Who has a housing bubble?

 

The Economist has supplied a graph which shows how far and fast house prices have risen in a range of countries.

Taking 1980 as the base with an Index of 100  (so there is available data for all  these countries) produces the following list of price rises: (approx Index level in each case judged from the graph)

South Africa   3590

Hong Kong     1450

New Zealand    1370

Spain  1180

Australia    1050

Singapore   1020

Italy 770

Uk 740

Ireland 580

US 360

Countries like Germany and Switzerland in the EU have seen smaller rises. In the EU  Ireland and Spain have shown the greatest overall rises in the boom. Both have experienced sharp falls  in recent years. Both have fallen victim to the destructive boom/bust cycle the Euro has imposed on them. Spain peaked at nearly 1700 before falling by 30%. Ireland peaked at 1151 before halving to 570. The UK was wise to stay out of this problem.

Outside the EU several Asian success story economies have experienced rapid house price rises. Hong Kong and Singapore have been particularly strong.  So too have Australia and New Zealand.

Judging by these international comparisons the UK experience has been in the middle of the pack. UK house prices experienced falls in 1990-92 when the UK was locked into the boom/bust cycle caused by membership of the Exchange Rate Mechanism and exit from it. The UK also experienced sharp falls in 2008-9 when again it experienced a violent boom/bust cycle thanks to misjudged fiscal and monetary policies.

There is no evidence from international comparisons that the UK is currently in an unsustainable house price boom, nor from the domestic market in most locations. It is true that in  central London in expensive areas there is substantial buying from abroad, usually for cash, which has been bidding up  prices strongly for some years. The competitive jurisdictions like Hong Kong and  Singapore have experienced something similar. To judge whether Central London is expensive for foreign buyers you need to compare high London prices with high prices in Hong Kong, New York, Sydney etc.

The government has this week published its details of the Housing deposit guarantee scheme. All those who have written in to condemn subsidies to the house buying market will be pleased to know that the scheme charges the lending institution a fee for the guarantee priced to avoid any state subsidy – which would be illegal under EU state aid rules anyway. This fee can and will be adjusted in future in the light of the actual bad debt rate experienced. I would not support a housing subsidy scheme where taxpayers were paying part of the bill for someone buying a property at up to £600,000.

 

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76 Comments

  1. Posted October 11, 2013 at 5:51 am | Permalink

    These figures have to be viewed in the context of the educational and economic prospects of the people who form the market.

    Recent OECD figures show Britain lagging at the back of the literacy and numeracy league tables. Wages are likely to fall in relation to established (and artificially propped up) house prices as our people lose competitivity. If there is no bubble then why low interest rates ? Why such high deposits demanded by the banks ?

    Houses at up to 10x earnings is a far cry from the 3x earnings limit sent by lenders when I first bought. Bubble or no bubble. These figures mean that less floor space is available for the same price (pro rata.)

    Average people in ordinary jobs in Britain are getting poorer and poorer.

    Do we have enough high paid jobs to keep this going ?

    • Posted October 11, 2013 at 11:03 am | Permalink

      No, we clearly need more well paid jobs and will get them when (and if) the government finally slims down, cuts regulation, taxes, energy costs, get some sensible banking and cuts waste.

      At the moment is is largely funded by money from overseas and nondoms, as London is a pleasant place and a very good tax haven for nondoms.

  2. Posted October 11, 2013 at 5:58 am | Permalink

    Difficult to see how in a place like Barrow-in-Furness in Cumbria house price rises have helped anyone or for that matter what drove up the prices other than property speculation from outside the area. There is little work and in recent years even less. Not even many East Europeans are there. A few doing state paid work such as caring jobs. For private companies. That is state paid work for private companies. Get that fantasists? The price of property doubled in about 2 years from 2002-2oo5. What dove this and who other than private landlords benefited. Not even them looking at the rent rates. Terraced house off which there are hundreds about £350-400 a month. Few jobs though outside the shipyard which only does state funded work, and the NHS and poor health in general for many which is of course not linked to economics only envy and fecklessness. Ram it.

    • Posted October 11, 2013 at 12:41 pm | Permalink

      Interesting period you mention there Bazman 2002 – 2005.

  3. Posted October 11, 2013 at 6:23 am | Permalink

    One wonders why private insurance cover cannot provide this government insurance I would not have thought that (from this point in the cycle) the risks were too high. The insurance premium should clearly not be the same for all areas and buyers as looks to be the case with the government scheme.

    What is needed urgently is more properties (or fewer people) just get the state out of the way of builders, relax the OTT building regulations and planning get some bank lending to developers and let them get on with it.

    • Posted October 11, 2013 at 9:17 am | Permalink

      I see Greg Barker (the Climate Change Minister) has claimed the BBC gives undue weight to the opinions of Global Warming Sceptics!

      What planet is this man on? The BBC rubbishes them at every single available opportunity and keeps them off the air, other than to rubbish and ridicule them. They even had a fake meeting of “experts” mainly it seems from Green Peace and the likes to endorse this bias/indoctrination. Ever BBC discussion is proceeded with the 95% of scientist …… and the over whelming majority b*******.

      Yes Greg the climate changes it always has, humans clearly have an influence as does thousands of other things. Slightly hotter is better on balance anyway, Co2 and warmth are both good for crop production anyway. The evidence for catastrophic warming is full of holes and does not agree with the measurements, the world has not warmed for 15 years. If it does not agree with experiment it is wrong!

      Anyway if the UK takes action it will make no difference it just export the jobs and emissions. Get over your idiotic religion Greg (if you really do believe in this drivel) and get energy prices down you dope! Adapt if and when needed lets save lives now by keeping the elderly warm and dealing with real problems like clean water, malaria and starvation. Not invented problems in 100 years time.

