it all fall into the sea one night, taking away your land as well as your building to lose it all.

    • David Hope
      Posted August 23, 2013 at 9:13 am | Permalink

      Really what I am getting at is that in a functioning free market where supply increases to meet demand homes wouldn’t go up much in value (beyond any improvements) and so a lot of the investment into homes wouldn’t happen. It’d just be people buying homes who wanted to live in them or rent them. They wouldn’t be treated as an asset that can grow hugely in value

      • lifelogic
        Posted August 23, 2013 at 2:49 pm | Permalink

        Look not every one can live in a mansion in Chelsea with a view of the river price is just the rationing mechanism. House and land prices reflect supply and demand. If you want cheaper house prices increase supply get the governments out of the way and/or decrease the population increase.

        Meanwhile houses in some other areas are very cheap indeed. You pays your money and takes your choice. If ten rich people want on house in Chelsea it will go up in price just as a Picasso would.

        • uanime5
          Posted August 23, 2013 at 4:12 pm | Permalink

          How exactly are you going to lower house prices by increasing supply when the wealthy are buying all the new houses, then renting them out at a higher price?

          • Edward2
            Posted August 23, 2013 at 5:26 pm | Permalink

            Have you got proof Uni, that all new houses are being bought by wealthy people and being offered only for rental?
            Or is this one of your left wing fantasies?

        • Bazman
          Posted August 23, 2013 at 6:01 pm | Permalink

          The price of the Picaso does not have a knock on effect of pricing people out of their homes as this does as often dodgy money is hoarded in property from dubious countries mega wealthy. A house they often do not even posses or pay any form of tax on making no contribution to the economy at a local or national level. Like holidays homes do but worse. You believe and propagate the views of the mega wealthy like some sort of transmitter fawning and hanging on their every word as truth. Understand that?

    • Denis Cooper
      Posted August 23, 2013 at 9:17 am | Permalink

      Reply to reply – But what is unique to housing is that everyone must always have it, unless they are prepared to live on the streets, and so while a person may decide that shares are over-valued and refrain from investing in them they cannot avoid putting their money into housing. They may decide that for the present they will rent rather than buy, but through their rent they are still funding the return on a previous investment in housing made by somebody else.

    • Mark
      Posted August 24, 2013 at 2:40 pm | Permalink

      It’s easy to lose all your money buying a house. Pay a bubble price mortgaged to the hilt, and watch your descent in to negative equity, repossession and bankrupty.

  3. lifelogic
    Posted August 23, 2013 at 6:39 am | Permalink

    Clearly investment in housing is not a bad thing, though one might think building a new house on a new site is rather better than destroying one first. Again there is a daft fiscal incentive through VAT to do the former rather than extend a house and daft building regulation also do not help.

    Many people now work from home more anyway and clearly need more space to do this.

    • lifelogic
      Posted August 23, 2013 at 8:55 am | Permalink

      Which is better a few acres of land with one huge wind turbine (generating next to nothing and needing huge subsidy) or full of sugar beet (also needing subsidy), or pig huts or 500 houses for 2000 people that they will pay for themselves? Why are pig huts more acceptable to planning than people huts?

      Import the sugar and pork abolish the subsidies, get fracking and build the houses that are badly needed.

      • uanime5
        Posted August 23, 2013 at 4:20 pm | Permalink

        You’re making the assumption that the land is equally suitable for wind turbines, sugar beat, pig houses, and people houses. As this is very rarely the case it’s usually not possible to replace pig farm, wind farms, and sugar farms with housing or vice versa.

        • Edward2
          Posted August 23, 2013 at 5:28 pm | Permalink

          Uni,
          Why on earth not?
          Land used for various farming uses can easily be used for housing or for those expensive windmills.

      • bigneil
        Posted August 25, 2013 at 5:11 pm | Permalink

        and in the future there will be scenes all over the country where the “under financial pressure” breadwinner turns to his partner and says ” have you seen the size of this fracking gas bill ? – -apologies but I couldn’t resist it.

  4. margaret brandreth-j
    Posted August 23, 2013 at 6:43 am | Permalink

    There is something deeper in the impulse to buy and own and improve as birds in the wild demonstrate in their nest building. “One impulse from a vernal wood can teach us more of man , of moral evil and of good than all the sages can.” Looking at the thousands of orphans fleeing from Syria and setting up in the Baath region of Northern Iraq , it becomes poignantly clear how important home is. The nomadic type life these children have been forced to adopt are reminders of that grounding we all need and the survival instinct which drives all to anchor themselves as countries, groups and individuals to a certain place on terra firma.
    Since survival and the superficial , but pivotal and superimposed method of bata: money is correlated to these instincts , it is hardly surprising that the importance it accrues takes us through the whole of life. Homes are fundamental to security and depict a place in the world.

  5. Mike Wilson
    Posted August 23, 2013 at 6:44 am | Permalink

    I have the feeling the whole proposition is false. This phrase, in particular, sums it up … ‘The country is a bit richer as a result’

    Someone buys a house (or, effectively, a bit of land), knocks it down and builds a larger house. And the country is, somehow, ‘richer’. Not sure I understand that concept. If you measure a country’s wealth as the sum of everything in it that is saleable, then I guess the labour used to build the house may be said to have made the country ‘richer’. Not sure what the point of that concept is though?

    We could all knock our houses down and big builder houses … but have no food to eat.

    Anyway, the bigger picture. Under the last government – and continuing under this one – there has been a big increase in buy to let. 1 in 5 properties are now owned by buy to let landlords. The logical extension of this – given that the next generation are priced out (and that regardless of where you are in the country, house prices are historically high compared to local wages (at low interest rates too)) – is that more and more of the housing stock is going to be owned by landlords.

    So a massive amount of ‘work’ or ‘investment’ is going to vapourise. To take just one example … how many BTL landlords will be in the garden centres on Sundays choosing plants for their garden. Buying decking or paving slabs etc. etc. How many extensions won’t get built? How many kitchens will not be refurbished.

    From the point of view of demand, jobs, money velocity etc. I can’t see anything wrong with people improving their houses. It is a big part of our economy. But if the present government keeps supporting house prices as they are – more and more of the housing stock will become rented and the economy as a whole will suffer.

    Reply In your first part you ignore the way the work on the new house creates income and wealth for the builders/suppliers to the project.

    • Mike Wilson
      Posted August 23, 2013 at 9:28 am | Permalink

      Reply to reply: I think I covered income and wealth for builders and suppliers in … ‘From the point of view of demand, jobs, money velocity etc. I can’t see anything wrong with people improving their houses.’

      I’ve just been out on my bike for a bit of exercise and noted 3 houses on the next estate with builders’ vans outside. Indeed, half the people I know seem to be involved in the home improvement business one way or another.

    • Leslie Singleton
      Posted August 23, 2013 at 10:44 am | Permalink

      Comment on Reply–I rarely understand anything I read with an Economics bent but every debit has its credit and all that so why isn’t the cash going in to the pockets of the builders and suppliers not exactly matched by the cash (and it often is cash) paid by the house owner?

      Reply To have a flourishing economy the money needs to circulate. The housebuyer spends with the builder who then can spend in his turn.

      • Leslie Singleton
        Posted August 23, 2013 at 2:30 pm | Permalink

        Thanks for Reply–OK but doesn’t the quantity of money just stay the same whether it circulates or not?

        Reply You need to consider both the quantity of money and the velocity of its circulation – both affect output.

