David Ulldemolins – Written evidence (EHM0086)
16th December 2015
Economics Affair Committee
(Economics of the UK housing market – written submission)
Dear Sirs,
‘For our today we sacrifice our tomorrow’
Taking inspiration from the WWII memorial inscription in Kohima my re-interpretation I believe sums up our society today.
The financial crisis that rocked the world economy in 2008 has not resulted in anyway near the financial constraint that would typify a significant shift away from a consumerist focused economy.
We live in a credit fuelled society and our addiction to debt or rather more the instruments that facilitate it are omnipresent.
The consumer’s acceptance to take on debt and the financial and retail industries willingness to foster it has resulted in today’s maelstrom of rising inequality.
I am an aspiring home purchaser and have been for many years. I wrote in 2008 to various housing commentators and those in positions of influence including the then Bank of England governor regarding the housing predicament I and many others were experiencing. Mr Mervyn King and his deputy Rachel Lomax kindly responded.
The Government’s own English Housing Survey 2013 to 2014 found home ownership has fallen to a 29-year low. A marked decline showed in the age range 25-34 year olds with homeownership dropping from 59% to 36% over the past ten years.
Seven years on the housing crisis is still far from over. Worryingly the same excesses that drove GDP growth prior to 2008 are still very much prevalent.
Coupled with the introduction of Help to Buy and with the scheme now extended until 2020 my heart literally sank following the original announcement by George Osborne.
I will demonstrate in the attached paper why housing is a topic the government must tackle and why both the Help to Buy & Right to Buy schemes must be repealed as soon as possible.
Proponents including the Government of the aforementioned schemes may argue they assist first-time buyers into home ownership and I am sure there are the testimony of thousands who have already participated in congratulating the chancellor but desperation can blind anyone from making a rational judgement.
Other rationale argued the scheme (Help to Buy) would provide an impetus for more homes to be built reducing the imbalance between supply and demand and in turn support the UK construction industry. However recent research suggested most new homes would have been built regardless and a report by the Nationwide in late November 2015 stated supply in the 12 months to September 2015 was at its lowest since the 1970’s with only 135,000 new homes built.
So how will the scheme’s success be judged? Is it simply by how many new households will be created or will it be if house prices are sustained or continue to rise?
The Help to Buy and extension to the Right to Buy schemes were and are a mask for short-term support used in the worst possible way in the run up to the last general election but at a possible cost of future economic creditability. So why does the Conservatives continue to support it? Perhaps votes over prudence does win.
Intervention needs to concentrate on existing stock, supply and regulation in order to ensure a healthy functioning market.
I have not been in settled accommodation for over a decade and I cannot begin to tell you how dispiriting this is. I am in full-time work on below average median income and not be able to purchase a reasonable sized property for my needs is unacceptable in today’s society.
The creativity of thousands if not millions are being stifled by the constant worry of living conditions and not being able to buy their own home.
Renting is not an option as this simply curtails one’s ability to save for a deposit so many are forced to rent rooms in private houses. Is this the society the Government wants its working citizens to live in?
Many commenters I believe have incorrectly assumed that a recovery in the housing market is one where prices increase. No a real recovery would be one where prices drop further so those on average median incomes and the majority of the working population would be able to purchase a home.
So what possible reasons could I have for disagreeing with Help to Buy? I am a first time buyer so surely the scheme is good news for me?
I hope I answer that question in the attached report and will attempt to contest the hitherto opinion that house prices rises are linked strictly to lack of supply in my analysis of housing that follows.
I am not an economist and in summary my opinions are of course subjective but I hope to provide for the first-time a comprehensive paper that has been drafted by someone directly affected with no corporate or other agenda apart from wishing to live in a fairer society.
As Mian & Sufi (2012) [1]argue the authorities misdiagnosed the financial crisis of 2008 by ensuring the banking sector was rescuing the financial sector and not assisting homeowners. This must surely change.
Thank you for taking the time to read my letter and attached report.
Yours sincerely
Mr David Ulldemolins
Enclosed: Report
Don’t Worry. There goes inspiration!
Why the UK housing market is broken and how government initiatives are doing more harm than good.
Contents
Help to Buy
“If we were in a housing boom of course we wouldn’t be doing this sort of thing,” (George Osborne, Chancellor of the Exchequer-The Times, Mortgage plan is not yet finished, admits Chancellor/ 20th March 2013)
“It’s the right thing to do to help struggling families who cannot afford a deposit” (Danny Alexander, Chief Secretary to the Treasury, BBC News interview, 19th September 2013)
"Lots of people who say 'oh, we shouldn't be doing this', are people who've got a house, got a mortgage, sometimes they've paid off the mortgage," (Grant Shapps, Conservative Party Chairman, BBC News interview, 29th September 2013)
The Help to Buy scheme should be called Help to Leverage (William Buiter, former MPC member and now chief economist of Citigroup, April 2014)
‘There is no housing boom’ (MP Sajid Javid, Culture Secretary, Newsnight 09th April 2014)
When the chancellor first announced this scheme in the spring budget of 2013 my heart literally sank. I have been an aspirational homeowner for fifteen years, a saver and never been in debt. House prices had been falling since 2008 but once again prices over the past couple of years have risen by current measurable indexes. Hasn’t the recent economic downturn taught the incumbent Government anything?