      • Posted October 11, 2013 at 9:58 pm | Permalink

        Given that the deniers have no evidence to back up any of their claims, just like creationists, there’s no reason to give either of them any air time.

        Hotter isn’t better, especially if you live in a country that’s already very hot.

        The scientific evidences shows that the world had risen over the past 15 years.

        • Posted October 12, 2013 at 1:09 pm | Permalink

          uanime5: “Given that the deniers have no evidence to back up any of their claims, ”

          You ask for evidence; I give you the geological record. Coal seams suggest we had tropical forrests covering much of area that is now the UK. Some of these seams are/were several feet thick suggesting the forests must have been there for several thousand years. So it was probably much hotter then.

          Glacial errosion of much of Scotland, Northern England, the lake district – suggests that it was much colder too in the past – to the extent that conditions similar to those in the Antarctic held sway over the whole of what is now the UK and Europe for several thousand years.

          During both of these periods of extreme climate* our human predecessors probably hadn’t slithered out of the slime. So no factories producing Co2 and no anthropogenic global warming.

          Yet, it wimpers, ‘No evidence’ – what do you thing the geological record is?? Scotch mist.

          Some times there is only one way to describe a person who insists on being a fool.

          • Posted October 12, 2013 at 4:18 pm | Permalink

            APL
            No amount of evidence would be good enough to alter the religious fervour that is the belief in man made global warming.
            Like those who have throughout the centuries predicted the end of the world, when one date passes they just ignore that evidence and create a new date for doomsday and just carry on unmoved.
            The IPCC predicted several degrees temperature rise in the 20th century and all got was 0.7
            They predicted rapidly increasing temperature from 2000 and the opposite has happened.
            Depite this they now are predicting up to eight degrees rise in this century
            All these scientists cannot be wrong because they all agree with each other.
            Shame the actual results don’t confirm their dire predictions.

          • Posted October 12, 2013 at 10:25 pm | Permalink

            Care to explain what factors caused the temperature changes in the past so that scientists can determine whether the same cause is currently causing the average global temperature to rise. If you refuse to name them then it’s clear that these causes have already been ruled out by scientists and you don’t want to admit this.

          • Posted October 13, 2013 at 2:30 pm | Permalink

            Uni
            It is for those who are keen believers in the theory of (only) man made global warming, to answer questions from others, not for us to have to prove a negative.

            Why only 0.7 of one degree rise in the 20th century, much less than predicted?
            Why no runaway rise since 2000 as predicted?
            Why are the islands still not underwater as predicted?
            Why the huge changes in climate before man was on this planet?
            Still no reply form you on these and many other questions despite many requests.
            Just a dull repetition of the mantra that “the majority of peer reviewed scientific community agree”…blah blah blah

          • Posted October 14, 2013 at 6:09 pm | Permalink

            Good with their mantras and standard slogans but when faced with a question to answer they just melt away.
            Lesson to be learnt here I feel

    • Posted October 11, 2013 at 9:26 am | Permalink

      Doubtless private insurers HAVE LOOKED at this potential market, and decided it’s not viable. Which is strong evidence that government insurance is a disguised subsidy. Moreover, most banks have enough mortgages to self-insure: which they do up to the 90% or so loan / house value level. But they are reluctant to go above that level because they know it’s not viable. And that’s just more evidence for the above mentioned government subsidy.

      Re “getting the state out of the way of builders” about 40% of the cost of housing is accounted for by the cost of land. See:

      http://www.policyexchange.org.uk/images/publications/making%20housing%20affordable%20-%20aug%2010.pdf

      I.e. a big relaxation on planning permission would knock getting on to 40% off the cost of housing.

    • Posted October 11, 2013 at 9:56 am | Permalink

      Private insurance for debt is by far the best option. Such contracts are usually called ‘credit-default swaps’ (CDS). So, in theory at least, banks could pool 15% of each of their 95% LTV mortgages. This would be called a ‘mortgage backed security’ (MBS). They could, in theory, insure the MBS via CDS. Of course, not all counterparties on the market have AAA credit ratings like the government do, this could be a problem, I mean what if your insurance doesn’t pay out? Lenders might still face nasty capital restrictions with such an arrangement.

      An innovative solution might be to spread the risk / reward to where it is wanted according to counterparty. They could divide up the MBS into slices called ‘tranches’. Whereby the lower tranches yield higher interest but soak up a higher proportion of any defaults. These could be sold to hedge funds and suchlike where only rich people who want to take risks are on the hook. Then the less risky tranches could be insured using CDS at much lower premiums.

      If the mortgage lenders only keep these less risky, insured tranches on their own balance sheets they won’t have to hold as much capital against them. So more 95% LTV mortgages will be available and rich people will take all the risk throgh their hedge funds. In fact why stop and 95% LTV. Think of all the people who could get on the property ladder if 100% LTV mortgages were available. Or what about 105% to cover all the fess and stamp duty? Everyone could own their own home!

      The best bit is, it’s all secured debt, secured on house prices. And, as JR points out above, history shows house prices always go up, never down, so the debts will always be 100% secured. It’s foolproof, I mean even if things do start to wobble a bit beacuse of some unforeseen external crisis the Bank of England can just lower interest rates to give everyone more headroom.

      If it comes to it, why bother with any capital requirements? Why shouldn’t mortgage interest rates be negative? Why can’t the Bank of England just print money and give it to the banks, who then give it to people with mortgages. Say 1% of the value of their mortgage every year, paid monthly. Free money and homeownership for everyone. If the economy slows down they can just raise the 1% to 2% and print more money for everyone. Everyone wins and nobody loses!

    • Posted October 11, 2013 at 10:20 am | Permalink

      @lifelogic
      “relax the OTT building regulations and planning “

      I think they already have.
      Did you know that you can employ your own friendly surveyor for the building control compliance? One of our neighbours has just completed a redevelopment project that needs to be seen to be believed without any oversight from the Council Building Control Inspector. The planning dept. also approved the plans on delegated authority ignoring all objections and with serious disregard to planning “guidelines”.

