The housing market that wouldn’t die
What will it take to actually reduce house prices?
A quarter of the economy has disappeared. Millions of people are out of work. The Government sinks ever deeper into debt. But look on the bright side — at least house prices are holding up! Indeed a report from Hometrack shows that Covid-19 has barely dented the year-on-year rise in the market:
One wonders what it would take to actually reduce prices. If a deadly pandemic won’t do the job, then how about an asteroid strike or a supervolcano going off? But even if something like that could be arranged, I’d have my doubts as to its efficacy — the Martians could nuke London from high orbit and the less radioactive suburbs would still be described as ‘up-and-coming.’
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In any case, apocalyptic events are bad for supply thus creating inflationary pressures. By way of contrast, Hometrack reports that demand is buoyant — despite the virus:
That’s especially true in the northern cities — perhaps a sign that the government’s levelling-up agenda is pushing at an open door.
Right now, ministers are focused on temporary stimulus measures to stop the economy from seizing up altogether. However, looking ahead, deeper reforms are needed to counter the long-term scarring effects of the pandemic.
It’s hard to think of anything that would do more to create new confidence than giving millions of people (especially young people) access to affordable homeownership. Yet, evidently, the conventional housing market will never deliver the necessary fall in prices. Even if there’s a ‘correction’ in 2021 — it will, most likely, be a temporary one. That’s because the big housebuilders still control new supply and have no interest in prices staying low. We saw how price levels recovered after the 2008 banking crisis and there’s no reason think that the same thing won’t happen again.
If the Government wants a different outcome, then it needs a different housing market — indeed a parallel market that works to spread homeownership instead of pushing up its cost.
Covid is a blip. Yes it appears to be devastating the economy but people still need somewhere to live. People still aspire to own property. This country has a finite amount of land allowed for development and we are, unquestionably, not building anywhere near enough houses to meet existing demand – even whilst the population continues to increase.
You know those Supply and Demand graphs you find at the front of any and every Economics books ““ from a “Beginner’s Guide” through to the work of Nobel laureates? They’re there for a reason.
Supply and demand is not merely a whim, that can be ignored in favour of some more ideologically appealing argument. It works. It describes the realities of the situation and is the foundation and fundamental principle of economics.
If you tamper with it, seek to control it or otherwise get in the way of it then there will be a downside. Artificial reduction in the price of something will cause demand to rise, supply will fall, and there will be a shortage.
The market price of something is the market price. If you wish to reduce that price then you must either lessen the demand or increase supply.
Any sensible economist, politician or just anyone at all acquainted with how things actually work could tell you that if you wish to see lower house prices/rents then you have two obvious options: you’d better build more houses for people to buy/rent or reduce the number of people looking to buy/rent them.
The latter option is anathema to the Guardian and leftish economists who, despite the mountain of evidence to the contrary, still insist that there doesn’t need to be any curbs on the number of people.
I’m wary of bringing this up because I will doubtless end up having to field responses about anti-immigrant policies ““ which is not is not the argument I am making ““ merely pointing out the realities of situation (particularly in the areas suffering the worst of the housing crisis).
So, at the risk of upsetting the pachydermaphobes – why do so many refuse to recognise the fairly large and obvious elephant in the room?
The Department for Communities and Local Government projections about the future growth in the number of households in England point out that if net migration to England was to continue at 233,000 a year (it is currently 300,000 and has averaged 208,000 in the last ten years), then 240,000 new homes will be needed each year for the next 25 years to keep up with demand, 45% of which will be due to future migration.
To meet this demand, we would need to build one home every five minutes (day and night) just to house future migrants and their children. If we refuse to address that fact, then no amount of tweaks to laws pertaining to landlords and renters will actually make an appreciable difference.
Guardian columnists and the BBC refuse to accept that immigration has had any negative impact on housing but if you take immigration figures and add to those the children born to immigrants you will find that fully 82% of the population increase since 2001 has been due to immigration.
That is a numerical fact, that is not merely an opinion, it is a fact.
So, if 82% of the increase in population has been related to immigration how can anyone possibly suggest that immigration has nothing to do with it?
If there is a housing crisis, and you add 2.5 million people to the population do you think that it:
A: Helps the situation?
B: Worsens the situation?
C: Has no impact on the situation?
(If you think options A or C are true then I have some magic beans I would like to sell you.)
Immigration has had an enormous impact on Britain, much of it very positive – but to pretend it has come at no cost or that the rise in population due to immigration has had no negative impact on the housing shortage is ludicrous.
It is impossible to find an effective solution when ideology blinds you to an obvious cause of a problem.