Headline grabbing news statements concerning the ever onward rise of house prices belie the real truth. The fact is we are still in the midst of a housing boom and one that needs to be deflated most notably in London and lower England in order to secure affordable homeownership for aspiring owners.
How is success measured on the scheme? Data published by the Treasury showed 7,313 Help to Buy 2 mortgages were completed in the scheme’s first six months.
This is 7,313 to many.
The scheme is a divisive issue but many proponents including the Prime Minister have argued the scheme has not stoked house prices as only 5pc of purchases were in London where the largest prices increases have been. It has had a larger impact in the regions.
Research prior to the statistical release by the Treasury from the NIESR argued many critics were overstating the impact and had little effect on prices. It found less than 2 per cent of the 1.1m housing transactions since April 2013 were the result of the scheme. Price rises it argued are due to cheap mortgages and the better availability of credit. As Jonathan Portes, director of NIESR stated “It is clearly mortgage availability and price that has pushed up demand”.
Interesting to note that in a co-authored article in the Guardian newspaper a year earlier he argued that the (scheme) will simply sow the seeds of tomorrow’s crisis and raise house prices. (Help to Buy: A great of distorting an already distorting housing market, 21st March 2013).
To concentrate on it simply in terms of driving up prices and driving growth in the capital is to miss the point. My own presentiment was always the impact regionally and on seller confidence. If Government intervention is seen as positive driver in stabilising prices both sellers and estate agents, see this as placing a floor on house price falls. I would certainly like to see empirical research done in this area.
Most concerning are the expressive thoughts of many in influential positions. Brian Murphy, head of lending at Mortgage Advice Bureau stated “writing off a scheme that is aiding those who most need it [first time-buyers] is not the way to go about it”.
The very fact that anyone using the Help to Buy scheme needs assisting is a reflection that prices are simply too high. Encouraging those with little savings to take on large debts is irrational and irresponsible. We cumulatively save too little as a nation and it should be other parts of the housing market such as the private rented sector that needs the regulatory hand of the Government not introducing a mortgage guarantee scheme for an indebted nation (£1.487 trillion deficit, ONS April 2015).
By delaying a much overdue correction will only heighten the probability of a severe deflation in prices later at which point many aspiring first-time buyers tempted with those offers of home assistance will potentially be the hardest hit.
Detractors of Help to Buy have been notable and it is important to note of just how many have raised serious concerns but the Government steadfastly refuses to change course (see Fig 1).
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Figure 1
The level of scepticism is important to highlight as its evidence to show there is a high amount of disquiet regarding the scheme.
Danny Dorling, Oxford University professor specialising in inequality has stated the scheme acts as an artificial floor by preventing prices adjusting to realistic levels and by some measures overpriced by 20 per cent.
By early 2013 concern was rapidly escalating and the Treasury Select Committee requested a two-page list of questions to the scheme’s impact and rationale.
Doubts by influential think tanks and figures in finance raised legitimate concerns as the year [2013] progressed with many highly critical.
The Social Market Foundation said “Overall, the scheme will entice young people to load themselves up with debt to finance overprices houses, keeping the housing bubble inflated with taxpayer guarantees”. “And if all goes wrong and house prices fall, the young will pay twice: once for their overpriced house and once through their taxes to pay for the losses on this unwise gamble”.
(Are we sowing the seeds of a new housing bubble? 23rd March, 2013, The Daily Telegraph)
The OECD said in May [2013] house prices in Britain were as much as 30pc too high relative to rents, and 20pc overvalued compared with incomes. In May 2014 it warned that the UK government should scale back on Help to Buy.
The International Monetary Fund (IMF) also levelled criticism warning that it would undermine its own aim of increasing access to housing and simply push up house prices. (IMF warns on dangers of Help to Buy mortgage scheme, 22nd May 2013, The Daily Telegraph)
Andrew Bridgen, a senior economist at Fathom Consulting, a forecasting firm run by former Bank of England economists, said: “Help to Buy is a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who should not be offered credit”. May 2013
The former chancellor Norman Lamont and Financial Times journalist Gillian Tet were both highly critical with Lamont arguing pre-financial crisis growth was illusionary (based on credit inflating the economy and consequently GDP) and Help to Buy was a plan for the Government to gain voters at the expense of an increase in debt for political means only (Newsnight 11th June 2013).
The Building Societies Association also spoke out warning that it could inflate property prices (Building Societies warn on ‘house price bubble’, 18th June 2013, The Daily Telegraph).
The most scathing remarks were by Albert Edwards of Societe Generale who called the scheme moronic. “I believe it truly is a moronic policy that stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business,” he wrote in a research note in June 2013.
Graeme Leach, Chief Economist at the Institute of Directors attacked the scheme arguing it will ‘drive up prices’. Commenting Mr Leach said “The housing market needs supply, not help to buy and the extension of this scheme is very dangerous. Government guarantees will not increase the supply of homes, but they will drive up prices at a time when it seems likely that house prices are already over-valued (George Osborne’s Help to Buy is ‘very dangerous’ expert warns, The Daily Telegraph, 23rd July 2013).