      • Posted October 11, 2013 at 11:05 am | Permalink

        Yes you have been able to do that for several years but you still have to comply if he/she is honest.

      • Posted October 11, 2013 at 12:00 pm | Permalink

        Tell your neighbours Bob, that if they have not completed the project in accordance with current building regulations and have not complied with the details of the planning permissions granted, there will be problems in the future if they come to sell the property.
        The solicitors and the surveyors acting for any future purchasers and their mortgage company, will discover if the development was done properly or not.
        If it is not, then they will not lend on it.

      • Posted October 11, 2013 at 9:31 pm | Permalink

        For any work where you just need Building Regulations, not planning permission, you can use an Approved Building Inspector. They are cheaper than the Council, and, as they are working for you, will come out and give advice at your convenience as well as when work starts. In my case, I have found them quite strict and helpful, though this may not always be the case. I initially contacted the Council for Building Regs approval, but they weren’t interested in getting the job (Why should they, they get paid the same either way?) I think Approved Inspectors were introduced in 1996 when we last had a Conservative government, probably because nothing was getting done under Council jurisdiction.

    • Posted October 11, 2013 at 12:08 pm | Permalink

      Prefabs

      • Posted October 12, 2013 at 3:25 pm | Permalink

        Everyone living in a prefab? Real Tory stuff. I live in a timber frame building which is a bit like a prefab I suppose, very good too and must be better with todays technology.

  4. Posted October 11, 2013 at 6:26 am | Permalink

    What currency are these figures is it an international basket or local currency and does it take account of local wage levels?

  5. Posted October 11, 2013 at 6:28 am | Permalink

    Forget Royal Mail, this is how to make real money (HT: IHT)

    “Now, five years after the start of the financial crisis, the [U.S.] housing market has come back, and many of these investors are cashing in. According to tabulations by Redfin, an online real estate listings site, banks have already sold about 1.5 million of the nearly 2 million homes that were foreclosed on during the past half-decade. Resales are becoming more common and can be hugely profitable. A house in Redwood City, Calif., for instance, was sold in a foreclosure auction in 2011 for less than half what the evicted owner paid in 2006. Ten months later, it was flipped for close to its previous price. Another house in Los Angeles went into foreclosure in 2012 and was flipped seven months later for a markup of $254,000, or 66 percent. Of the 87,062 foreclosures in the last five years that were bought by corporate investors and have been flipped, about a quarter were sold for at least $100,000 more than what the investor originally paid, according to Redfin.”

    “The boom-bust-flip phenomenon is just one of the most obvious ways that research suggests the financial crisis has benefited the upper class while brutalizing the middle class. Rents have risen at twice the pace of the overall cost-of-living index, partly because middle-class families can’t get the credit they need to buy.”

  6. Posted October 11, 2013 at 6:31 am | Permalink

    I doubt that (say) a 2-bedroom house in Melville Johannesburg is now worth more than (say) a 4-bedroom house in Wokingham which is what those figures would suggest, so I suspect that the figure for South Africa does not fully take the falling value of the Rand into account?

  7. Posted October 11, 2013 at 6:39 am | Permalink

    They are all in a housing bubble, some worse than others. Just look at historical prices as multiples of earnings.

    Wages are falling in real terms, and have been for years. The mortgages are unserviceable without subsidy, even at 30 year low rates. Rates have been falling for 30years, the risks are to the upside. And then what?

    A bubble, anything over trend growth, WILL burst, no matter what the govt tries. Reversion to mean. By sticking its oar into the market, the govt has subsidized the bubble and caused houses to be rationed by price to created distortions and apparent shortages in most, but not all areas. Get the govt out of the market, allow the market to clear and find the price that can be sustained. Unfortunately that will mean a sharp correction.

    • Posted October 11, 2013 at 12:52 pm | Permalink

      No it won’t. It will just stall the market completely. Individuals cannot afford to sell below market and will simply stick. When interest rates rise, people will be bankrupted under this government’s scheme (as well as the government picking up their guarantee) Sufficient houses may come on to the market to potentially affect prices, but the disposessed will still need somewhere to live, they won’t just disappear, so the money men will buy up properties cheaply and rent them out at higher cost than mortgages, propped up probably with government money. How will they allow families to be out on the streets by the tens of thousands. It aint gonna happen. The wider housing market will just die.

      What is needed is for houses to be built new and sold on a cost plus profit base rather than selling at market rates.( Why are we so obsessed with building brick by brick, rather than in a factory and installed quickly and cheaply? Unless houses are built and made available cheaper, which will also need political will to change building regs and planning, we will become a nation of renters, which may be fine until retirement, when rents continue to rise whilst income falls. If this happens there will have to be either big increases in our ridiculously low pension rates or a collapse in rents.

      Similarly, with the lowering of wages we are seeing – people simply will not be able to afford the rents as at present and the rental market will collapse, except that the government won’t allow it to happen – too many big money people getting hurt is not an option for politicians.

    • Posted October 11, 2013 at 8:42 pm | Permalink

      Quite right – they are all in bubble territory, with the possible exception of the US, where prices have corrected strongly across much of the country.

      The choice of an index base year has a significant influence on the relative indices: 1980 was a peak year for the UK for real house prices measured adjusted for RPI inflation. Prices had risen very sharply in the preceding two years due to the economic mismanagement of the Labour government, which lost the election despite (or possibly in part because of) ~30% p.a. house price increases.

      In contrast, in New Zealand, 1980 was a low point in the house price cycle in real terms, so the index is biassed upwards.