Everything has a cost, migration too. The bigger issue is national cohesiveness (and not European migrants are not a problem).
Everybody (Daily Mail/Sun/Express/Telegraph) banged on about migration; every time I watched QT audience members raised the issue of migration. UKIP, Tories endlessly banged on about migration!
Why didn’t government stopped it?
Because the economy needs migrants. UK has an aging population, low productivity and an ever increasing demand for public services.
So the choice was (and still is) migration of lower growth and worst services.
I am all for “there is more to a country than GDP growth”, but the people need to accept that there is a hard decision to make.
As of now (from Brexit to BoJo’s election) the position seems to be BoJO’s cake position.
The economy does not need half a million migrants a year. They may increase GDP gross but it reduces GDP per capita.
There is a persistent and somewhat glib insistence among many that “Immigrants put in more than they take out.” A statement that has been roundly and soundly debunked many times over – though probably never reported on the BBC or Guardian as it defies the Blairite orthodoxy on the benefits of limitless immigration.
Young, able-bodied immigrants do, indeed, contribute more than they extract.
However, factor in their spouses, their off-spring, the fact that these once-young migrants will age and no longer contribute, not to mention the monies that migrants receive that are sent overseas and not spent here, or the child benefit paid for children living in other EU countries and the picture becomes rather different.
Nobody seems to be able to agree on anything like an exact figure but overall migration to the UK is a massively greater cost to the exchequer than a benefit. Any increase in GDP has to be weighed against the size of population and the provision of services.
The 3 major recent studies have assessed the net fiscal impact of migrants in the UK over different periods.
“¦.The OECD found an average annual net fiscal cost of Â£4.3 billion in the years 2007 to 2009. Thus, on average, EU migrants paid Â£4.3 billion less in taxes than they received in benefits and services.
“¦. Centre for Research and Analysis on Migration (CReAM) at University College London found that all migrants were a net fiscal cost of Â£14.8 billion in the financial year 2011/12.
…. Using similar methodology to CReAM, research by Migration Watch UK found that all migrants were a net fiscal cost of Â£13 billion in 2014/15.
“¦”¦ Recent migrants from non-EU countries were also a net cost to the Exchequer in both analyses. CReAM estimated a net cost of Â£2.2 billion in 2011/12 meanwhile Migration Watch estimated a cost of Â£3.8 billion in 2014/15.
Everything you say is spot on. Unfortunately, even though it is obviously true, it is widely regarded by the elites as beyond the pale on moral grounds.
“If you tamper with it, seek to control it or otherwise get in the way of it then there will be a downside.”
Yes, but HMG has used public policy to influence the housing market since the end of WWI :
It should do so now so as to reduce demand, whilst implementing policies to increase supply, which take longer to feed through than demand reduction measures.
Spot on. If I could give a million upticks I would.
Two points .
You underestimate immigration. It is currently running at over 500,000 per annum . 10,000 a week. Barmy .
You underplay demand (available lending) control lending and house prices will increase less.
Actually, I did say “Net” immigration which is closer to the figures I quoted.
At risk of committing a proof by anecdote fallacy, I will say that I live in Los Angeles, right in the muck of bad housing policy.
My apartment complex is rent controlled, another glaring example of left-wing “good intent” policy that has virtually no good outcomes, as agreed upon by the vast majority of economists, left and right.
Some tenants have been here almost 40 years. My quick napkin calculations starting at average area rents in 1980, shows that they are currently paying less than half of what more recent tenants are paying. So the rest of us are then forced to involuntarily subsidize their rent. This also forces the ownership to maintain the property at bare minimum cost, using illegal immigrant “repairmen”, and leaving things unfixed for long periods of time.
This also limits the amount of owner revenue/capital, which decreases the likelihood and frequency they can develop new properties, thus lowering supply.
These old tenants live in near squalor, hoard junk, and go through our dumpsters at night pulling out everything from discarded furniture and electronics, to bottles and cans for 5Â¢ redemptions (actually I believe cans in CA are redeemed by aluminum weight, which makes each can closer to 1Â¢).
I don’t say that to rip on them, as they’re sweet people. But they are victims of how “empathetic” price-control policy lowers the bar to get by. This is why they don’t stop dumpster diving, because a few hundred cans and bottles a day is enough to help them meet their arbitrarily determined rent price each month. It’s as if they’re stuck in an isolated economy that moves at 10% the rate of everyone else’s, currently somewhere circa 1995.
They have no incentive to look for better paying jobs, nor can they ever leave. They have been robbed of their autonomy and path to upward mobility. They are prisoners in an artificial market created for them by politicians who came under the banner of “fairness”.