The Adam Smith Institute warned in a report house prices will rise and make home ownership less accessible (Briefing: Burning down the house, Government is not the solution to the housing crisis, September 2013).
In November 2013 the Nationwide Boss Graham Beale confirmed it will not take part in the second stage of the scheme.
Did the government heed these warnings? By 2014 the government sought to expand the scheme instead.
Lord Turner the former head of the city watchdog has sensibly warned the ‘recovery’ appears to be built on the very foundations that precipitated the financial crisis. Incentivising home purchasing by not increasing the fixed supply of homes will potentially result in the market crashing as price would be the only denominator to give. (Lord Turner: Housing boom could drag UK back into crisis. Daily Telegraph, 26 March 2014)
Interestingly the Chancellor’s economic justification for the scheme was contradicted by the Treasury’s own internal analysis when the policy was being formulated. The aim was to encourage more house building but the internal report did not believe the policy would have the intended effect on increasing house supply. Statistical evidence since the final quarter of 2013 shows property transactions had grown by just 2% (HMRC). Similarly housing construction since the introduction of the Help to Buy scheme in the first quarter of 2013 to the third quarter of 2014 shows a 15 per cent rise (28,630 to 32,890). The introduction of the second phase of the scheme in the final quarter 2013 shows just a one per cent rise.
The total number of properties sold under the equity loan scheme up to December 2013 was 41,533 properties and under the mortgage guarantee 30,269 by September 2014 (the first full-year). (The Independent: Chancellor ignored advice from Treasury to launch Help to Buy Scheme, 05th February 2015)
Former members of the Bank of England’s Monetary Policy Committee have also voiced objections with Adam Posen now president of the Washington based Peterson Institute told listeners on Radio 5 Live’s Wake Up to Money programme the scheme (Help to Buy) was mistaken and dysfunctional.
More recently (01st December 2015) comments made by Dame Kate Barker to the House of Lords Economic Affairs Committee reinforced criticism to the scheme [Help to Buy] by arguing there were better ways to use the money. She is also highly critical of extending the right to buy to housing association tenant’s (more later).
My real fear is that the Government’s introduction of these schemes will prove to be a false dawn for the housing market and will only seek to cause more damage than good. It will only entice more people into debt.
In addition, it is extremely worrying that many of these concerns and objections are seemingly ignored.
Short term policy planning is no substitute for a long term strategic plan with emphasis on sustainability and equality.
In regards to the wider economy, I urge the MPC to raise interest rates so we can rebalance the economy away from debt. This provides the impetus to save and hopefully discourage those from taking on too much debt. As outlined by numerous reports most recently by the Resolution Foundation if many people cannot afford repayments at just 3% then the strategy of low interest rates has been misguided.
The era of cheap money should have ended with the financial crisis as it has manifested an element of confidence that is wholly misplaced.
Does the Government genuinely believe that all those applicants who found it so hard to save a 5% deposit will then be in a position five interest free years later to repay back a 20% loan?
There is no doubt scheme’s such as Help to Buy and Shared Ownership are assisting individuals onto the housing ladder. That is not in dispute. The issue is at what cost to the applicant and the market as a whole?
They could be viewed as lures enticing prospective home buyers into a purchasing a property they can ill afford with potentially huge repercussions much later on. At that stage the present government cabinet would likely to have changed.
Arguably those that benefit the most may not be households but corporate entities such as the house builders. Tragically they have for years gorged on fat profits by short changing the very people they expect to purchase from them. Compared to most house size metrics across the continent they produce ever smaller homes for ever higher margins.
To countercheck this potential gross imbalance of providing poor quality stock one of the Government’s only useful Quango’s was CABE which was effectively disbanded in 2011 by amalgamating it into the Design Council. It had a reputation for producing hard hitting reports on the English housing market. In one it stated that over two thirds of new homes were of a poor standard!
Furthermore, evidence of Help to Buy’s impact on house builders can be gleaned from there revenues. Bellway announced in February 2014 its order book had jumped to £783million by the end of January 2014 with the average house price selling for £212,000 due in part it stated to the Help to Buy scheme.
If the housebuilders were so confident in selling homes for such high prices, why are they so eager to embrace such schemes?
Take the following developments by Crest Nicholson in Hereford and Bristol.
Reviewing the Land Registry data against the price of the scheme in general (Table 1) and individual homes (Table 2) it is quite clear the Land Registry prices are significantly lower.
Table 1
Table 2
The house builder appears to be marking their prices very high and then discounting the equity scheme entry point around the local average dependent on the type of property. Surely though Help to Buy should be significantly lower than the average Land Registry price as what would then be the point in assisting first-time buyers.
As intimated above proponents of the various government equity schemes appear to be unsurprisingly the very institutions that stand to lose the most if such schemes were not in operation. One mortgage industry body has claimed that first-time buyers will suffer if the Government allows the Help to Buy mortgage guarantee scheme to expire and has called for a permanent replacement.
According to research by the Intermediary Mortgage Lenders Association (IMLA), failing to replace the Help to Buy mortgage guarantees scheme (HTB2) with a permanent mortgage indemnity scheme would choke off competition and reduce access to the market for first-time buyers.
If the government scheme is allowed to expire it asserted by the end of 2016 without a permanent replacement almost two thirds of lenders it said believed that competition in the high loan-to-value (LTV) market will fall without a permanent replacement.