      Over longer spans of time, international comparisons based on local index prices need to be adjusted at the least for exchange rates. The South African Rand has fallen from 1.81ZAR/£ to 13.02ZAR/£ since 1980, which makes the exchange rate adjusted increase just 499 – well below the UK’s.

      In short, the statistics somewhat flatter the UK’s true relative position.

      Perhaps it is better to use the methodology of Dr Morgan Kelly of UCD, who has studied house price booms and busts of OECD economies extensively. His paper (which includes charts of real house prices for some of the countries mentioned) can be found here:

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

  8. Posted October 11, 2013 at 6:45 am | Permalink

    South Africa is a special case, its market has been freed up post apartheid, creating a flood of new demand.

    The UK has the same problem as the EU, but for different reasons. Our rates are low due to money printing, their rates were artificially lowered by convergeance to gain entry into Europe. And just as in the Union of States called the USA, the rich states subsidize the poor states.

    • Posted October 11, 2013 at 8:40 am | Permalink

      It looks like we have a similar situation North/South to the EU within the UK, with HTB subsidies applying to areas which may need them but applying to areas where a boom is in progress.

  9. Posted October 11, 2013 at 6:54 am | Permalink

    The Economist is an establishment mouthpiece, they never predicted the 2008 crash. They will miss the next crash too.

    • Posted October 11, 2013 at 9:20 am | Permalink

      It certainly is largely an establishment mouth piece. Largely Pro EU, pro the AG Warming religion etc.

      • Posted October 11, 2013 at 10:38 am | Permalink

        And in favour of bombing Syria (“Hit Him Hard”). Pro-EU, pro-AGW, pro-Syria intervention is an odd assortment of political beliefs shared only by David Cameron and a handful of others that I can think of.

    • Posted October 11, 2013 at 12:53 pm | Permalink

      True Gary, but I scratch my head and wonder how anyone could miss that?

      Oh, I forgot, Gordon Brown couldn’t see it coming despite being advised my men like Sir Stuart Rose that there was something wrong with the market.

      I don’t know if anyone inside the Westminster ‘bubble’ has noticed that we still have massive amounts of government and personal debt that needs to be sorted. So might a crash not happen again if we keep adding to the mess?

      Tad

    • Posted October 12, 2013 at 8:24 am | Permalink

      Actually they did. But you had to be smart to notice.

      I distinctly recall a conversation I had with a now deceased supplier where I told him about an article on derivatives trading. It was at least a year – two perhaps – before the bank collapse. The economist pointed out the scale of the vast market in these, and the unquantifiable risk they posed to the global economy. Meanwhile gold was rising in price, land was rising in price and the chancellor of our country was telling everyone there would be no return to boom and bust.

      Oh, and I knew in August 2007 this crash was underway. That was the second bad month our business had since John Major was in power. A year later the banks went kaboom and everyone denied they could possibly have known.

      The current recession is not over yet incidentally. We are in a zombie state, and have been for 3 years at least. Prices are rising, costs are rising, wages are stagnant, confidence is low, and nobody I know ( who isnt doing wind turbines or railway business ) is making any money.

  10. Posted October 11, 2013 at 7:11 am | Permalink

    I must admit to being very lost as to why you defend current house prices are fine, week after week.

    It is self evident that we have had millions more people coming to live in the UK but we have not had millions more homes. Thus supply has been heavily constrained compared to the previous equilibrium.

    Further it is self evident that interest rates are not at a market rate.

    I would also add that in HK there are many families living in box rooms in squalor and that in Singapore most people live state housing with the private housing being more for millionaires.

    This does not strike me as not something to aim for

  11. Posted October 11, 2013 at 7:32 am | Permalink

    So are houses in the UK cheaper and more affordable because their prices have risen by “only” 640% since 1980?

    However, the cost of living calculator on this website:

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

    says that a basket of goods and services which could have been bought for £100 in 1980 would have cost £364 in 2012; on that basis I find that average increase in house prices since 1980 has only been about 2.2% pa above average general price inflation.

  12. Posted October 11, 2013 at 7:48 am | Permalink

    Thank you for a fair analysis of the housing situation. I am so glad the government is not allowed to introduce another Sub-Prime scandal.

    One footnote: Here in Wisbech, Cambs, a “Chinese” invested in two historic buildings in the town centre.
    An arsonist torched both buildings. Both were left as burned out shells – one on the famous North brink. It has been sort of propped up so it doesn’t look – from the front – too awful. The other one greets everyone into the town with burned out hopelessness and with plants growing out of the brickwork.
    Can anyone get hold of the “Chinese” owner? Of course not!
    So burned out architecture is now a permanent feature of what is billed as a “famous Georgian Town”.

  13. Posted October 11, 2013 at 8:11 am | Permalink

    In Singapore, cooling measures have been implemented round after round with each round more drastic than the other. So far totaling 7 rounds since 2011. The need to curb the flow of easy money is the duty of the regulators.

  14. Posted October 11, 2013 at 8:16 am | Permalink

    John,

    You protest too much.

    Looked at from “a beginners guide to psychology” point of view it’s clear that anyone who protests this much does not believe in their own case.

    You are justifying the unjustifiable. I note even the IMF has been saying exactly the same warnings on this as I have, a body which has been quite happy to stoke bubbles up in the past.

    I have never been more sure you are wrong, and deep down you know it too.

    The whole political class is a disgrace.

    Regards

  15. Posted October 11, 2013 at 8:22 am | Permalink

    A property bubble in parenthesis with the local population’s ability to pay (exceptions for posh parts of London of course.)

    The OECD has not just recognised a fall in basic literacy and numeracy but mentions a skills crisis in the UK. We are not training enough people to the required standards.

    It is clear that the current migration policy is seeing the departure of skilled workers over the importation of unskilled ones on balance.

    How is this to maintain property prices. I posit that a property bubble can exist regardless of international figures.