        • Leslie Singleton
          Posted August 23, 2013 at 3:13 pm | Permalink

          More thanks for further Reply–I know you are right because I had a letter to The Times published a long time ago in which I asked whether, if Viking (I think it was) discovered that Martians use (a fixed supply) of marbles for money, was inflation on Mars possible or not and could Economists please answer Yes or No? In those days addresses were published in The Times and I was swamped by letters (some saying nothing but literally just “Yes or No”) the main thrust of which was all about Velocity of Circulation but I still do not really understand. To my simple mind at any point in time the Quantity is constant so the wealth it represents must be constant too. I note that you have shifted to “output”.

          Reply If there is £1million in bank account or banknote money then the economy that backs could be anything between say £1m a year out put and £12m a year output, depending on how often the money was passed from person to person as transactions take place. Output and Income are of course different ways of describing the same economy, and should be the same when adjusted for overseas trade.

          • Leslie Singleton
            Posted August 23, 2013 at 5:25 pm | Permalink

            Thanks again–As I say you have jumped to “Output” and I guess I cannot get out of my head some book I remember that had a unit of money, say a £, in the Economy representing say (only) a bag of sugar meaning a bag of sugar was (necessarily?) priced at £1 per bag. I cannot follow the jump to Output. Nuclear Physics (at you know where and Harwell) was by comparison easy to understand.

  6. margaret brandreth-j
    Posted August 23, 2013 at 7:08 am | Permalink

    I must correct that, not orphans but children.

  7. Colin Donald
    Posted August 23, 2013 at 7:24 am | Permalink

    People ‘tear houses down’, but what replaces it often looks less attractive and less in keeping with other houses in the street. Sometimes people seem to be wantonly tearing down our history and the very features that make our old towns and cities beautiful.
    The real problem is that there is no VAT on complete new build but, if you just extend or restore, then VAT IS charged.
    Government policy is therefore an incentive to destroy rather than to restore and preserve.
    ColinD.

    • Leslie Singleton
      Posted August 23, 2013 at 10:57 am | Permalink

      Colin–Couldn’t agree more. One tries to make allowances for “De gustibus…” but personally I reckon any new build these days – plastics, concrete and glass – is invariably just plain awful. Modern architecture – no true arches, or headers and string courses in brickwork, ghastly mastic joints, minimal use of natural materials such as slate etc – hardly helps. Just been watching Portillo’s (railway) journeys. Am I alone in finding the rebuilt stations and, last night, the new Parliament building in Wales just plain ugly?

  8. Nick
    Posted August 23, 2013 at 7:45 am | Permalink

    It’s needed because you have let in 5.1 million ‘legal’ migrants, plus another 1-2 million illegals.

    It’s the consequences of your policies or your failure.

    Reply Not my policies.

    • Iain Gill
      Posted August 23, 2013 at 9:11 am | Permalink

      Not your policies but you could take a stance closer to that held by most decent citizens and not that adopted by the political bubble of all the main parties.

    • ian wragg
      Posted August 23, 2013 at 5:47 pm | Permalink

      The policies of the party you support so be extension your policies.

  9. Denis Cooper
    Posted August 23, 2013 at 7:50 am | Permalink

    I’d agree that it makes little difference to the economy whether the money is invested in owner-occupied homes or rented homes.

    The more important question is whether too much money is being ploughed into bigger and/or better homes rather than into other assets which would have greater long-term productive value.

    And I think that the answer to that question must be “yes”, because in general we have moved beyond the stage when millions of people were crammed into slums and suffering bad health and having their lives shortened as a direct result of their poor and insanitary accommodation.

    Quite apart from the grief it caused high infant mortality was a great waste of resources, and so too was the premature death or disability of adults who could otherwise have had many productive years ahead of them.

    What we have now is the desire for accommodation which is not merely satisfactory or just very comfortable but increasingly luxurious, and while there is little wrong with that in itself there is the question of how much luxury we as a nation can afford.

    It seems that one of important features of the last housing boom was the huge sums of money borrowed from abroad, and now from fear of the alternative the government is attempting to artificially sustain over-inflated prices, and actually celebrating when they start to rise even further; but surely this indicates that our internal productive resources are insufficient to provide the higher standards of accommodation which are sought?

    Of course there is the problem that compared to investing in home improvements or in another bigger or better home it is not particularly easy for the average person to invest in productive assets.

    Buying existing shares in a company through the stock market does nothing to increase the capital available to the company; it is only when the company issues new shares that it raises additional money for investment, otherwise buying and selling shares merely effects changes in ownership of the existing shares without any change to the capital available to the company. This is a basic point which apparently eluded Gordon Brown when he devised his ridiculous taper for CGT on shares with the stated aim of increasing long-term investment by companies.

    Reply A successful consumer economy is based on people wanting things they do not need and enjoying them, or having more of things they do need than they need just to survive, from tv and sporting events to bigger homes and more clothes. Investment is just the means to facilitate better and more consumption.

    • Denis Cooper
      Posted August 23, 2013 at 9:34 am | Permalink

      JR, whatever the merits or demerits of an economy based on ever-increasing consumption, it cannot survive in the long term if much of the consumption has to be funded by:

      a) Borrowing huge sums of existing money from outside the country,

      and/or

      b) Creating huge sums of new money within the country.

      Eventually there come a time when a) is no longer possible, as indeed had already happened, and ultimately b), once described by somebody whose name I forget for the moment as being “the last resort of a desperate government”, will lead to severe debasement of the currency, a falling exchange rate against other currencies and hyperinflation.

    • alan jutson
      Posted August 23, 2013 at 9:58 am | Permalink

      reply-reply

      An interesting answer John.

      Yes you are right, a circle of money being spent, the more the transactions the better, as more people benefit.

      But

      With the government taking 20% out of circulation with each transaction it is not long before the Government HAS IT ALL.

      Given that the majority of us on this site think that Government is wasteful, gets poor value for money spent, and is inefficient, how much better would it be if it was still in circulation with the public who earned it.

      Yes I know some Government/taxpayers money gets recirculated via wages, benefits and pensions.
      But Governments have proved over the years they are poor managers of OUR money.
      Indeed, even all of our money is not enough, they borrow ever more.

    • Credible
      Posted August 23, 2013 at 11:47 am | Permalink

      Reply to Reply

      Can we increase consumption forever ? What is “better consumption” ?

      Reply Yes – all my lifetime consumption and incomes have been rising, with just a few interruptions

      • Credible
        Posted August 23, 2013 at 6:05 pm | Permalink

        If history has taught us anything, and with your qualifications you should know, what happens in a lifetime is no guarantee for the future. Stability typically only lasts a few generations at best. The planet’s resources are finite.

    • sm
      Posted August 25, 2013 at 1:50 pm | Permalink

      I think Steve Keen has a model which nails this. House prices, debt and the ponzi economy. Why don’t you check it out.

  10. Gary
    Posted August 23, 2013 at 7:57 am | Permalink

    No, investment in housing is not necessarily a bad thing. What is objectionable, especially for self professed proponents of the market, is when govt and their banking partners underwrite the housing market and distort the market and make every other investment in the market more riskier than investing in a house. The govt prevents the housing market from clearing and finding its correct level. History shows us that without govt support for housing, the stock markey is a better investment, an investment in real productive businesses.

    The central bank / govt housing bubble is a disaster waiting to happen. If it has not already happened.

