All posts tagged: house prices
Most people accept that our housing market is bust. House prices remain stubbornly high even though a whole generation can’t afford to buy. The planning system won’t deliver the homes we need, and builders won’t build them even if it did. The private rented sector is growing yet rents are still rising and in many parts of the country it costs more to rent than to buy. Bed and breakfast is booming. Every year, the government invests around £1 billion on new “affordable” housing, yet spends £23 billion on propping up high rents through the housing benefit system. It’s a crazy world.
But it’s important to remember that this dysfunctional housing market does not just create personal misery, it also has damaging economic consequences.
A recent piece of research by Shelter shows that if private rents had risen only at the same rate as general inflation since 2001 private tenants would now have an additional £8 billion in their pockets, that’s an astonishing £2,000 per household each year. Imagine what an impact that extra income could have on the economy.
But it strikes me that the Shelter research could also be applied to the owner occupied sector. House prices have increased at roughly four times the rate of general inflation over the past thirty years. That means bigger mortgages, which means less disposable income for home-owners. As a result, our housing costs are the third highest in Europe. I haven’t been able to source any figures on how this impacts on household incomes, but my back of an envelope calculations go as follows: the LSE calculates that rents would have risen by only 22% if they had followed CPI since 2001 compared to an actual increase of 76%. If we apply the same ratios to the 11 million home-owners with mortgages, paying an average of £500 a month, (that’s £66 billion a year), then homeowners would have an extra £19.5 billion in their pockets every year if house prices had increased in line with CPI. That’s £1,770 for each household. (Of course interest rates are at an historically low level and a like-for- like comparison is difficult, but I think my figures are in the right ball-park, unless anyone out there is prepared to challenge them?)
So that means private renters and owners have effectively been robbed of a staggering £27.5 billion per annum as a result of inflation-busting house prices and rents. That’s roughly half of the entire annual spend on education. Imagine if that money was available for spending by households in the UK economy instead of being poured into the pockets of landlords and mortgage companies, and then swallowed up by the the sub-prime debt mountain. Is it any wonder that our economy is suffering from a lack of demand? And of course, high rents also add to the cost of goods in the shops, as they increase the overheads of all traders.
Compare and contrast this to Germany where house prices have fallen by ten percent in real terms over the past thirty years and where housing costs are significantly lower, due primarily to their willingness to release sufficient land to keep housing markets in balance, to restrict the amount of mortgage credit and to regulate the private rented sector making it an attractive alternative for potential home-owners. As a result, Germans enjoy stable housing rents and house prices and some of the highest standards of living in Europe. They can invest their surplus cash in savings, cars, holidays and other consumer products that benefit the economy.
The clear message from this is; yes housebuilding can provide a major economic stimulus, but it is low rents and low house prices relative to incomes that will create the greatest economic benefits in the long term. David Cameron’s attack on the NIMBYs this week was a welcome development but we still have miles to go before we reap the benefits of a balanced housing market and restore the pounds missing from our pockets.
Do you fancy a one-bed apartment in Berlin for £35,000 or a four- bed detached house in the Rhineland for £51,000?
In many parts of Germany house prices are a fraction of their UK equivalents – in fact, German house prices have decreased in real terms by 10 percent over the past thirty years, whereas UK house prices have increased by a staggering 233 percent in real terms over the same period. Yet German salaries are equal to or higher than ours. As a consequence Germans have more cash to spend on consumer goods and a higher standard of living, and they save twice as much as us, which means more capital for industry and commerce. Is it any surprise that the German economy is consistently out-performing ours?
There are a number of reasons for the disparity between the German and UK housing markets. Firstly, German home ownership is just over 40 percent compared to our 65 percent (there are stark regional variations – in Berlin 90 percent of all homes are privately rented) and the Germans do not worship ownership in the way we do. Not only is it more difficult to get mortgage finance (20 percent deposits are a typical requirement) but the private rented sector offers high quality, secure, affordable and plentiful accommodation so there are fewer incentives to buy. You can rent an 85 square metre property for less than £500 per month in Berlin or for around £360 per month in Leipzig. There is also tight rent control and unlimited contracts are common, so that tenants, if they give notice, can stay put for the long-term. Deposits must be repaid with interest on moving out.
In addition, Germany’s tax regime is not very favourable for property owners. There is a property transfer tax and an annual land tax. But the German housebuilding industry is also more diverse than ours with more prefabraction and more self-builders. The German constitution includes an explicit “right-to-build’’ clause, so that owners can build on their property or land without permission so long as it conforms with local codes.
But the biggest advantage of the German system is that they actively encourage new housing supply and release about twice as much land for housing as we do. German local authorities receive grants based on an accurate assessment of residents, so there is an incentive to develop new homes. The Cologne Institute for Economic Research calculated that in 2010 there were 50 hectares of new housing development land per 100,000 population in Germany but only 15 hectares in the UK. That means the Germans are building three times as many new homes as us pro-rata even though our population growth is greater than theirs. This means that German housing supply is elastic and can respond quickly to rising demand - hence their stable house prices, whereas in the UK our restrictive planning laws and tight green belts do not allow developers to respond to increased demand, so our supply is inelastic. More demand combined with a fixed supply of homes means steep price rises, volatility, and boom and bust.
For me, in the ongoing debate over our deepening housing crisis and the National Planning Policy Framework there are two stand-out lessons from the German experience. One, we are failing to release enough land for housing and this is causing volatility and unsustainable bubbles within our housing market that cause damage to our people and our economy. Two, a high quality, affordable, private rented sector benefits from regulation and rent control.
(Thanks to Andreas SchulzeBäing and ImmobilienScout for assistance with this article)
One of my daughter’s friends has just bought a house, the first of her peer group to enter the property market. Is this a sign that the housing market is on the up?
This is definitely a QTWTAIN (Question To Which The Answer Is No), but there are some indications of a thaw in the mortgage freeze of the last four years. Almost 9,000 mortgage products were either brought to the market or updated between April and June of this year, according to data provided by Defaqto. This included 414 new mortgages, whilst 600 products were removed, but, significantly, 100 buy-to-let mortgages were introduced and only 66 removed. Compare this to the period between 2007 and April 2009 when the number of mortgage products plummeted from 15,600 to 1,542 as the financial crisis hit home.
Over the past four years banks have been frantically rebuilding their shattered balance sheets and it seems the tide has turned with new products coming forward and dividends being paid out.
As credit re-enters the housing market there is a danger that the lessons of the past will be ignored once again, and we end up returning to boom and bust. With housebuilding at its lowest level for sixty years any influx of mortgage credit will just lead to house price inflation, and we need that like the proverbial hole in the head. I am old enough to remember the crash before last in 1993, when Norman Lamont introduced the housing market package, funding housing associations to buy up whole new estates from developers as a way of stimulating the housing market.
Subsequently, between 1996 and 2007 house prices nearly trebled, whereas the underlying trends of building costs, inflation and population growth since were stable or rose only slightly. The housing bubble was the result of speculation and easy credit, funded by savers in China, India and other countries with a current account surplus. But the truth is that very few commentators saw the 2007 crash coming. Let’s hope this time around all of the key players show a little more foresight and common sense.