    • Posted October 11, 2013 at 8:26 am | Permalink

      Messed up my editing. Substitute ‘parenthesis’ with ‘proportion’ please.

  16. Posted October 11, 2013 at 8:22 am | Permalink

    Having had to change jobs several times because of the booms and busts in the building industry, I had come to the conclusion that, as the first sign of a boom is always in property, it would be wise for those in charge to watch for signs of this and to adjust interest rates a little in order to head off later catastrophic mega rates.
    However, as usua,l the housing cost index is not even included in the inflation rate.

    You say that HMG is charging banks a fee for the guarantee over the missing 15% in order to restore 95% mortgages. Will this cover the whole 15% if the property falls in value and there is a default? If it does not, then wwhy do banks not offer 95% already? If it does cover the whole 15% then a property falling from 600k by 30% would leave the taxpayer with 15% of £570k to find =85k. Would the fee cover this.

    You know that in London and parts of the South East there is already a boom. In my area, on the South Coast, a terraced 4 bedroom house in a street where prices have been around £320k has been on the market for £495k and has sold in one week. We have a house in a part of London which has experienced flat prices for 4 years. The advised price was £250k but having waited and put it on sale for £275k for offers in excess we have buyers from young couples to BTL trying to outbid. Thanks Georgie Boy, you have brought back gazumping just in time. Glad we aren’t a young couple or BTL who has forgotten that RedEd is going to bring back rent control and BTLs will be dumped back on the market, bringing big falls.

    I can only guess that the reason that the guarantee was extended to cover expensive property in boom areas was because of lobbying by the housebuilders or that the treasury is rubbing its hands on the thought of CGT on inflated prices without inflation tapering. Or perhaps they really are that stupid?

    • Posted October 11, 2013 at 9:14 am | Permalink

      I mentioned recently that some young friends looking to buy a house in Newbury found themselves pitched into a bidding war.

      • Posted October 11, 2013 at 1:14 pm | Permalink

        Denis, that happened only last week to my lad. To get the place he wanted, in the area he wanted (and some way from the sky-high prices of his home town), he had to keep upping his offer. Luckily, his was the accepted bid, but it was a difficult job for his old man to justify the extra cost to him!

        Tad

    • Posted October 11, 2013 at 9:41 am | Permalink

      Off subject, just before I dashed out to alter a property in order to comply with the latest regs, I was phoned by a confident young lady from a firm which was ‘working with the government’ to tell me about the latest offers whereby I would get ‘free electric’ for life. Had I heard about the latest price rises? This entailed the fitting of a PV ststem, the favourite of the moment, although it is by far the most expensive means of production.(see post on regulation2 days ago)

      But this can’t be true I said. Are you saying I will get free electricity no matter how much I use. Yes she said ‘it’s free electric’. But my house roof faces East. ‘That doesn’t matter, we put them any side. Modern panels are better and they work any side’. What about North? ‘That’s ok because you will have a South side too’.

      So, there you have it. HMG and Energy Whizz (not their real name) will save us having to pay all those future bills. -Unless we all do it and have to subsidise each other at 41p a unit production on a roof receiving half of the daylight, aswith most older properties built for north/south windows.

      • Posted October 11, 2013 at 12:07 pm | Permalink

        Stred
        We also have had sales people calling us on this topic claiming you get “free electricity”
        This simply is not true, so beware of their claims.
        If you want to know the real situation I have a link to a Govt site below.

        There is a saving to be made on your monthly electricity bill but the initial investment is large and the payback period on your investment is long.

        http://www.energysavingtrust.org.uk/Generating-energy/Getting-money-back/Feed-In-Tariffs-scheme-FITs

        • Posted October 14, 2013 at 8:41 am | Permalink

          I realise these claims are rubbish, but these firms are supposed to be approved by the government and have to qualify as registered providers under the Greendeal. Surely, with all these dodgy calls arriving, someone at DECC should be intervening. The majority of PV installations I have seen recently are facing in positions which produce half or less of the electricity and will double payback periods. An EPC certificate on our property gave the return around 4%pa and presumably this is the optimum for south facing.

  17. Posted October 11, 2013 at 8:59 am | Permalink

    This table is further proof that in most parts of the UK, buying a first property is no less affordable than it has been in the past.

    Until I retired a short time ago I was an IFA engaged in arranging mortgages for more than 35 years. What has changed is the attitude towards savings and expectation amongst young people.

    In most parts of the country, first time buyers have never been able to buy any kind of home without two incomes.

    For the majority, a flat has always been the only affordable first rung on the ladder.

    Back in the 70s an 80% mortgage was the norm and interest rates were 8% or higher

    It’s only been since the 80’s that a deposit of 10% or less has been needed and interest rates have been very much lower.

    Potential buyers used to accept that sacrifices had to be made to get on the housing ladder. You started without debts, second hand furniture and an old car, if you were lucky.

    Today many applicants come for a mortgage with no history of saving, large car loans and credit car debts and a poor credit history. It is these problems that cause difficulties with affordabililty, not high house prices.

    I have practiced in the Thames Valley and in Dorset. In the area around Bournemouth where I now live it is easily possible to buy a small flat that needs a little TLC for £100,000. With a £10,000 deposit this can be bought on a single income of less than £25,000 or joint incomes of less than £30,000 at a fixed rate of around 5%.

    This is hardly very demanding is it ?

    However, add in a car loan of £5-10,000 and an unpaid credit card debt of £3-5000 ( by no means an unusual scenario these days ) and a lot more income is necessary. Add in the fact that a lot of young people want to buy on a single income or want a house as their first purchase and expectations are way out of step with those of their parents when they started out.

    Buying a property is a lot better than renting. A mortgage is a responsibility and should be taken a lot more seriously. It should rightly not be as easy to enter into as a tenancy agreement.