    • Edward2
      Posted August 23, 2013 at 8:19 am | Permalink

      Gary
      If I apply for a loan to buy a house and they accept my application after many enquiries about my ability to pay, and I provide a deposit on that property, then I see no great problem.
      I have found my monthly costs are quite a bit less than if I were to rent.
      I could lose my job but I fancy my chances of finding another.
      I can cover the chance of injury or illness with a combination of insurance, savings and my employers sick pay scheme
      Ultimately if all else failed I could sell up.
      Yours is a doomsday scenario which even in the worst recessions did not really crash the housing market.
      And with record growth in population and no relaxation in planning rules demand will go on rising.
      We all need a roof over our head.

      • Mike Wilson
        Posted August 23, 2013 at 9:41 am | Permalink

        @Edward2 – Yes, we all need a roof over our head. What happens when we can’t afford one because the bankers have lent successive generations more and more money (to buy the SAME houses, let’s not forget) but wages have not, in a globalized economy, kept up?

        I agree with your general points though. At some point you have to take a chance. Most people plunge into house buying with a massive mortgage and a fantastic faith in the future (they won’t get ill, lose their job etc. etc.). Human optimism knows no bounds.

        In the last recession, the housing market did crash. I bought a house in 1991 for 100k that had sold for 157k in 1987. The previous owner LOST 57k. My brother threw the keys to his flat through the letter box of the building society and disappeared off the radar for a number of years. When he resurfaced – the minute he appeared on the PAYE system again – he was pursued for the debt and has an attachment of earnings order still in force to this day. He will never be able to repay that debt.

        A lot of people had their homes repossessed last time. Is this a good thing? Obviously, for them, no. But for society as a whole? I am not so sure. Look where we are now. Young people are paying half their wages in rent or on mortgages. I can’t see that this benefits anyone except bankers and, in fact, sucks demand out of the economy.

        Think of the 12 billion in bankers bonuses. Wouldn’t it be better if that 12 billion stayed in the hands of millions of individuals to spend and create widespread demand, rather than a demand for a small number of multi million pound houses and yachts?

        • Edward2
          Posted August 23, 2013 at 2:11 pm | Permalink

          I share some of your concerns Mike, we have children and they will one day need help to buy their first homes from us, as properties are more expensive versus average incomes mow than “in our day”.
          But rents are not cheap either near where we live.

          The solution must be to build many more properties for sale and rent to satisfy the huge unsatisfied demand by the growing population in the UK, rather than trying to somehow regulate and restrict financial institutions ability to give mortgages to people.

          • Mark
            Posted August 24, 2013 at 3:23 pm | Permalink

            The solution is precisely to stop financial institutions from lending ridiculous sums that only go to propping up property prices. When I first bought mortgage lenders capped lending at £15,000 regardless of your income. Borrowing beyond that was at eye watering personal loan rates (and for a term of only 2-4 years). When I resold on moving with my job I just managed to get what I paid – but in an era of extremely high inflation so in real terms a substantial fall in price. The restrictions successfully lowered real house prices.

          • Edward2
            Posted August 25, 2013 at 4:56 pm | Permalink

            Mark
            Your solution would stop all but the very wealthy ever buying a home.
            Not much equality of opportunity there.
            I dont see rents being much cheaper than mortgage finance even rents set by housing associations and social housing.

          • Mark
            Posted August 25, 2013 at 9:49 pm | Permalink

            You have a rather strange logic if you think that lower real house prices are more unaffordable than higher ones. Capping mortgages and increasing mortgage rates takes the heat out of rising markets before they get out of hand. Such tactics can also lead to price falls – as happened in the 1990s. They make prices more affordable, not less.

            Ever increasing price to income ratios make prices the preserve of the rich. Providing subsidised loans to try to preserve prices is a classic Ponzi scheme that will damage the finances of those who fall for its short term charms.

            Reply In a market where borrowing levels are crucial to many people’s ability to buy, you can have a period during a downturn when house prices fall but they are less affordable, because even less mortgage finance is available. I remember buying my home around the bottom of the post ERM house price crash. It was very difficult because the mortgage surveyor valued the house below the price I thought was fair – a price the house was never going to be sold at, and one it has never reached since.

          • Mark
            Posted August 26, 2013 at 1:29 pm | Permalink

            Reply to reply:

            I remember attending a dinner at which Sir Alan Walters explained the high real interest rate and mortgage restriction policy that applied at the time: he was a government adviser, as I am sure you recall. I echo his logic.

            Any time you have a bubble prices correct. The volume of housing transaction inevitably declines in a falling market, and lenders are inevitably cautious until after the market has turned. The impact of falling prices is minimised by allowing them to fall as rapidly as possible consistent with not creating a banking meltdown. It is further minimised by preventing a bubble from occurring in the first place. Prolonging the agony, by re-inflating and extending the bubble only makes things worse in the long run, as shown by Prof Morgan Kelly’s research on nearly 40 OECD house price booms and busts: his 2007 paper containing a remarkably accurate forecast for Ireland is here:

            http://www.esri.ie/UserFiles/publications/20070628164646/QEC2007Sum_SA_Kelly.pdf

        • StevenL
          Posted August 24, 2013 at 10:13 am | Permalink

          and has an attachment of earnings order still in force to this day. He will never be able to repay that debt

          He should have invested a couple of hundred quid declaring bankrupt then shouldn’t he?

    • Nina Andreeva
      Posted August 23, 2013 at 8:29 am | Permalink

      Sit back and watch the disaster unfold! Prior to 2007/8 I loved listening to people say how they were getting mortgaged up to the eyeballs on an “interest only” basis and that they would clear the debt by downsizing. I hope they have thought about Margaret’s comments on how expensive downsizing is before doing so.

      Anybody who is in the trade knows that there is a lot of forbearance going on at the banks at the moment for anybody who gets into trouble e.g. they will extend the term of the loan, offer you a int only deal, which is also now making a come back for new buyers.So its quite hard for anybody to face a repo in an early ’90s style. However Carney cannot smother a rise in interest rates forever and when it happens, then we will see how many people love to have a place of (millstone) of their own.

      • alan jutson
        Posted August 23, 2013 at 10:15 am | Permalink

        Nina

        Seems like its only you, and myself can forsee a BTL bubble bursting sometime the future, especially when interest rates rise.

        Do also remember the new cap on benefits, and the scaling back of housing benefit, may reduce rent demand at present prices.

        The bust may come sooner than many think !

        But what is the Government doing, its trying to prolong the day of reckoning with its present policies.
        Thus the crash may be bigger than it needs when it comes and all unwinds.

        Portfolio’s built on sand springs to mind.

      • Edward2
        Posted August 23, 2013 at 10:32 am | Permalink

        Nina, don’t forget that any interest rate rises will affect renters too.
        Landlords impacted by their higher monthly costs will increase your rents.
        Also many of us home buyers have fixed rate loans on our homes which may be a little higher than the best current rates on offer, but enable us to look forward many years with a known budget and gives us time to prepare for the increased outgoings when the fixed rate deal expires.

        • StevenL
          Posted August 24, 2013 at 10:35 am | Permalink

          It’s not that easy to just increase people’s rents. I’ve lived in shared housing where the landlord tries to increase/introduce new costs. You get draft up a letter saying ‘no’, complaining about niggle with the house, threatening to move out and then get everyone to sign it. Invariably they back down rather that lose 3 or 4 good tenants at once.

          • Edward2
            Posted August 24, 2013 at 11:24 am | Permalink

            StevenL,
            You are speaking about one landlord trying to put up rents.
            It would be different if all landlords borrowing rates suddenly went up, because all landlords would then try to recover their extra costs and the whole market rate would rise.
            Would you still be able to find cheaper accommodation nearby?