We of course heard in the autumn statement in 2015 the scheme was to be extended to 2020.
Balanced criticism by such parties is rare. Instead the focus is on how
Research by the IMLA revealed that three quarters (75%) of brokers and 65% of lenders expect first time buyer numbers would drop if the scheme ends without a successor in place. A majority of both groups (75% of brokers and 85% of lenders) believe access to homeownership would suffer as a result, having already dropped significantly among 25-34 year olds in the last 10 years.
Similarly, the Mortgage Advice Bureau said fewer homes would have been built over the past two years. Figures from the DCLG showed 118,830 homes were built in England in 2014 with equity loan completions totalling 28,666, 24% of the total. In 2013 a total of 109,570 new homes were built. If HTB1 was discounted, then the total number of new homes built would have fallen by 5% year-on-year. The figures showed the cost of the typical house brought via the scheme in January was £205,327 and the average salary of a buyer using HTB1 was £32,338 less than the market average of £39,811.
This highlights what is wrong with such schemes. £205,327 as an average cost for an assisted property is still vastly overpriced. Using an income multiple of 4.5 on an income of £32,338 results in £145,521. The £60,000 shortfall would then have to be met by combination of deposit and equity loan which incidentally would have to be paid back in five years.
Typically, some sections of the press have an almost unhealthy juxtaposition on stoking up the market. Property correspondents of some national newspapers are advocates of the scheme. Take Anne Ashworth from The Times whom we are told is the property columnist of the year who argues for a property tax instead of ‘penalising the beneficiaries of Help to Buy’.
It almost makes one weep. The beneficiaries of disbanding such schemes would be all of those striving to get on the market if prices were much lower not by a scheme artificially manipulating the market by coaxing first-time buyers into an over inflated market.
Just a few days ago housing experts have said the scheme is underpinning the market. 2,252 homes were brought in September giving it a record third quarter.
Ray Boulger of John Charcol mortgages estimates the proportion of sales directly linked to the scheme is 40% and on some building sites nearly 70%.
He states ‘that [Help to Buy] makes it massively important’. I would argue ‘that makes it a monumental mistake’.
Providing life support to underpin the housing market is dangerous and the wrong strategy. It has resulted in house prices being supported at levels that if left to their natural course would more than likely have fallen and by turn many more household being able to afford one.
House Prices
House prices have reached record levels this year according to all the major indices. So is this cause to celebrate?
For the seller it may well be good news but the law of unintended consequences may not necessarily result in the benefit they may think they are expecting.
The general health of society appears to revolve around material wealth. In regards to housing it is generally accepted that high prices are seen as beneficial regardless of the drawbacks both economically and socially.
However, it is important to note that some institutions including the Bank for International Settlements, the IMF (United Kingdom 2012 Article IV Consultation), the Bank of England’s own biannual Systemic Risk Survey and even the head of the Government’s Office of Budget Responsibility have all concluded Britain’s house prices are overvalued in relation to income.
These expert findings facilitate the framework to support my hypothesis that not only house prices are far too expensive but reasoned debate by especially the press is somewhat missing. Far larger numbers of people read newspapers than a report by an economics institution so who does the public take as gospel? The hype of a newspaper columnist or an academic economist?
Academics within the field have also concluded prices are too high. Research by Professor James Mitchell, Professor of Economic Modelling and Forecasting at Warwick Business School warned in late 2013 that house prices were overvalued in ten out of thirteen regions in comparison to income.
Since then prices have only increased further.
Factoring in recent reports on the burden of debt and that the squeeze on incomes is the worst for 25 years how can a policy such as Help to Buy that encourages more debt be seen as prudent?
Hitherto assumptions of house prices increases have always centred on the lack of supply. Of course more homes should be built in order to meet a growing population yet I fail to see how the restriction of supply alone can result in such sustained increases?
In certain areas potential homeowners can drive growth such as prime central London (PCL) locations where there may be additional factors such as international investment buyers but this alone cannot drive regional house price growth.
If supply was such a constraint on prices as we are constantly led to believe why did house prices fall at all during the downturn in 2008 & 2009?
Home building virtually came to a standstill after the financial crisis and this constricted supply even further but did this result in prices increasing? No they continued downwards. Unsurprisingly it was the constraint of mortgage finance that precipitated the falls.
My hypothesis is that price rises in the main can only be supported by very loose monetary policy (low interest rates), lax lending procedures by both bank and building societies and schemes such as Help to Buy that can be utilised by house builders to manipulate prices. This in turn drives affordability so if prices are now increasing it is the product of the monetary and regulatory environment.
Recently the ratings agency Moody’s warned of the threat to the UK economy from a house price drop. Analysing 50 episodes of house price declines it found they were typically followed by a 6 per cent decline in GDP. The factors accentuating recent price rises were low interest rates, rising populations and slow construction it stated. (16th April 2015)
Low interest rates were also viewed as a danger sign by BNP Paribas who have warned holding base rates risks house prices rising faster.