    It is also not unreasonable for banks and building societies to expect mortgage applicants to demonstrate some history of financial responsibility. Just turning up with some debt offset by a deposit of £10,000 gifted from parents demonstrates just the opposite !

    A healthy economy depends on confidence. Rightly of wrongly, in Britain confidence depends on a healthy housing market. We need gently rising house prices to restore and maintain that “feel good factor”.

    The Government’s help to buy scheme is a good step in the right direction and, outside hotspots like London it will do a lot of good. As the recovery continues and the scheme takes off hopefully confidence will return.

    • Posted October 12, 2013 at 11:05 am | Permalink

      Excellent post Chris

  18. Posted October 11, 2013 at 9:11 am | Permalink

    I find from here:

    http://www.measuringworth.com/datasets/ukgdp/result.php

    that in 1980 per capita GDP was £4140 and by 2010 it had grown to £23455; so taking 1980 as a base of 100 it was 567 in 2010.

    So roughly speaking house prices have outstripped nominal per capita GDP by a factor of 740/567 = 1.31; taking that as being over 32 years it would only be an average of 0.8% pa compound, but that small excess over the average growth of per capita GDP is enough to make houses significantly less affordable with the passage of time.

  19. Posted October 11, 2013 at 9:29 am | Permalink

    High and rising house prices rises are intended to serve one purpose and one purpose only – expansion of credit .

    They are just a method which the banks and government have used to ensure that the lions share of the fruits of people labour accrues to them in the form of margin on interest rather than real businesses in the real economy .

    Parliament should be ashamed that it supported the CBI’s effort to close down pensions so that money could be pumped into interest on mortgages too .

    How about another column in your table showing the how the provision for old age has declined in the same period ?

    It sucks John .

    • Posted October 11, 2013 at 2:28 pm | Permalink

      Businesses have shut down pensions because of repeated assaults on the viability of pension schemes thanks to a combination of low returns – Gordon Brown’s assault on dividends and our shamefully useless actuarial profession, which at huge expense, failed to foresee the things they are paid to foresee.

      If a company offers a pension scheme this may become your biggest liability. Most of us in the private expect further raids on the money we have saved to fund the unfunded pensions of the public sector – in the UK and the entire western world.

      PS The two senior civil servants I know have big property portfolios because they don’t have to save 40% of their salary to get bumper pensions they will enjoy.

  20. Posted October 11, 2013 at 10:37 am | Permalink

    What matters in each country are:
    (1) the rise in house prices RELATIVE to general inflation
    (2) the ratio of average house price to average income (in the UK, this is still way above the long term trend ratio).

  21. Posted October 11, 2013 at 10:41 am | Permalink

    Surely that is a meaningless chart? If economy x were to grow three times fast than economy y and house prices were to grow twice as fast in economy x then any bubble would be more likely in economy y.
    Some of those countries were third world in 1980!

  22. Posted October 11, 2013 at 10:49 am | Permalink

    The interactive chart on the Economist site, shows that JR’s figures appear to be based upon nominal house prices. Using the same chart, it is possible to derive comparative values for inflation adjusted, average income and average rent. (It is also possible to obtain precise figures by placing the cursor on the location to embolden the line on the graph, then to place the cursor at a particular date for a corresponding index value.)

    http://www.economist.com/blogs/dailychart/2011/11/global-house-prices

    Figures from 1975 are preferable by ignoring Hong Kong. (Mao died in 1976 and HK is now an important city in Guangdong).

    According to the graphs, UK house prices have increased since 1975 by 136.5% in inflation adjusted terms, but only by 13.7% against average income. I had the impression that house prices were higher against average incomes. What has changed since 1975? London has become the world capital of banksterism and a safe haven for those with a recent acquisition of inordinate wealth. Working for the taxpayer has become the best route for becoming better remunerated and pensioned than the taxpayer and manufacturing has become all but extinct; there has also been a substantial influx of people who are not in point of fact, English.

  23. Posted October 11, 2013 at 10:56 am | Permalink

    One thing that strikes me is the complete lack of a correlation between rising prices and scarcity of land. Singapore and Hong Kong have a drastic shortage. New Zealand, Australia and the US have low populations per square mile.

    If it isn’t technological (all these countries have good tech) and it isn’t shortage of land it must be regulatory.

  24. Posted October 11, 2013 at 11:07 am | Permalink

    That is the unspoken truth, the elephant in the room. The broker parasites in the form of the govt and the financial middle men having taken an ever larger slice of the economic cake, now require more and that means expanding credit onto the populace. Think of it as a debt for equity swap, or a leveraged buyout of the country, where the equity accrues to these middle men while the populace is saddled with the debt.

    In time, this will be recognised as the treason it is.

  25. Posted October 11, 2013 at 12:15 pm | Permalink

    Do I understand correctly that at the same time as it is being considered that kids (understandably) need to be a year older to be able to drive (at 18) the same kids (many of whom cannot read or write or do arithmetic) are being considered for the vote a year younger (at 16). I don’t think the world is going to last much longer–it has gone bonkers.

  26. Posted October 11, 2013 at 1:37 pm | Permalink

    This scheme to artificially re-inflate house prices is blatantly and cynically political with two aims:
    1. Convince voters in marginals that all is well by virtue of their extra “wealth” in their homes in order to save Conservative marginals.
    2. Save the banks from having to write down their loan books so the Government can offload Lloyds and RBS.

    When interest rates return to normal there will be an almighty crunch. The house price/income ratio is well above trend and was prevented from a normal market correction by Government and BoE interference – QE, 0.5% base rates etc.
    It will end in tears – but hey, if it keeps Red Ed out, maybe that’s a price worth paying?