          • StevenL
            Posted August 24, 2013 at 6:41 pm | Permalink

            @Edward2

            You seem to be falling into the trap of thinking all landlords are heavily leveraged with BTL mortgages. They are not, only a small proportion of them are.

            The price of renting might be more related to the actual supply of and demand for rented properties than leveraged landlords costs.

          • Edward2
            Posted August 25, 2013 at 5:25 pm | Permalink

            Well StevenL, I’m reading many on here claiming doomsday is approaching for all Landlords because they are all heavily leveraged and will not survive any increases in bases rates nor the effects of housing benefit rule changes
            Yet you say that market rents will not be able to rise due to competition for tenants and the many landlords who have no borrowings
            Both arguments cannot be correct.

  11. They Work For Us
    Posted August 23, 2013 at 8:08 am | Permalink

    I was pleased to hear that the Treasury is vehemently against allowing local authorities being allowed to BORROW so that they can build and “invest” in more housing stock. A local authority is too big to fail and the taxpayer will end up picking up the results of their profligacy.

  12. Richard1
    Posted August 23, 2013 at 8:09 am | Permalink

    Any investment where someone is spending their own money on something they want, providing economic opportunity for those serving and supplying them, is positive. This is except to the extent, as you say, that they might create negative effects for someone else. That’s why we have planning laws. (The only people who deserve any sympathy in the Sussex fracking pantomime are the people whose own homes might be affected).

    ‘Investment’ by the state however is much more doubtful. It might turn out to be a good thing, but there is a high chance of it being wasted, because it is directed by politicians and bureaucrats assessing what they think people might or should want, not what they actually do want. As more information comes out on the costs and benefits of HS2 we see how governments – even Conservative ministers such as Mr Osborne – can be tempted to back absurd and economically destructive vanity projects for political ends.

  13. Acorn
    Posted August 23, 2013 at 8:26 am | Permalink

    I have been looking for an answer to Mike’s question of yesterday. How can all the houses be worth trillions, when there will never be enough credit around to buy even a fraction of them. That reminded me of the “Fallacy of Composition” and the “Paradox of Thrift”. Explanation for Bank Holiday reading:- http://neweconomicperspectives.org/2009/08/teaching-fallacy-of-composition-federal.html . The Paradox of Thrift applies to the DIY brigade in economic terms. One man’s DIY, is another man’s empty wage packet.

    If you want to see how much (someone has) to pay for (a luxury flat in a central district of London ed) London flat, see http://www.globalpropertyguide.com/Europe/United-Kingdom/Rental-Yields . Then click on the left menu “Price/Rent Ratio”. GPG reports data only on prime capital cities property not little people’s houses.

    • Mike Wilson
      Posted August 23, 2013 at 9:33 am | Permalink

      Hi Acorn – I am happy to admit that really serious economics goes over my head. I just about understand fractional reserve banking but am never quite clear on the idea that if everyone paid their loans back to the banks then there would be no money! And that ‘all money is issued as debt!’ I must read more as it does interest me. Thanks for your links. Apart from planning a kitchen refit (doing my bit to help the economy eh?) this weekend, I have nothing much on so will have a look at the links you provided.

    • margaret brandreth-j
      Posted August 23, 2013 at 1:18 pm | Permalink

      These macroeconomic stances are obvious and is why I in particular apply them to the NHS , the UK’s biggest employer. No single method of selling , buying, saving, investment or financing is workable on its own as the continuity of flow which John mentions will stand still or worse implode. It is the variation in dynamics which energise flow is certain directions. The individual looking at his own personal plight will simultaneously look at his place in relation to society , thus incorporating the whole mutable picture. No one with any intelligence would suggest the same course of events and structure for all, or else we would all domino off that edge of the cliff into the sea.

    • Acorn
      Posted August 23, 2013 at 4:04 pm | Permalink

      There is big government and big government spending, the two are very different and tend to get confused. There are two types of money, central bank money and commercial bank money. The first is convertible into nothing but itself, the second is convertible into the first. There are two types of assets, financial and non-financial (cars, machine tools, real stuff etc). There are two types (basically) of macroeconomists, those that think taxes fund government expenditure and those who know it doesn’t.

      Thanks

  14. Iain Gill
    Posted August 23, 2013 at 8:43 am | Permalink

    John,

    Certainly in my case you are not discussing this with some left wing nutter, or someone who is hell bent on disagreement with you. I am, and I think many people here are, generally supportive and pro John Redwood. But friendly feedback from those on your side should be listened to. Your response here sounds like desperation.

    I too am pro home ownership, when it makes sense for the occupiers.

    I don’t like:
    1 – one part of society cross subsiding another, except in the case of the genuinely needy. So I don’t like savers subsidising mortgage holders. I don’t like folk in private rental accommodation subsiding folk with mortgages and in so called social housing (unless folk in either are genuinely needy). I don’t like new private housing having to fund about 30% new social housing in order to get the planning permission. Stop all the complicated cross subsidies and leave people to make their own decisions.
    2 – the market being rigged by the government. The government should stop manipulating house prices and leave the market alone as much as possible.
    3 – blind advice to young folk to always buy. For one there will be corrections and they need to have open eyes to that. For two many will do better being able to move quickly to take advantage of job offers.
    4 – anything that reduces the mobility of the workforce. We need to free up the ability of people to move for work much more in all types of housing.
    5 – poor quality housing, or management of housing stock. I think many small private landlords in this country provide a very poor service to their tenants and the German style of big private landlords would improve the professionalism of the service provided. I think many councils and housing associations provide rubbish service to their tenants, and I would break up these state monopolies’s. Planning system, which encourages small rooms, poor parking provision, and so on, needs fixing.
    6 decent folk getting a raw deal, as decent tenants in the private sector do with only 6-month contracts available mostly.

    I want decisions and freedom to be with individual citizens and not with government forcing the markets. I want the standard of housing provision to rise.

    I really don’t mind what proportions of the housing market are rental versus mortgaged etc, I just want the individual people to be free to make their own choices free from state market manipulation.

    Good luck etc

    Reply I agree with a lot of what you say. There is no legal constraint on larger companies entering the rented market, and some signs they might do so now. Nor is there any legal ban on longer dated tenancies. Like you I do not like too much government intervention in markets. The current interventions on FFL and Help to Buy have been required owing to previous wrong interventions with the commercial banks leading to the banking mess of 2008-9.

    • Iain Gill
      Posted August 23, 2013 at 1:19 pm | Permalink

      Thanks.

      But there are a lot more state interventions than that going on. Interest rates for one. School catchment areas another. Planning approach and where builders are being allowed to build. Tax perks for buy to let landlords. The benefits system disregarding wealth when it is held in your house but not if you choose to hold it in the bank is getting more extreme forcing more people to buy property to protect their wealth. Endless propping up of social housing estates in areas with no jobs markets which should have been allowed to fail allowing the people to move. The whole way decisions on who gets a social housing allocation and where they can live is a massive manipulation and not done on the priorities most of the population support. New house buyers being forced to fund new social housing, when often the folk in the social housing are better off than the house buyer. And so on. Massive state subsidy to social housing tenants when many are very wealthy, indeed I know some with multiple new cars sending their kids to private school with live in nannys – why are we subsidising their rent? and so on

      • Bazman
        Posted August 23, 2013 at 6:24 pm | Permalink

        So someone looses their job they loose their house even after a large number of years in that job which is often with a government funded company who they have now decided to pull the plug on new contracts? BAE systems in Barrow-in-Furness is a prime example of this. The workforce are to be forced dower south to compete with young East Europeans living five to a room/car, because they foolishly had children whilst living in social housing?