And to anecdotally comment on the supply/demand point, there is a lot adjacent to my apartment building that began construction over two years ago. Every few months they’ll come back and make a little progress. But for the last 6 months or so, it’s been stalled. Why? Because of insane regulations on housing development. Waiting for permits, approvals, environmental “compliance”, etc. I would not be surprised if the developers abandoned the project at this point. Just another example of how supply is extremely bottlenecked, while demand keeps increasing.
Absolutely right. Frankly, anyone who thinks Rent Control is the answer to the housing problem doesn’t understand the question.
All Rent Controls do is reduce the availability of places to rent.
Harvard produced a research paper surveying economists around the globe to see if there were any areas on which there was almost universal consensus ““…. Guess what one, single issue topped the list? …”¦ yup “¦. The ineffectiveness of Rent Control.
Fully 93% agreed with the statement that: “A ceiling on rents reduces the quantity and quality of housing available.”
Swedish economist Assar Lindbeck spelled it out even more starkly ““ “Next to bombing, Rent Controls seem to be the most efficient technique we know for destroying cities”.
I’ve asked fans of rent control in the past, – what price should rent control be set at?
What would be the sense of setting the rent control price above the market price? None.
If you set the price below market price that leads to a shortage.
Rent control directly incentivizes fewer new builds and existing buildings will not be maintained. Do we need to see more appalling tragedies like Grenfell to make that point?
Of course, some Labour supporters still have faith that their leaders might stumble across a rent price which doesn’t cause either shortage and decay, nor a surplus, …… but that magic formula rent control price is already well known – just known by another name, – it’s called “The Market Price”.
Yes, supply and demand for housing play a huge part as you so clearly state, but the market price for houses has one other important factor and that is interest rates which, despite all that BoE independence baloney, is all driven by government policy.
People get very tangled about house prices .They claim its all about supply- It is simple -there is obviously demand and supply. Supply is clear – the number of available houses.
Demand is not so simple – demand is really the amounts buyers can borrow.
When lenders lend more, house prices rise- when lenders restrict lending to a smaller income multiple, house prices rise less.
So the issue needs to be tackled from both ends. More homes need to be available. And Lending needs to be sensible. It used to be three times income with a maximum loan to value of 90% – and house prices were sensible.
Governt schemes like assisted buying just increase demand and put prices up.
You have forgotten one key factor – interest rates. When we bought our first house in 1968 the interest rate on our mortgage was fractionally under 7% and from there it went on ever upwards to 10% and more. It did drop during the last few years of our final mortgage, but too late for us get any real benefit from them.
Borrowers are constrained by the proportion of their income they can afford to spend on a mortgage. When interest is high how much they can afford to borrow is constrained and prices are lower. Reduce interest rates and there is more money to go into the price of the property.
I do not think lenders are now reckless in their lending. They learnt the hard way in 2008. But they are pushing the punishment onto the borrowers by demanding huge deposits. from purchasers. As Michael Reed says, loans should be limited to three times the borrowers income and also limited to 3 times the first salary and half the second to help single house owners and those with young children.
UK GOV and BofE are throwing money with both hands at the economy and housing market. But in the end either the housing will go down or Â£ will go down.
My money is no Â£ (by keeping as little as possible).
Yes, as has been obvious for many years, they will do anything – literally anything – to prop up the housing market. They will even, as you say, destroy the currency and the value of money itself.
They are not “money-grubbing”. UK Gov (of both parties) has made a decision to support home ownership as the driving force for economic growth. Not hard to understand.
“Money-grubbing” is a pejorative description to apply to people seeking income, but in fact it is something we all do (we all want money), landlords or not. The fact is, successive governments have not thought enough about de-incentivising BTL relative to first-time purchase, so of course investors with spare cash will “money-grub” in the property market if the promised returns are greater than in other forms of investment.
And, yes, the power in the market is indeed tilted in favour of landlords, their often rent-inflating agents, and their off-the-shelf, non-negotiable rental agreements.
What is the moral difference between a self employed person buying a property to fund their pension & public sector employees who let pension fund managers buy the property to fund their pensions?
If you wish to have stable or lower house prices, there are two simple cures.
One is financial, – the government to stop throwing money at house prices, such as reducing stamp duty and the first time buyers bribe and to increase interest rates.
The second is planning permission and most building regulations, get rid of those and more houses will be built.
I am not sure any party would get elected on that platform, but it is a solution!
Agreed, but as massive borrowers themselves the government is not in a good position to reduce interest rates. Besides there’s all that other borrowing they want to do for their fancy projects so that they can fulfill the main aim of any politician … to stay in power.
