When will housing be affordable?

The government is discovering that wishing for housing to be more affordable, as they did for several years, creates an uncomfortable world of negative equity, weak banks and mortgage famine. They by now should have worked out that their theory that you needed to build more houses to bring house prices down was completely wrong. We today have plunging prices at the same time as large cuts in new building.

So when will housing be affordable? There is no single good price level, as it all depends on what price level the mortgage banks will support. They, under strong regulatory influence both ways, have lurched from believing very high prices are affordable, to working with much lower prices. What is affordable when banks will lend 5 times salary is not affordable when they will only lend 3 times salary. What was affordable with a 100% mortgage may not be affordable with an 80% mortgage.

The boom was so overdone in London that even people on good incomes were priced out of the London housing market unless they already owned a property or had some other windfall to help them. Still today, after considerable falls in the market, a new MP on £63,000 a year would be hard pressed to find anything more than a studio flat he or she could afford north of the river near the office. A professional, middle manager or Doctor on around £100,000 would have little choice of anything other than a one bedroom flat in the central districts if they were starting out with a mortgage and not much else. Pity anyone on average wages, they do not have a chance in inner London.

I fear this all means the fall has further to go. The government has not yet found a way to help mend the banks. The mortgage market is still far from happy. Northern Rock is in effective run off, so Northern’s mortgages need refinancing elsewhere as they fall due. On current policies we have not found a base for the property market. That means more losses at the taxpayer financed banks, in line with the deteriorating loan experience revealed by HBOS in their figures yesterday. Taxpayers are currently losing more than £7 billion on the bank shares the government has bought for £37 billion at current prices.

This week I asked the Foreign Secretary why it appears that Northern Rock cannot offer competitive busniess rates in the market owing to EU competition rules, but this constraint does not seem to apply to RBS. He said he would write to me with an answer. I think we need to know, as it seems odd that the smaller bank is prevented from writing much new business, whilst the bigger bank is unaffected.


  1. Ian Jones
    December 13, 2008

    The Government has provided billions to the banks in the hope that it would go towards mortgage lending and so keep house prices high. Unfortunately for the Government, the banks have simply kept this cash on the basis that they know house prices are overvalued so they will use the cash to sure up their capital positions as prices fall.

    This is the market working, it does not need more Government intervention as delaying the fall will simply delay the recovery. The more money they print the lower the pound will go and the higher non-asset inflation will become. This leads to job losses as firms have to cut costs.

    Obviously negative equity doesnt go down too well with voters so Labour will try everything including 0% interest rates and reckless spending to try to avoid it and will end up repeating the same mistakes as the 1970’s. Depressing.

  2. Neil Craig
    December 13, 2008

    John I disagree with you here. House prices are not low by historical trends it is merely that they are not quite as overblown as they were. Earlier this year I found that house prices had gone up 4 times compared to the RPI over the last century. This is indeed because of government regulation which prevents new building. Government’s theory that building more houses would bring down the price was absolutely right, it is just that, as usual, they sisn’t actually do it when the bubble was still inflating.

    I consider that the long term interest of the country is that houses should be widely available at reasonable prices. It is difficult to think of anything which would improve real standards of living more. This would in turn mean that people would start thinking of houses as simply places to live rather than investments – & would start looking for genuinely productive investments. If this meant a lot of banks finding that even more of the mortgages they held were in negative equity then tough. It is much more important to grow the economy with real production than keep all the pieces of paper in line.

    Reply: I did not say homes should be dear! I point out that getting from current levels to lower levels – which I think will happen – is going to be painful.

    1. Adam-
      December 13, 2008

      Interesting thoughts. From where I see it, what it all comes down to is that the Government, the market and, in fact, everyone has confused inflation caused by a shortage of housing stock with an economic boom. In fact, for a nation that has spent the last fifteen or twenty years essentially reliant on housing and lending money for said housing, we’ve actually built staggeringly little new housing stock in that period. Now the market is correcting to more realistic valuations as economic conditions undermine demand (deflation), which would increase the money supply available for other things, resulting in substantial non-asset inflation.

      So, worst case, if Gordon Brown’s (re)inflation plan flops, which is very possible, we could end up with a worthless currency, worthless assets and a shell of an economy.


      The penny drops.

      After you with the worry balls, sir!

  3. Bazman
    December 13, 2008

    This blind faith in the markets in housing is clearly foolish. If the markets had worked in this fantasy, there would have been a building frenzy with people and businesses fleeing to the north in search of cheap property to buy and rent, especially rent. Wages in London for everyone would have been sky high too
    The reality is that people live where they can get good wages, which is where business are at, which often means near to London and Europe and their relatives are too. With the average person and often ‘family’ earning about twenty grand a year. Don’t quote the average wage as its not true for the majority of the population, and with the majority of houses, except in rundown areas costing over a hundred grand, the party could not go on. You cannot exist just paying a mortgage and the ones who do and live on Cornflake Hill just crack and start using credit cards for luxuries like takeaways. The credit card crunch must still be in the pipeline.
    A debate about social housing is needed. If you live in subsidised housing and rent. The state is then the landlord/bank and does have some control of you. Non negotiable. Goes down badly with left and right, but not if you have scum neighbors or no house.

  4. mikestallard
    December 13, 2008

    Interesting article in the Telegraph Business section today. Mr Brown has spent out. He has also not declared the full extent of government debt either, which, if you add it all up instead of just bits of it, comes to several times our GDP, about twice as bad as France and a lot worse than Italy.
    The international lenders are smelling a rat – so the pound tumbles down. Financiers are, we are told, leaving London in droves.
    The IMF is a last resort, but it will be very busy lending to other customers when we have to go begging.
    So why not borrow off the national banks, especially the nationalised ones? This is, perhaps, why the rates are being kept so skewed making it impossible for them to lend and so attractive to them to build up capital – to support the government.
    I do know that this has been touched on in this blog before, but, put like that, it seems to make a lot of sense.

  5. Bazman
    December 14, 2008

    Great time to buy a large house and car these days if you are brave.
    I would say that the price of houses is based on the cost of the land they are built on, which is determined by a large part law and regulations. The real price of a car is it’s second hand price. The first owner pays a massive premium to have the prestige of driving a new car. That second hand price also being determined to a large part on running costs and maintenance. fashion and reputation for reliability, true or otherwise, also plays a part too. House prices do not seem to reflect these factors very much.
    It’s true that Britain is one of the most urbanised countries in the world, but the physical reality of this is about 6% of the land concreted over. NIMBY’s from across the political spectrum have a lot to answer for. Ultra insulated chap housing in the form of back to back terraces and the now illegal to build blind back terraces could be the answer. Not the future slums being built now. Docklands anyone? I bet todays Rachman’s are interested.

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