        • Iain Gill
          Posted August 25, 2013 at 6:57 pm | Permalink

          Well I work and rent in the private sector, if I have no work or get ill and run out of savings I will be on the streets within 6 months (as that’s the standard tenancy renewal term and landlords don’t extend to folk in that position), I don’t see anyone crying over that.

          As I have said I would remove all state subsidy to council and housing association houses, and instead pay more money to needy people needing housing help – the ill, the old, and the unemployed. On average this would balance out and at the beginning everyone would be in the same position, if not I would put in transition measures so they were and it only changed slightly through time. Except wealthy people in council or housing association houses who would get no help, and would be expected to pay unsubsidised price for rent, and this would be used to increase housing help for all genuinely needy people.

          In a location where one big local employer dominates and they shut then yes try and attract new businesses to the area. But if after a prolonged period no new employer emerges I expect a number of things to happen

          1 the price of rental and buying of local residential properties to drop (this goes on to make the area much more competitive and can ironically then attract new business who can use employees happy on less money as the housing is cheaper, and so on)
          2 people if they are getting any state help towards housing directly to start moving themselves to places where jobs are easier to find, because they would not be tied to council houses to keep their housing discount like now. The individual people are made free to choose the same as everyone spending their own money can.
          3 sad as it is at the end of the day I don’t support keeping places going with no real employment prospects like we are doing at the moment in several places
          4 by stopping subsidy to council houses it will make it much easier for better private landlords to enter the market and offer much better deal than tenants usually get from councils.

          As for Barrow, I used to go out with a lass from Barrow so know it well. I think its likely the UK will want nuclear subs into the future and will want them built here, so its likely to be kept going for that reason. It’s also a leader in toilet roll production I seem to remember? I wish the place well, and I would be as emotionally hurt as anyone if it took a serious downturn. But we need to be ruthless it doesn’t matter where it is we should not be paying massive amounts to keep state housing going in areas which no loner have a jobs market.

          The money the state pays towards housing should be going to those place where people want to live, where the jobs are nowadays, and not to prop up areas where all employers have moved away. The best way is to give freedom to people to take their subsidy wherever they want to live.

          And yes I expect several large council estates to quickly become uneconomical with this regime in place, sorry but they need to shut. The country is not a charity to help brick buildings in places with no jobs prospects! But I expect the money given to people to move to support new building elsewhere where it would be more use.

          This regime would also put a stop to queues for housing for needy people as they would have the cash to spend in the market. It also drops the number of state employers needed to administer things, so saving money to go towards increasing housing money paid to needy people.

          • Bazman
            Posted August 27, 2013 at 5:42 am | Permalink

            The bill for housing benefits is set to rise a couple of billion or more in the next year so you will get your wishes without any abolition of housing benefit. The house prices doubled in mid 1990’s without any rise in employment giving no benefits to the residents and causing further hardships rents to rise despite the lack of work. This money going to landlords and having nothing to do with council houses or housing association which are holding the rents down and hence the housing benefits that you want extending. Everyone is to move south or where there is work without enough accommodation? What you really mean is the subsidy of housing to all. What would happen then as millions are forced onto the street with no accommodation even B&B? They should just take it? I bet they don’t and rightly so.

          • Iain Gill
            Posted August 27, 2013 at 7:48 am | Permalink

            Bazman,

            I agree with much of what you say.

            The way the government(s) have manipulated house prices upwards is a disgrace, and something I do not support. It is not the market it is very much government manipulation.

            The tax perks to landlords in the buy-to-let sector are a disgrace.

            The imbalance between the North and South is a disgrace and also a symptom of poor government policy.

            But armys of state employees corruptly rationing subsidised housing to the few is not the way ahead. And the state funding large numbers of houses in areas which can no longer be financially viable is not the way ahead.

            Cheers

  15. David Williams
    Posted August 23, 2013 at 9:23 am | Permalink

    Improving the existing housing stock is a good thing. Better than building on green fields.

    Why can’t we have a reduced rate of VAT for home improvements like France (5%)?

  16. Atlas
    Posted August 23, 2013 at 9:40 am | Permalink

    John there seems to be a wiff of the ‘broken window’ argument in economics here.

    So,
    cost of purchase + cost of demolition + cost of building + cost of living elsewhere whilst all this is done <= ( is less than or equals) new value

    for the the proposition of net increased wealth to be true.

    Is this really so? or, as others have indicated, is it a quirk of VAT rules and so not a net "Real" gain to the country at all?

  17. Posted August 23, 2013 at 9:42 am | Permalink

    Surely an investment is something from which you hope to make an overall profit and thus housing is generally an investment..
    However, somewhat off the point, it was revealed yesterday that Labour had made a overall loss (and hence paid no tax) on their property investments due to very high administration costs. An expert said that they should have made 3 to 5%. On the basis that they were not fiddling their tax, surely this shows that if the Labour party can’t run their own property portfolio at a profit, what hope do we have if they run the country. The huge administrative costs seem typical of things run by most politicians/civil servants, which is why I am always sceptical of “investments” made by governments.

  18. Alan Wheatley
    Posted August 23, 2013 at 9:56 am | Permalink

    My parents told me that when in 1937 they got married they bought their own home, on a mortgage, their friends thought they were doing the wrong thing. At that time most rented. But they were ahead of the curve, and got the benefit many years later when they retired and sold the house and moved to something cheaper.

    I particularly agree with your last sentence.

  19. Denis Cooper
    Posted August 23, 2013 at 10:01 am | Permalink

    JR, you may be interested in Howard Flight’s article today, inter alia about venture capital to support entrepreneurs:

    http://conservativehome.blogs.com/platform/2013/08/lord-flight.html

    To which my response ends:

    “There seems to be a gap here, no way of accumulating small investments from many people to provide the capital needed to start up new businesses; for the man on the Clapham omnibus it’s much easier to put his spare money into a building society to help fund new housing rather than new businesses.”

    Is that not the case, and is it not a problem which needs to be addressed?

  20. Credible
    Posted August 23, 2013 at 11:42 am | Permalink

    John,

    No offence, but you really don’t have a clue do you. Houses are already or are becoming unaffordable for ordinary people. Not just in economically strong hot spots. It will be even worse for the next generation.

    House prices have recently gone up most in poorer areas percentage wise (e.g. northeast), not London, because they start at a lower base and are still just about affordable (with extra help from the government’s socialist help to buy scheme). But they will soon be unaffordable too. At some point those that have bought will face higher interest rates. Those that don’t have won’t be able to get and those that have won’t be able to keep.

    Reply Of course I understand. When I bought my first home, the nearest to London I could afford was Didcot and the mortgage cost more than half my income, as I had to buy just after a major house price surge. House prices are currently high, and very high in the most successful places. There are, however, affordable houses – by definition, as if none were affordable all prices would fall. I want people to earn more and keep more of what they earn. I want more people to be able to afford a home of their own, and will support policies to do so. I did oppose the monetary bubble prior to 2008 which caused so much difficulty.

    • Rob
      Posted August 23, 2013 at 5:15 pm | Permalink

      Reply to Reply: “There are, however, affordable houses – by definition, as if none were affordable all prices would fall.”

      But are they only affordable due to government house price manipulation? I suggest they are.

      Reason: If they were affordable then why have the government created Funding for Lending, Help to Buy and kept “emergency” low interest rates for over 5 years?