  27. Posted October 11, 2013 at 1:55 pm | Permalink

    The housing market in this country is getting itself slowly into a better position. Social housing must be a fair way though , to house people, keep rents flowing and for councils to retain value on the properties they build. If they sell them all off then the capital is frittered away , whereas keeping the balance right ensures houses as investments are kept within the system. All have a right to own , yet all can not guarantee that their work patterns will be the same for life.
    Cheaper (word left out ed) rabbit hutches are now being built where all rooms are within a few square metres. A good investment for (some ed) and quite trendy I believe, but not a good environment to bring up children.

  28. Posted October 11, 2013 at 1:56 pm | Permalink

    That’s the problem with bubbles. No one at the top realises they are there until they balloon and burst. The BoE and the last Labour government saw no bubble in the housing market did they? However, many financial reporters issued relevant warnings throughout 2006 and 2007 especially after watching the USA market implode. The housing bubble burst of 2007- was not actually a crash, as it was pumped up again by low interest rates and BoE tampering. It still has a way to go down yet to match the long term averages.

    The Americans had a type of Help to Buy scheme which was termed “Sub-Prime Mortgages”. We all know what that did for the USA economy, so why does Osborne think his idea will be any different to the USA model? If there are job losses, if the interest rates rise anytime soon or if wages are cut, all or any of those ‘if’s’ will produce a similar outcome to Sub Prime and that spells disaster. Lenders will call in the “insurance” from the tax payers to cover the inevitable losses that will evolve from the ensuing defaults and the tax payer will bear the brunt but the lenders and the developers will not have any problem. I think everyone who reads this blog knows that this idea is merely to win Tory votes come 2015 and George is praying that everything holds together until then. Who will help us out when this goes pear shaped? And who will bail out the Conservative party after such a calamitous event? For they will be seen as the wreckers of the little people, who wanted a home of their own and who were conned into buying something they could not afford, just like the USA victims.

  29. Posted October 11, 2013 at 2:08 pm | Permalink

    What a bizarre article today.

    Where to start?
    Okay, a mud hut in South Africa goes from being worth sixpence in 1980 to 10 quid now – so what?
    The figures and the whole basis of the argument made in the argument are both fallacious and irrelevant.

    What is relevant?
    How much does a company have to pay a worker in the UK so they can put a roof over their head compared to how much a company has to pay a worker in Korea, China, India or South Africa etc.
    Now those figures would make interesting reading.

    And a bit of re-writing of history cannot go unchallenged.

    UK house prices experienced falls in 1990-92 when the UK was locked into the boom/bust cycle caused by membership of the Exchange Rate Mechanism and exit from it.

    Sorry, Mr. Redwood – you are not getting away with that. House prices boomed in the mid 1980s because your party de-regulated credit. The days of saving with a building society for 2 years before a 2.5 x salary + 1 x partner’s salary would be offered disappeared – followed by a free for all. I bought a cottage in Cookham in 1983 for 32k. I sold it in 1987 for 84k! Banks were falling over themselves to buy up estate agency chains. Even in those inflationary days, the price rises were WAY above wage and price inflation. The housing bubble you allowed to occur came to a dramatic stop on August 1st 1988. Your chancellor had thrown petrol on the flames by announcing months in advance that joint mortgage tax relief was to end. Young people went mad trying to get on the ladder – even buying properties together with casual friends.

    Nothing, absolutely NOTHING to do with our membership of the ERM. The housing market completely stalled and after a year or two of disbelief, slowly house prices crept down.

    Incidentally, the boom and bust in the 1980s/early 90s was largely confined to London and the immediate South East. Places like Norfolk barely noticed it. (I have family there). Up North, for example, prices barely rose or fell.

    The New Labour boom, to some extent reversed the Tory boom. Because house prices were so cheap in the North and because generous housing benefit was guaranteed, a wave of ‘investors’ from the South invaded the North and bought up streets of 2 up, 2 down terraces forcing prices up from 20k in 1997 to 120k by 2007. A big percentage of these rises took place in the late 1990s – I remember a program on the box detailing the Buy to Let empire a woman had built up. She owned 37 houses – mainly ex council – in the streets around hers.

    These are the houses that have fallen back in price. Whereas, in New Labour’s boom, prices in the South (generally, excluding London) only went up by a factor of between 2 and 2.5.
    House prices in Wokingham have barely changed since the credit crunch. The market stalled, they came down a little, but they have recovered – and a little more now.

    Have a look here if you don’t believe me.

    http://www.home.co.uk/guides/house_prices_report.htm?county=berks&all=1

    It shows prices in Berkshire have roughly doubled since 2000.

    But, wages for many people have been static – falling even in real terms – for 15 years.

    Average wages, we are told, are 25k. Have a look in the employment agencies in Wokingham and it seems you need a pretty good job these days to earn 25k.

    Here’s a modest house in Wokingham – the sort of place an average person might want to raise their family in.

    http://www.rightmove.co.uk/property-for-sale/property-41119933.html

    It is priced at two hundred and sixty, thousand pounds

    Or, over 10 times an average salary

    Now, your government is trying to coax young people into buying property – as well as loading them up to repay our debts incurred by the government’s borrowing.

    It is immoral and disgusting.

    Stop trying to rig the housing market and let that house fall to the price level the next generation can afford. One day there will just be no-one left who can afford them, and, at that point, prices will come down. You are simply delaying the inevitable.

    • Posted October 12, 2013 at 11:11 am | Permalink

      +1!

      The last, crazy few years of the cycle always involve more credit deregulation and leverage. In the early 70’s it was Heath, Thatcher in the early 80’s and Brown in the 00’s. Then the crash comes, usually about 18 years or so after the last one.

      As long as they can keep banks paying under 2% for their money, and lending it out for over 3%, another cycle can continue and is set to go mad sometime from around 2018-2020 I reckon.

    • Posted October 12, 2013 at 1:16 pm | Permalink

      “Nothing, absolutely NOTHING to do with our membership of the ERM.”