The turning point may be very nearly upon us. In October Swiss bank UBS warned London’s housing market has formed the world’s largest house price bubble. In an analysis of the ratios between property prices to income and rents it found the measures had reached all-time highs. More than any other capital city London it argued faces a substantial “price correction”. Tellingly the bank also stated the Government’s Help to Buy scheme had played a factor in stoking demand (Global Real Estate Bubble Index, October)
While the DCLG asserts there is ‘no evidence’ of Help to Buy increasing prices a report by Shelter in September 2015 found it did with prices rising by £8,250 as a direct result of the scheme’s introduction in 2013. Why hasn’t the DCLG not conducted its own public review of the scheme?
Those that belief (an array of commentators from national newspapers to estate agents and even think tanks) that house prices will keep rising due primarily to a restriction in supply appear to ignore the fact this argument is not evidence based in the real market.
Take the following comment made by Nationwide’s chief economist Robert Gardner following the release of double digit annual house price inflation in 2014. He said ‘house price growth is outstripping income growth by a wide margin. Unless supply accelerates significantly, affordability will become stretched’. (UK house price growth hits double digits, Financial Times, 01st May 2014).
These comments could have been lifted out of any standard entry economics textbook. The restriction of supply can lead to price rises by virtue of increased demand but this is far too simplistic to account for the UK housing market.
Prices were heading down after the financial crisis and needed to drop at least another 30% for prices and income to correlate properly again, more so in London. Low house prices will result in more people having higher disposable incomes and the economy by turn will benefit.
Statements such as this are often quoted in the press. The restriction of supply is the panacea for growth.
Even senior economists say it. Kevin Daly, Senior European Economist at Goldman Sachs stated ‘across the nation prices have risen 10% driven by the easing of credit availability but what hasn’t increased is supply and it is this that lies at the heart of our view that UK house prices remain somewhat below fair value’.
His argument was supported by a graph on housing completions showing a significant decline not seen since the 1920’s. The justification for fair value is based on rental yields over the long term cost of borrowing. (House price inflation casts shadow over UK recovery, Emily Cadman, Financial Times, 01st May 2014/video in article; UK’s housing bust without boom - interviewed by Sarah O’ Connor, Economics correspondent).
In assessing whether the market is in a bubble using just data sets without consideration for other factors I believe is misleading and far too restrictive.
One very recent report by academics at Lancaster University for example uses an econometric technique by Yale economist Peter Phillips. Their analysis claims Britain’s property market is not in a bubble despite acknowledging that UK prices are at historical highs. They do however sound a caveat on London which it states is on the cusp of one and the effect could ripple out to the surrounding regions. (UK Housing Observatory Report, November 2015).
Thankfully there are commentators such as Simon Jenkins (CEO of the National Trust) whose rationale is firmly in the ‘common sense’ category. Writing earlier in the year he argued wealth, subsidy and the supply of money are the primary factors in house price growth. (The Spectator, The Myth of the Housing Crisis, 28th February, 2015)
There is no doubt we are in the midst of a house price bubble. Some would argue this is restricted to London and the South East but I would juxtaposition this with the notion that surely anywhere where the average price grossly exceeds the average medium wage then the market is not working efficiently.
Interest Rates
Low interest rates have been a permanent fixture for some time now and the introduction of the Funding for Lending scheme by the Treasury and the Bank of England in 2012 emboldened the banks to again expand mortgage credit. This is no coincidence that house prices in turn started to creep up again.
Thankfully the Funding for Lending scheme changed its terms of reference in late 2013 to exclude finance for mortgages from 2014. Unfortunately, the government in anticipation of such a move announced an initiative that provided a fillip for both house builders and the banks all to the detriment of the first time buyer who will be saddled with huge debts on homes that are simply overpriced.
If the government and the Bank of England really wanted to help the potential homebuyer it would have confined the Funding for Lending scheme to businesses only and introduced a stricter mortgage lending criteria sooner than April 2014.
It is only right that anyone applying for a mortgage must prove they have attained the financial discipline in order to maintain monthly mortgage payments and saved money for a deposit.
The Bank of England in its Quarterly Bulletin in December 2013 warned that if interest rate rose to only 3% then a third of the 11 million households with mortgages would be in serious financial difficulty with many having to resort to attaining a second job or cut spending.
Michael Buiter in April 2014 warned some households will be in trouble when interest rates rise. When Bank rates return to 4% and unemployment rises households that have taken out 90% loan to value will be in deep trouble. It’s extremely reckless to encourage people to take out 90 percent loan-to-value ratios.
(The Times, 4th April 2014/ Fears about house prices are hype, claims Osborne)
Keeping rates so low for so long has created an imperfect market tempering household’s tolerance to debt and strengthening the use of credit as the primary source of spending.
Debt & Personal Finances
Personal debt both secure and unsecured is at worrying levels. Figures published by the Bank of England in November 2013 showed personal borrowing including mortgages and unsecure loans stood at a record £1.43 trillion and that amount has only grown since.
A plethora of reports from think thanks to insurance companies all paint a gloomy picture not just nationally but globally.
A major report into the health of the nation’s finances by the Money Advice Service in August 2013 found nine million people across the UK are living with serious debt problems and 26 million people are struggling financially. Its report into the health of the nation’s finances found many people are living a "live for now" culture.