    • Credible
      Posted August 23, 2013 at 6:00 pm | Permalink

      Given the job you had then, I very much doubt you could afford to buy in Didcot and work in London now.
      Houses are affordable by fewer and fewer who own more and more. The prices are kept high, but ordinary people are increasingly unable to buy them. It staggers me you can’t see that.

      Reply I have proposed various ways of bringing housing demand and supply more into balance. Less inward migration, more competitive banks. more housebuilding are all important parts of the answer. I do see that houses are dear, and do seek ways to enable more people to own their own home. I also have to work with what we have – they did follow my advice on the banks over the last decade, so we may well need more government intervention to deal with the problems that past government misdirection and intervention with the banks has brought about. Proposing a new property crash to bring prices down rapidly from here would not help either the economy or people’s chance to buy – it could generate a new slump.

  21. Neil Craig
    Posted August 23, 2013 at 12:16 pm | Permalink

    What this phenomenon shows is confirmation of my claim that at least 3/4 of housing cost is government regulation.

    It is far easier to get planning permission to rebuild your own house than to build a new one elsewhere. It is also inherently far more expensive in building terms to demolish your house, maintaining the façade and then rebuild a new one reattached to the façade. Also there are always economies of scale form mass production – if the government allows mass production.

    Imagine that if you wanted a new car you had to handbuild the wheels, engine, interior and chassis and then weld on the body of your old Escort. This is the equivalent.

    In fact that this is sufficiently cheaper as to attract anybody into putting up with the inconvenience of doing it strongly suggests that my 3/4 parasitism estimate is understated. Even 90% might well be.

    The degree of backwardness and waste in housing cannot be overstated. We have never seen a modern house.

    • uanime5
      Posted August 23, 2013 at 9:24 pm | Permalink

      Nothing that John said confirms your claim that 3/4 of housing cost is government regulation. The fact that you have never been able to name which government regulations are the most expensive leads me to suspect that you have no idea what regulations affect building a house.

      • Edward 2
        Posted August 24, 2013 at 8:39 am | Permalink

        I would guess Uni that you have never tried to gain planning permission nor tried to manage a building project because if you had you would quickly realise just how much is added to the overall project cost by the tortuous processes involved.

      • Neil Craig
        Posted August 24, 2013 at 10:23 am | Permalink

        I have pointed out more than once on this site that house prices have gone up fourfold compared to the RPI over the last century. I have invited anybody to give a technological reason for that. If there is not one then obviously it is regulatory.

        Let me, once again, invite you to give those technological reasons for housebuilding being more difficult than in Victorian times Uan. If you honestly believe what you are saying you will be able to say, but on so many previous occasions when you have made assertions you have been unable to support them with fats when asked. Lets see if this time you are thousands of times closer to factual than normal.

        Reply The main reason for the price rise is the long term conduct of monetary policy, especially the artificial bubble pre 2008. There has also been a long term trend to better houses, with more equipment as part of the package – e.g. central heating, fitted kitchens etc which justifies some extra cost/price

        • Neil Craig
          Posted August 24, 2013 at 2:27 pm | Permalink

          Central heating is a reasonable point (though cars have far more add ons since the model T was it.

          However monetary policy would have had no excess influence if the government had not been unnaturally restricting housebuilding. Speculation only occurs in markets (like old masters) where the laws of supply and demand do not lead to increased supply.

          Denis under gives another example of the unnatural increase in house prices, well beyond inflation.

  22. behindthefrogs
    Posted August 23, 2013 at 1:05 pm | Permalink

    Various replies in this thread point to an urgent need for the government to impose capital gains tax on property sales by foreigners. This would seem to be capable of helping to force down property prices particularly in London as well as being a useful source of revenue.

  23. oldtimer
    Posted August 23, 2013 at 1:47 pm | Permalink

    My wife and I celebrate our golden wedding anniversary this year. Out of curiosity I checked out the current market value of the first house we bought c48 years ago. It cost us about £7,000. Today the market value of that house and those around it (it was a town house) is about £500,000, a multiple of over 70 times! And that is excluding the cost of stamp duty, fees and removal charges (c£4-50,000) if we wanted to repurchase it. That is testimony to the power of inflation in the intervening period and of housing policies which keep new houses in short supply. I found it quite shocking when I worked out the 70x multiple.

    The belief that house prices will always go up lies, in part behind the desire to own the property you live, even though that is not always true. And for many, owning the roof over your head is a tangible store of value beyond compare.

    Reply Incomes have also gone up substantially in cash and real terms

    • Anonymous
      Posted August 23, 2013 at 2:50 pm | Permalink

      Reply to reply

      It would be interesting to know if today’s salary from Old Timer’s profession would have covered the cost of a £500k home.

      If not then this represents a fall in living standards

      I know for a fact that I own less floor space in a less salubrious area than my father did in the same profession.

      It’s not what people earn that counts. It’s what they owe and what things cost !

      At the current trajectory I have a great feeling of unease in the pit of my belly.

      Reply A more typical family development would show improvement over the last 50 years. The grandparents lived in small rented accommodation. The parents managed to afford a home to buy, and then were able to trade up a bit.

      • Anonymous
        Posted August 24, 2013 at 8:25 am | Permalink

        Reply to reply: For most that trend has gone into reverse. Children will most likely stay at home with parents into adulthood or live their lives in small rented accommodation.

        The job-for-life with pension and carriage clock at the end of it, the annual holidays, perhaps a camper van and the neat bungalow owned outright – these exist only within the realms of fantasy for most people under 40 years of age.

        These things my parents took for granted.

        Reply That is why we need to do more to open up home owning for the many again.

        • Anonymous
          Posted August 24, 2013 at 9:44 am | Permalink

          Reply to reply: Open up new and more inventive lines of credit perhaps, use the inflationary magic bullet to enrich those holding tangible assets by diminishing their debts, sell off more national ‘family silver’ to raise cash…

          These are the things which enriched the older generation – bumping the problems onto the next generation.

          What new tricks are there in the bag to perpetuate the illusion of wealth in Britain ?

          It seems that the sale of assets (therefore entitlement to profits) has now extended from utilities and infrastructure to our very homes. We are competing with foreign btl investors for our own accommodation.

          Is nothing sacred ?

    • Denis Cooper
      Posted August 23, 2013 at 4:06 pm | Permalink

      9.3% pa compound growth over 48 years takes £7000 to £499,880.

      According to this:

      http://www.thisismoney.co.uk/money/bills/article-1633409/Historic-inflation-calculator-value-money-changed-1900.html

      if the price had just gone up with RPI then it would now be about £160,000, which corresponds to an average inflation rate of 6.7% pa compounded over 48 years.

      So the real growth in the price has been an average of about 2.4% pa compound, a bit more than a quarter of the 9.3% pa nominal growth rate; all the rest has only compensated for the erosion of the purchasing power of the pound.

      • oldtimer
        Posted August 24, 2013 at 2:27 pm | Permalink

        Thanks for doing the sums; they are most revealing.

        In answer to an earlier query, I very much doubt that an equivalent occupation to mine would have increased pay pro rata to the observed house price increase.

  24. The Shed
    Posted August 23, 2013 at 2:41 pm | Permalink

    There is another aspect of the demolish/re-build/re-furbish issue which, in my view, outweighs all others but which has not been touched on so far: the energy efficiency available by building new from scratch.