When successive government have destroyed private pensions, lowered interest rates to zero, and are once again overseeing a stock market crash, you can’t blame people for going in to BTL. What else are they supposed to do? Starve before dying in a ditch?
But that is the point, you and I are pensioners now with an occupational pension and probably a mortgage free house whose value we can utilise through equity release.
For those who have yet to retire, who may be only a short distance into their working lives, with occupational pensions long gone and interests rates low, then a buy-to-let is the only thing between them and starving in a ditch in old age
Good point Fraser. I’m a ‘private landlord’ circumstantially due to moving in with my partner and renting my house to my partner’s brother for the past 8 years. He’s still paying the same rent as he was when he moved in and it’s currently half the market value! (I’ll let you guess what the tattoo on my forehead reads) Yes I’d like him to move out so I can increase (considerably) my monthly income from my property but: 1 He’s family. 2 He can’t afford to move on. Also being in relatively good health and 15 years younger than I he’ll potentially live at my house paying a peppercorn rent until the day I die or, as I plan in a couple of years, sell it. Bummer. Yes many BTL landlords are trying to earn money and with interest rates so low what I ask are they/we supposed to do with our savings stick it in Premium Bonds? And if people didn’t buy to let where would all the renters live; very few are anywhere near a position to buy their own property – at any price. BTL landlords like us aren’t all money grubbers named Rackman, in may case I reckon its my tenant (although I concede it’s entirely my fault) that’s the money grubber here. 😉
My thoughts too.
Whilst retention of supply by developers is clearly a factor, I’m not sure it’s really the main driver here. Similar price trends are observed all around the world, in markets with very different characteristics, from Sydney to Beijing. There’s a stronger argument for this to be driven by the ever increasing amount of money made available by private banks, as a result of the financial deregulation of recent decades. House prices in Britain didn’t increase in real terms this century until banks were given freer reign to create money.
I’m more familiar with housing markets in the US than UK, but my instinct is that there are many similar dynamics at play.
One point is that while many people like the idea of housing becoming more affordable overall, essentially nobody wants the value of *their house* to decline. The stat I find is that ~60% of households in the UK own their homes, so that’s a large constituency against widespread declines in home prices. From a standpoint of practical politics, we *might* get policies that slow growth in home prices, but there’d be widespread pressure for government policies to try to stop actual decline in prices.
That political reality is exacerbated because many homeowners develop a sense that they’re entitled to keep in place any regulatory restrictions that change the “character” of where they live – dense nearby development, for example. And, while I in broad terms support allowing additional housing supply to be built as a solution to lack of housing affordability, I do have some sympathy for people who have bought homes recently – paying up due to the current regulatory regime – and then face a negative financial and (at least in their eyes) lifestyle impact from a change in those rules.
It’s therefore a difficult and self-perpetuating problem, and I agree with the other comments that the issue fundamentally boils down to supply and demand.
I agree that interest rates are also a factor, since homes are long-lived assets and usually purchased with debt financing on the basis of what mortgage payment someone can afford. It seems that especially becomes the dominant factor when supply is restricted, whether due to regulatory limits on new construction and/or geographic limitations on what constitutes a desirable, high-demand area (ability to commute, for example).
Can we get cheaper houses without more expensive money (i.e. higher interest rates)?
Yes- restrict lending to three times one income.
Its very simple to reduce the price of housing but what politician would be brave enough to preside over a reduction in the value of everyone’s homes?
As per the 1970 and early 80s… restrict the mortgage borrowing to 3.5 times single salary or 3 times joint salary. This restriction in the amount people can borrow will have an immediate affect on house prices. There are is no RRP on prices, only what people are prepared or can afford.
There has been a lot of government fiat money creation, but the way it is injected into the economy guarantees inflation of all financial assets at the expense of real economic activity.
I see a lot of comments lamenting the effect of “buy-to-let”. Recently, the government has been waging a war on buy-to-let with a lot of expensive regulations. The net result is that small landlords are very discouraged, and the market is consolidating in larger entities that can cope with the red tape. If I were advising someone who wanted to invest in buy-to-let now, I would say, “get a professional managing agent”. Navigating the rules is now a nightmare, the cost of which must be factored into the return you can expect.
What we are seeing is fiat money seeking quick deployment, and a consolidation of control over real (existing) assets bought with that money. “Rich getting richer” at the expense of the (former) middle and the bottom. Look up the “Cantillon effect”.
There is a plan. Build build build ðŸµï¸
Beyond that, the rental housing market is I’m sure the primary reason why house prices (and rents) stay so unaffordable.
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