The AXA Big Money Index Report published in September 2013 highlighted the financial pressures on the present generation of parents with nearly 40% believing they will not be able to contribute financially for their offspring in the same way they had been assisted.
The charity Shelter highlighted in early 2014 the financial stress many households are facing following a YouGov poll of 4,000 people. In particular, 70% of families with children were struggling compared with 63% of the general population. Both percentages are worryingly high with more household income being apportioned to service higher household spending including mortgage/rent and both rent and mortgage costs increasing due to the indebtedness more households are taking on.
Earlier research by Shelter found one household in every 105 was in danger of repossession.
As research by Michael Johnson an academic at the Centre for Policy Studies pointed out in May 2014 the British save only 2.4% of their income compared to 11.7pc for French. This he argues needs to change as the current economic environment is unsustainable due to below normal interest rates that have all created an appetite for apathy and consumerism.
In May 2015 the European head of Goldman Sachs Asset Management, Andrew Wilson issued a stark warning the world is sinking under too much debt and posed a significant threat to the global economy.
In an assessment on the health of the UK economy the IMF warned household indebtedness in Britain is as serious an issue as in Portugal and more than many other developed nations. It is due primarily it argued by borrowing on expensive homes. High debt levels it reminded us is hindering economic growth and financial stability. Figures showed household debt was worth 87.1 per cent of gross domestic product; higher than in Portugal at 82.6 per cent. (Global Financial Stability Report/April 2015)
A separate survey by MoneySuperMarket.com found a further 13 million Britons will fall into debt this year; a 40% increase on 2014 (April 2015).
This prediction was enforced by the Markit’s UK Household Finance Index for August 2015 showing household finances were deteriorating at the fastest rate of the year.
It is not just the young who are having difficulties. Saga recently reported (September 2015) that 700,000 over 70’s did not clear their home loan before they stopped working. The average debt still owed is £50k. The group stated “In reality the home is becoming a drain on finances”.
With homes worth more than ever before then these issues will only acerbate further.
The dysfunctional state of the housing market is putting extreme strain on the ability of any individual to set aside enough income for savings let alone for life’s emergencies and retirement.
Research of over 2,000 UK adults by True Potential LLP showed that millions are not saving enough in order to avoid poverty in old age. It found the average worker was saving just £1.72 a day or £51pcm. 13.5 million (45% of Britons) had no pension savings. (Paper: Tacking the Savings Gap, September 11, 2015)
If homes as an asset class were cheaper than they are today the savings ability of many households would rise and this in turn would help the economy with excess savings being used in the real economy to purchase products and services.
1. OBR – Office for Budget Responsibility. Forecast outlined in the Budget 2014
2. The Money Charity Debt Statistics April 2014
3. Shelter – YouGov survey of 4,000 British adults. Published January 2014.
4. Money Advice Survey – Report ‘Indebted Lives: the complexities of life in debt’ November 2013
5. AXA Big Money Index Report-September 2013
Right to Buy
A recent report that a council home sold for £1.2m and sold for ten times its original discounted price is what I term the equivalent of an immoral bomb.
(Daily Express: Sold for 1.2m: The council flat worth £130,000 25 years ago)
There are many detractors regarding this policy and central government should perhaps look to the Welsh Assembly on guidance over housing as they at least have a sensible rationale in place. They have introduced a ban on Right to Buy as it rightly ensures the stock of social housing is maintained at its current level. They rightly argue selling one house to fund another is counter-productive.
The danger by politicians in making short-term popularist policy announcements are have a serious effect on all aspects of the housing market.
Two surveys in mid-April 2015 suggested the recently announced Right to Buy extension for housing associations is not popular and would not have the intended consequent of building one for one replacement. A poll by YouGov suggests only 28% of voters are in agreement for Right to Buy and Inside Housing in a survey of housing associations suggests they will only be able to build one home for every five sold.
So unpopular is the policy extension to housing associations the Confederation of British Industry and Jones Lang LaSalle have criticised the announcement calling it short-termism and a terrible policy.
Does the Government take this criticism on board like Help to Buy? The answer is an unequivocal no. This in itself should warrant a parliamentary inquiry on the saneness of decision-making alone.
Personally I do not know one person who considers the policy has any merits. More telling is the fact that some of those who are in local authority housing consider it to be a poor policy. Coincidentally these are households working in local government but like everyone who is eligible why wouldn’t they not take advantage?
Playing devil’s advocate, the only positive in offering Right to Buy is that more homes would be added to the supply side.
However, there is one overriding and very important moral question that is rarely raised but must be addressed. How can it be fair that one household acquires a property at a discounted rate and then sells it to another for a full market rate?
There is simply no rationale philosophical counter argument. If there is then please let me know? If you cannot answer this, then the policy is wrong.
The council tenant by contrast to the household who may have languished in the privately rented sector for many years paying exorbitant rents has had the benefit of an extensive tenancy management service providing a free repairs service in many instances and access to housing professionals like a housing officer.
With the recent plan to extend Right to Buy for housing association tenant’s and the news that a housing association tenant in London for example can potentially take a portable voucher for a current maximum discount of £103,900 and buy a property anywhere in the country the argument against the policy is compelling.
I urge policy makers to recommend the Right to Buy is cancelled for the sake of equitableness and what it means for a fair society.