    It’s neither technically difficult nor overly costly to design and build a new house to very high standards of thermal efficiency. By contrast, it is usually both very costly and relatively ineffective to retrofit an existing dwelling to worthwhile standards. Furthermore, the latter option can often involve installing less than attractive ‘eco-bling’. Going the whole hog with an ‘eco-refurb’ can cost the owner of an ‘average’ house £80,000 or more—and still it won’t perform anywhere near as well as a new build replacement. As a Royal Academy of Engineering report recently noted:

    “The use of on-site renewable energy generation has become highly fashionable, but its contribution to the energy demands of conventionally designed buildings is
    negligible. The priority must be to engineer buildings to minimise energy demands in the first place.”

    The same report also notes:

    “By the time the building design has been sketched the major opportunities for
    energy conservation will have either been captured or lost forever.”

    Apart from simple measures such as loft and cavity wall insulation, which are both relatively cheap and moderately effective, ‘popular’ (if I can call them that because they are anything but popular! Consider for example the latest news from British Gas: they report that the take up of the eco-measures they offer has been ‘disappointing’, which I would argue shows, encouragingly, that the average UK householder is not taken in by the sales patter.) eco-measures are a serious malinvestment in most instances and a worrying example of corporatism at its worst. For example, try finding a provider of EWI (external wall insulation) systems (average cost £8k-12k on an average semi’) who will guarantee their product for more than 25 years. Well, if you’re lucky, that ‘investment’ may just about save you the capital outlay over the 25 year period (it won’t)—and then you’ve got to start all over again? That isn’t investment, its malinvestment. The activity may well increase GDP and jobs, but then so would more Departments for Keeping Elephants Out of Trees.

    Interestingly, there’s a bit of a fuss going down in planning circles at the moment at the Coalition’s proposals (out to consultation until October) to allow barn conversions under permitted development (that part of the system whereby Central government grants a general permission to by-pass the need for a planning application to a local authority). Predictably, the planners don’t like being by-passed and one of their issues is that thorny old chestnut: is it really a ‘conversion’ (because only a little bit of old wall remains) or is it complete re-build.

    This issue has occupied both the Planning Inspectorate (Appeals) and the Courts for years and it behoves the Coalition government, if it goes ahead with the proposals (April 2014), to clarify one way or the other whether ‘brownfield’ first as a policy takes precedence over the presumption against development in the open countryside. The difference between ‘conversion’ and complete re-build is far from academic: it is the difference between investment and malinvestment.

    To see why, let’s have a look at the maths using a simple example and disregarding inflation. It’s not an exageration to say that the difference between ‘conversion’ and complete re-build can easily amount to £3,000 p.a. in fuel costs at today’s energy prices in a building like a barn conversion. We can set aside the fact that new build will usually be cheaper to construct, even with its thermal efficiency measures, than the conversion: any differences here are one off costs. The real value of the more energy efficient option is the long term compounded annual savings of that £3k per annum, per annum (£3k is added to the principle sum invested and in turn componded every year.)

    I’ll leave it to others to work out what the total would amount to after, say, 25 years, 50 years—or better still the life of the building at 100 years minimum. But taking just the first year’s £3,000, invested at 5% a year: it doubles after 14 years; after 25 years it will grow to £10,159; after 50 years to £34,402; and after 100 years……£394,503. Now add the next year’s £3,000 (less one year’s interest) and then the following year’s (less 2 year’s interest) and then…..Well, you can see where we’re going.

    So, to answer Mr Redwood’s question: it depends on the building engineering physics used in the construction as to whether the outcome proves to be ‘investment’ or ‘malinvestment’.

    Of course, there’s another way of looking at the figures above: if you choose the inferior, less energy efficient option, after one year you’ve only wasted £3,000, after 25 years, only £75,000…and so on.

    • Mark
      Posted August 24, 2013 at 4:55 pm | Permalink

      Any time I look at one of those Energy Performance Certificates I am reminded of the nonsense economics behind the recommended actions. A good investment rule of thumb would be to consider only projects with a payback of seven years or better on an unsubsidised basis. Similar considerations apply to new homes. The added capital costs have to be financed and paid for, as does more expensive maintenance associated with e.g. modern condensing boilers. All too often suggestions are made that are completely uneconomic, with savings that wouldn’t pay the interest bill on the costs. The Green Deal charges 7%, which implies anything with more than a 14 year payback would never meet the interest bill.

      Buyers are perfectly capable of taking account of higher energy costs in offering a lower price for a less energy efficient home that has cost less because it doesn’t have all the latest gizzmos and layers of insulation restricting internal space. They may also not feel the need to maintain high inside temperatures, and prefer natural light and ventilation.

  25. Anonymous
    Posted August 23, 2013 at 2:41 pm | Permalink

    An economy which seems to be so based on house values and house renovations smacks of one that is based upon people taking in each other’s washing for their living.

    You mentioned in an earlier response houses being affordable (otherwise they wouldn’t be selling) but this is with 0.5% interest, bank forbearance, interest only mortgages, longer term mortgages and greater lending multiples of wages than there used to be (ordinary mums having to work and farm their children out to daycare – often childcarers themselves !)

    There is now the phenomenon of parents weighing it with part share/hefty deposits.

    How long before kids are sent up chimneys to help with mortgage costs ?

    Generation rent (on average wages of 26k) cannot afford to make pension provisions AND buy a house. It’s either one or the other. The chances of taking the state pension we’ve paid for is looking slim.

    So.

    When we’ve done building over this green and pleasant land and then everyone draws the equity from their homes to pay for retirement (at more or less the same time) what will become of the investment then when there is a surfeit of properties up for grabs ?

    Industry and export is meant to provide the wealth to give us houses. Building houses does not provide us the wealth to give us houses.

    No-one is against investment in houses. But many of us are deeply concerned with our economy being so house orientated.

    Reply Given the rate of new migration and live births there is no danger of the retiring generation running out of buyers if they wish to sell their homes.

    • Anonymous
      Posted August 23, 2013 at 5:48 pm | Permalink

      Reply to reply: You said in a previous thread that migration hasn’t had much of an impact on house prices/availability.

      How do minimum wage workers and benefit claimants sustain house prices without state subsidy ?

      Reply I have always proposed less migration and have always accepted that demand for housing from recently arrived people has been part of the upward pressure on rents and prices. I propose policies to stimulate enterprise and lead to the creation of more better paid jobs.

  26. Romsey
    Posted August 23, 2013 at 4:27 pm | Permalink

    How & on what individuals choose to invest their capital should be entirely up them. If the Gov believes the money could be better invested elsewhere, it should incentivise investing in those alternatives. This is usually done by the tax system. What the Gov should not be doing is propping up the housing market via Funding for Lending, New Buy & Help to Buy. This detracts from the banks lending for corporate investment in productive activities, denies bank facilities to the low paid forcing them to rely on pay-day lenders & gives the Gov an unwelcome economic interest in high house prices. Why are rising house prices treated as a sign of economic recovery but all other inflation is rightly treated as a bad sign ? The Giv should focus its own resources on those investments the private sector either cannot fund or is unsuited for – nuclear power stations, airports & roads etc

    • Rob
      Posted August 23, 2013 at 9:15 pm | Permalink

      Great post.

    • Mike Wilson
      Posted August 23, 2013 at 9:45 pm | Permalink

      @Romsey: ‘…Why are rising house prices treated as a sign of economic recovery but all other inflation is rightly treated as a bad sign? …’

      Spot on. Even our host here seems unable to restrain himself from regarding house price increases as positive news.

      When, oh when, are people going to wake up and realise? Will they be happy if house prices double again? Rents double again? When will enough be enough.

      Utter muppets the lot of them.