      You can’t just discount the facts that first Lawson kept interest rates excessively low in his attempt to shadow the DMark, his aim being to keep the pound from rising above 3 DMark, and then later interest rates soared in an effort to keep the pound in the ERM.

  30. Posted October 11, 2013 at 5:35 pm | Permalink

    Off-topic:

    http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/10370306/UK-fracking-ambitions-threatened-by-EU-warning-over-methane-emissions.html

    And, no, we don’t have a veto:

    “Britain has no veto on EU environmental laws, which are decided by “qualified majority vote” and are often used as a backdoor way to override national energy policy.”

    So now we discuss which Prime Minister – Heath, Thatcher, Major, Blair, Brown – agreed that we should have no veto over EU environmental laws.

    I haven’t had time to look into it and so I can’t say for sure, but my first guess is that the answer will turn out to be … that great eurosceptic, “the blessed Margaret”, through her Single European Act.

  31. Posted October 11, 2013 at 5:54 pm | Permalink

    I suggest people read Martin Wolf’s article in the FT today for a good antidote to Mr Redwood’s party line piece.

    As for:

    “UK house prices experienced falls in 1990-92 when the UK was locked into the boom/bust cycle caused by membership of the Exchange Rate Mechanism and exit from it.”

    This is a selective reading of events, as usual. Mr Redwood does not mention the 1980 house price bubble engendered by the last Tory government. In particular, Lawson created a spike in house prices in 1988 because of the idiotic way he ended the government’s mortgage subsidy (tax relief on interest). Those who refuse to remember their history are condemned to repeat it.

    Reply There was no house bubble in 1980- and if there were it would have come from Labour policy 1974-79.
    The late 1980s house price bubble was created by shadowing the DM followed by entry into the ERM. This crazy system forced the Bank to print more money and sell it across the exchanges to try to keep the value of the pound down. The money so created allowed the commercial banks to lend too much in mortgages. Cutting mortgage interest subsidies was an attempt to cool the impact of the DM shadowing.

    • Posted October 12, 2013 at 12:56 pm | Permalink

      The topping on the cake was Lawson giving many months advance notice that he would be ending double mortgage tax relief for those who hadn’t already staked their claim to it by the August, as I recall off the cuff.

      Rather like now with Miliband giving nearly two years notice that he intends to freeze retail energy prices, people took note and reacted accordingly.

  32. Posted October 11, 2013 at 7:28 pm | Permalink

    another question..Isn’t a housing bubble relative to the area it is in and the cost of living/rather than economic policies/ it employs ?

  33. Posted October 11, 2013 at 7:40 pm | Permalink

    This little comparison table would mean more if we had, alongside it, how the average wage has risen in each of these countries. My suspicion is that wages in most of the high flyers e.g Singapore, HK, have grown faster than our own. Either that or they are other victims of foreign hot money . My guess is also their governments are trying to cool things, and aren’t offering their house builders more money on a plate to sell houses.
    Coupled with this, whose economy would you rather have, Italy, UK, Spain with their overheated construction sector or Germany, Switzerland?
    Anyhow, I think you just proved yourself wrong with this story.

  34. Posted October 11, 2013 at 10:05 pm | Permalink

    What we also need to know is how salaries and inflation have increased in these countries since 1980. For example if house prices in South Africa increased by 3,590% but wages increased by 4,000% then this means houses are now more affordable. Also if inflation was 3,590% in South Africa during this period then this means that in real terms house prices haven’t increased.

    Also the Government has mismanaged the economy to such as degree that for the first time since WW2 the Red Cross is having to provide food aid for the poor. Expect this to cost the Conservatives votes at the next election.

    http://www.independent.co.uk/news/uk/home-news/exclusive-red-cross-launches-emergency-food-aid-plan-for-uks-hungry-8872496.html

    • Posted October 12, 2013 at 12:48 pm | Permalink

      If this was a really serious problem needing the urgent attention of the Red Cross then no doubt Labour politicians across the land would have long ago swung into action to feed the starving and collect their votes.

      Shouldn’t we remember who wrecked the economy when they were last in office, before we listen to anything they have to say now?

      • Posted October 12, 2013 at 10:35 pm | Permalink

        The economy was growing at 2% when Labour left, so it’s not their fault that Osborne’s austerity policies trashed the economy.

        • Posted October 13, 2013 at 9:21 am | Permalink

          Labour left with the government having used £198 billion of newly printed money to help pay its bills, which corresponded to about 14% of GDP conjured out of the air by the Bank of England.

          Without that cunning ploy it would have been forced into making drastic public spending cuts during 2009, rather than being able to defer the pain until after the election so that the next government could take the blame.

        • Posted October 13, 2013 at 2:36 pm | Permalink

          The 2% growth you keep stating Uni, was the result of excessive State spending and borrowing that nearly ruined this nation and could not continue.
          It was fanstasy growth created by just the State.
          Compared to the amount “invested” by save the world Gordon the 2% growth that resulted was a very poor return.

          What we have now is genuine growth developed by the private sector not mindlessly hosing money into the economy that was borrowed.

  35. Posted October 12, 2013 at 10:01 am | Permalink

    “All those who have written in to condemn subsidies to the house buying market will be pleased to know that the scheme charges the lending institution a fee for the guarantee priced to avoid any state subsidy”

    Riiiight…. so there’s no subsidy. Is it just the magic beans that is going to drive through loans that would not otherwise be made then?

    And what kind of analysis compares house price rises across countries without looking at the GNP growth rates across those countries?

    • Posted October 12, 2013 at 12:39 pm | Permalink

      More precisely, per capita GNP growth rates.

  36. Posted October 12, 2013 at 3:27 pm | Permalink

    Why is this government not encouraging more house sharing in this country to reduce the housing shortage?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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