Renting (Private)
The private rented sector in its present state is an absolute disgrace to our country and regulatory controls should be put in place as soon as possible.
The difference between the public and private sectors could not be starker. In council owned properties tenants have the luxury of a free responsive repair team often contracted out to a privately run company. Additionally, there are programs to renew kitchens, bathrooms, doors and windows and tenant’s often have the support of a dedicated neighbourhood team.
By stark contrast is the private-sector where the lack of official oversight enables many landlords to continually provide sub-standard accommodation yet still make vast amounts of money from both working individuals and the taxpayer (if the tenant(s) are on benefits).
Every landlord no matter how small their portfolio should be compelled to sign agreements with their local authority to provide a nationally acceptable standard of living accommodation for fair rent. Consideration should be given to utilise the local authority’s repairs team at their cost if they have not made adequate provision for such a service.
The recent furore over ID checks is nonsensical with some sections of the press and landlord associations saying it will be too onerous. What nonsense. The public sector has always asked for ID at sign-up partly due to fraud prevention and of course data protection.
Recent reports have only sought to substantiate the inadequacies of the sector.
The outcome of a three-year investigation by Shelter and Crisis in February 2014 concluded that many tenants are living in unsuitable housing conditions often with severe damp and mould issues with unresponsive and aggressive landlords. The pressure on waiting lists has resulted in many local authorities discharging their statutory homeless duty by offering privately rented accommodation. The assessment was based on 128 households in three regions of England over a nineteen-month period. (Report: A Roof Over My Head: the final report of the Sustain project, a longitudinal study of housing outcomes and wellbeing in private rented accommodation)
Similarly, a previous report by Shelter in December 2013 found over 200,000 households are at risk of repossession or eviction and the proportion of landlords taking their tenant’s to court for repossession outnumbers lenders to borrowers by a factor of three.
This is hardly surprising due to the fiscal trap of renting. The combination of high fees and rent does not enable households to save for a deposit and the only winners are landlords who charge exorbitant rents with little reinvestment into the property they own.
BBC South highlighted the story of two tenants in private sector accommodation in Reading, their flats riddled with dampness were fitted with non-double glazed windows. It was a shocking indictment of how low standards can get without adequate regulations. When the programme received feedback from the landlord he informed them it was due to the tenant’s living conditions that acerbated the problem. (BBC South, 6th February 2014)
This is an often quoted retort to such concerns. There is in fact no empirical evidence stating tenant’s living conditions are to blame for such severe damp problems (condensation dampness). This shows how landlords can undeservedly blame tenants for property related issues when they themselves should be dealing with the problem. However not many tenants have both the confidence and financial means of taking these issues through the courts.
Depressingly research by the IPPR North think-tank found one million homes in the private rented sector fail to meet basic standards of safety, warmth and repair. Billions of pounds of taxpayers' money are being spent on housing benefit for rent given to private landlords who fail to keep the properties in good condition. The report concluded that privately rented properties are the most expensive yet are in the worst condition, and that taxpayers' money would be better spent on improving conditions for tenants. (Report: Back to Rising Damp? Addressing Housing Quality in the Private Rented Sector, January 2014)
In April 2014 the Chartered Institute for Housing pointed out interest only mortgages are not available to first-time buyers but are to the unregulated market of buy to let lending. This of course provides a competitive advantage not only in attaining a mortgage but for tax purposes and although I do not agree with the CIH assertion that this should once again be made available to first-time buyers (perhaps the CIH has forgotten the recent financial crisis stemmed from risky lending) this category of lending should be banned all together. Additionally, more stringent checks by the bank in regards to maintenance provision should be a legal requirement.
Finally, attention must be paid to estate agent fees. In the not too distant past a new prospective tenant paid just a deposit and a small reference fee before commencing their tenancy. Today the story is very different.
A typical tenancy agreement has the following charges including a tenancy deposit scheme fee, agreement fee, check-in fee, reference fee, deposit x 1.5 rent and first month’s rent. Ongoing costs include an extension of tenancy fee. Outgoing costs cover a checkout fee, checkout inventory fee and reference fee if required.
This is simply absurd. Take the reference fee often well over £100. What does this report have in comparison to one acquired from a leading credit rating agency for a couple of pounds?
Vital reforms are long overdue in this sector and the government’s focus on homeownership per se should be refocused to all sectors of housing including the private sector.
Renting (Public)
Although services to public sector tenants are more than adequate as outlined previously wholesale reform for those eligible for housing needs urgent attention.
Due to council allocation procedures even when a council tenant has been evicted by a court order this is often viewed as an involuntarily act and the local authority has a duty to re-house. Not only has the authority lost money on non-payment of rent for example but also money spent on the legal process and eviction. Extremely prudent use of tax-payer’s money I am sure you will agree?
The whole question of eligibility is further driving inequality not between the rich and poor but now between the low and middle earners and those that simply have never been in employment.
The fact that some people in work cannot afford a home and are left to the private rented sector as opposed to those who are eligible for a secure tenancy with attached rights to buy (discussed below) is shameful.