  27. Posted August 23, 2013 at 4:59 pm | Permalink

    Surely if the houses are needed for people to live in then an investment should be made. Whether this is social housing, buy to let or buy to live in the result is the same – an investment will be made.

    I would be interested to know what those in Germany who rent actually do with the money they don’t invest in their home.

    • StevenL
      Posted August 25, 2013 at 3:35 pm | Permalink

      They save it in German banks who then lend it to spendthrift places like Greece so they can buy more Mercs.

  28. rd
    Posted August 23, 2013 at 5:11 pm | Permalink

    Seriously lost the plot here Sir… the broken window fallacy ring a bell?

  29. Rob
    Posted August 23, 2013 at 9:14 pm | Permalink

    All of this “investment” in housing and a government hell-bent on keeping house prices high with the policies of “Funding for Lending”, “Help to Buy” and sustained record low interest rates must be a good thing.

    I mean, the acts of savings theft and relatively high inflation to effectively steal money from retirees and those about to retire, to pass on to the costs of overpriced houses of the over-borrowed are both a brilliant move by this government via the above mentioned policies.

    After all, these retirees would only waste it on things like food and heating and enjoying the remaider of their lives doing something they always wanted to do with their hard earned savings.

  30. Posted August 24, 2013 at 12:14 am | Permalink

    The vast majority of the population in the UK rely on their house or flat to be an investment over the long term both to build up capital and leave it to their offspring. The House price “feel good” factor plays a very important part in stimulating the economy through confidence.

    Any increase in values is a function of demand : if a lot more houses were built of a type and in places people wanted to live in, prices would inevitably cease to rise or would fall.

    Market forces mean that if there are only 1,000 homes available in a desirable area, the 1,000 people with the most purchasing power will inevitably buy them and everyone else will be left out.

    At the other end of the scale, you can buy a street of derelict houses in the North for peanuts : Why ? : nobody wants to live in these areas so neither individuals wanting a home or investors looking to let will buy them at any price.

    The normal situation in most of the UK is the reverse of this : insufficient new housing starts and the restrictions in the number of planning permissions granted in desirable areas play a part in creating demand and rising prices. Add in the sensible CGT exemption for principle place of residence and you have all the conditions for a rising market.

    Any Government taking measures to change this would do so at their peril.

  31. Mike Wilson
    Posted August 24, 2013 at 9:13 am | Permalink

    I think it is fair to say that the consensus is that the government should not be subsidising or supporting the housing market in any way.

    Perhaps, Mr. Redwood, you could pass that message on. One of these days the next generation may find a collective voice and hold to account those who helped to price them out of the market.

    There is a wasted opportunity here. As someone said a while ago, the government could have done anything in 2010 and got away with it. Even now the government could be saying ‘The endless increase in house prices under Labour has had a lot of negative affects. People regularly increasing their mortgage to pay off their credit cards was not, and is not, sustainable. It will always end in a banking crisis. Why should the banks lend more and more money against the same houses so we all have bigger mortgages and rents to pay? It’s attractive when you are older, when you want to sell your house perhaps and downsize, but for most people throughout their lives it just means they have less money in their pockets to live on. So we will not be going back to Labour’s borrowing binge.’ Etc. Etc.

    You ought to able to present this in a positive light. Instead of which you have decided to keep the bubble inflated by guaranteeing mortgages with my money.

  32. Mark
    Posted August 24, 2013 at 5:25 pm | Permalink

    In the 1970s,( it is said rich people in the Middle East ed) bought gold plated Rolls Royces that they used to smash up as dodgem cars in the desert. It was good business for the Crewe factory and Mulliner Park Ward, but did little for the rest of the economy.

    Keynes had the idea of paying to dig holes in the road and fill them in again. It was actually a better idea in that the activity could be spread anywhere there was a road, not just to Crewe or in rebuilding a property in Chelsington, but it missed the idea of building a useful new road altogether.

    James Dyson had an even better idea: building a factory to make vacuum cleaners, many of which were exported, that provided employment on a rather more permanent basis – at least until red tape and taxes made it uneconomic and he relocated the operation abroad.

    Incidentally, I trust that the national statistics write down the destroyed property (perhaps not if it is in foreign ownership?), and take proper account of the funds remitted to their families by an e.g. Polish workforce, buying their imported food in a Polish shop. The economic leakages can be very high.

    I think Mr Gove was very wise to halt Mr Balls’ Building School for the Future programme, which was aiming to rebuild every state school in the country in little more than ten years: rather more wasteful than foreign billionaires and UK hedge fund managers in terms of destroying perfectly good school buildings. Some of our best schools use buildings that are hundreds of years old.

    Renting does make sense when property is bubble priced. It is the way to go short house price risk while keeping a roof over your head, and avoiding making a life changing commitment that would cramp future spending and saving. The real question is, who is taking the long side of that trade. In London at least it is clearly foreign buyers:

    http://www.thisismoney.co.uk/money/mortgageshome/article-2340858/85-homes-Central-London-sold-overseas-buyers.html

    That does no harm to the UK economy if they’re the ones who suffer the capital losses when the bust happens. However, new first time buyers and landlords expanding their portfolios on the back of the present lending incentives will lose out. I suppose if our banks default on foreign borrowings they make to provide the mortgages we could as a country shuffle some of the consequence off. Otherwise, we will be paying out interest and capital to foreign lenders simply because house prices were bid up.

    Reply If you are right in suggesting house prices are now unsustainably high then the foreign buyers of these properties are subsidising the UK sellers of this property.

    • Mark
      Posted August 25, 2013 at 10:27 pm | Permalink

      I’m not sure why you haven’t moderated this post. The Rolls anecdote is true: the purpose of the purchases was for use as dodgem cars or stock car racing, with smashing the cars up regarded as a display of wealth or conspicous consumption as J.K.Galbraith would have labelled it.

      Reply The post is long, refers to incidents I cannot verify, and has a cross reference to another site which I have not had time to check. I will get round to it when I have more time. Please make it easier for me to post by summarising what you want to say instead of just putting in a cross link to another site. Links to Hansard/government sites/reputable newspapers etc are fine as I do usually post those without checking.

  33. Bazman
    Posted August 24, 2013 at 5:46 pm | Permalink

    Everyone has failed to mention how transport links and geographical isolation effect property prices. Better and faster rail links would help the problem whether you think HS2 should be built or not. Many would be arguing against Stevenson’s Rocket and the canals. It is not possible to build enough houses within the M25 and this idea of stopping housing benefits to high areas of employment to make the population move to where there is work is a thick fantasy. Where? Within the M25? Companies locate in the areas with the best transport links is true, but many industries do not need transport links such as call centres, but they need large pool of people for recruitment as they pay little and have a large turnover of staff with skill such as foreign languages. This is not available in isolated areas. Nuclear submarines however need geographical attributes to be built so London is not viable and the workers will not work for minimum wage no matter what. Low wages yes. They are to be sent out of the town every time the government does not need submarines? More free market fatlistic fantasy that believes that anything can be solved by just having no regulations or tax. Where is the infrastructure coming from. Tolls. That is another story told by people who want tolls for things they do not use even if they do. Ram it.

  34. Mark
    Posted August 26, 2013 at 12:20 pm | Permalink

    The site referenced is the financial section of the Daily Mail newspaper.

    This is Money is part of the Daily Mail, Mail on Sunday & Metro media group

    © Associated Newspapers Limited

    I think you are just uncomfortable with the argument I presented.

    Reply Fine, I will have another look. I do not fail to post things where I disagree with the arguments! Just look at what I do post.

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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