There are instances especially in the under 21’s where families suddenly turn out their offspring (conveniently at the age of 18) and the individual lands at the reception of their local housing allocation service claiming homelessness. Often to substantiate the circumstance the advisor may have to accept a letter from the family. The supposedly homeless individual is then often granted accommodation and the cycle of free accommodation and access to benefits commences again. Unsurprisingly the very family that had been so heartless in the first place is often supporting the individual at the time of sign-up. I leave to you to decide the moral ethicalness.
The Solution
Introduce mandatory introductory tenancies to ensure responsible tenants get homes and any tenant that causes a problem will be dealt with swiftly negating the need for sometimes costly legal actions.
The allocations legal framework should be centred on those most at need and given appropriate supported housing and to those in work on below average incomes. The reason so many estates across the country have endemic social problems is because many people are awarded homes without the requisite ability to sustain them.
There should also be a restriction including age on those able to access housing on the strength of their families say so.
To negate families who are anti-social and alleviate the need to use the services of costly bed and breakfast accommodation why isn’t there a strategy in place to build more managed accommodation? By this I mean managed centres with a bedroom and bathroom facilities with a communal kitchen. This type of accommodation could also provide the requisite life skills and prevent the type of issues that have become prevalent across council and housing association estates.
Supply & Land
The focus on house builders using Help to Buy as an economic platform for building more homes is a misnomer and only serves to drive profits on what still is a woeful building programme. Figures released by the Department for Communities and Local Government in August 2015 show a 14 per cent decline in housing starts to 33,280 in the April-June 2015 period; the steepest decline since the last quarter three years ago. This is 32 per cent below the peak in 2007.
There are currently 635,000 unoccupied properties in the UK.
We are often told we live in an overcrowded nation and although we have a significant population in comparison to other countries with similar land areas the fact remains that less than 10 per cent of our land is built on. Furthermore, there are thousands of acres of brownfield land that are not being put to good use.
Why we haven’t a planning system open to more development is baffling.
Developing brownfield land and some semi-brownfield sites in all the cities (51) towns (936) and villages (4,221) in England is of paramount importance. This would of course increase the housing stock exponentially and reduce the imbalance between supply and demand.
Common sense must prevail and there is absolutely no need to build on flood plains and this should be incorporated into planning law.
In very simple terms building an extra 10,000 homes in every city, 1000 in every town and 50 in every village would equate to an additional 510,000 + 936,000 + 211,050 respectively. Nearly 1.9 million homes compared to the paltry amount currently being built. Although capacity and skills could be an issue due to years of under investment every urban area should have a plan to build more sustainable communities.
The Government needs to invigorate communities by passing legislation so pockets of land that have been left undeveloped are given to house builders for a low purchase price who in turn must make legal commitments to develop in a short time frame or face significant penalties. At the moment there is simply no need for them to do so. A national housing building programme would inject a much needed boost to the construction sector and support directly and indirectly thousands of jobs.
The Home Building Federation in trying to justify why house builders are not building enough announced in one television interview that it is fundamentally a problem with deposits effectively laying the blame with financial institutions for not giving mortgages.
This is a classic blame the banker’s tactic. The banks do of course have to tighten their criteria in order to be responsible lenders but are then an easy target by a dubious industry body that cannot make a critical assessment of its own members.
The house builders of course are pricing their homes artificially high (as explained previously) and expecting the government to come up with novel schemes like Help to Buy to enforce such prices. Very similar to a revised version of a Ponzi scheme isn’t it?
The Government should seek to pass legislation to prevent land-banking and any developer must commence work within a statutory time period.
Reform of the Stamp Duty Land Tax (SDLT) should also be considered with the burden being perhaps being placed on sellers.
The Media
Interestingly house prices in the tabloid press are almost always surrounded by hyperbole.
The newspapers with larger readerships (The Daily Express & Mail) than the more balanced opinions in papers such as The Telegraph and the Times seem to constantly hype up the housing market.
Even during the financial crisis, the Daily Express in particular ran many articles focusing on house prices predictions that showed prices were forecast to increase but very rarely decreasing and in many cases eschewing real economic debate.
Headlines during the financial crisis were extremely positive and when prices actually started to move upwards their property correspondents went into overdrive latching onto any positive data. They often quoted property professionals that had a vested interest in positivity such as estate agents.
In 2013 The Daily Express ran with 45 separate articles including 16 that made the paper’s headlines.
So why is this important? The media has a responsibility to report on matters of fact and offer balanced opinion. Quite how a national paper such as The Daily Express can run story after story with headlines screaming ‘House prices to soar’ is mystifying. Their influence can be significant and could potentially sway individuals into making rash decisions as it gives the perception they should act before the market gets any further out of control.
Conclusion
The property market in all its guises is not functioning effectively. Government initiatives are not being concentrated in the right areas. Stoking demand only is not the right strategy.
Housebuilding is woeful and where is a national building framework that is ensuring every city, town and village has a coherent plan to build homes every year.
Disbanding Right to Buy must be a priority due to its inherent unfairness and urgent reform must be initiated in regards to the private and public rental sectors.
Positively many of the issues can be addressed. Unfortunately, the very people who are in charge of policy and wield the requisite power to implement change seem somewhat lethargic to do what is necessary.
Real leadership is necessary and only by recognising when mistakes have been made [i.e. Right to Buy and Help to Buy] can a coherent plan be then put in place.
16 December 2015
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