An Englishman’s home is his Castle – or his Jail?
I have been pondering our obsession with ownership of property.
I bought my first home in the early 1980s, it cost me a little over 2½ times my (then low) salary; I had a mortgage of 2½ times my salary with the balance from savings and a small private loan. Interest rates then jumped to 15%; it hurt but was manageable (just).
Now my current house is worth about 7 times what I might earn in a good year; my mortgage is paid off and I have probably made more from property than I have from saving unspent salary. By careful trading down, I can probably release a sum that when turned into an annuity, will be worth more than my projected pension. And I live in a low property value area.
But what of someone starting today? The Office of National Statistics (2009 Annual Survey of Hours and Earnings) states that the average wage (across the entire working population) in 2009 was £489 – equivalent to about £25,500 per year. Looking at the age distribution (Table 6.7a) shows that for 22-29 year-olds the average was about £21,000, but the median (i.e. the number where half earn less and half earn more) was just under £19,000. The age distribution is not broken down by region, but Table 8.7a indicates that the median for my county is about £19,500, but 40% (of all ages) earn less than £16,600 – the distribution is very uneven.
The land Registry House Price Index for my county indicates that the average price of a terraced house (June 2010) is about £89,000 (Median figures not available).
Even a rough calculation can show that the average terrace house costs 4¼ times the average wage of 22-29 year olds. To restrict a mortgage to 3 times salary (£63,000) means that the average 22-29 year old needs a deposit of £26,000. Now these are “rough calculations”, and the young will buy houses that are cheaper than average (but I am already restricting this discussion to terraced houses), but the point is made: getting on the housing ladder is becoming more and more difficult.
So the banks gave mortgages of 4¼ (or more) times salary – which is probably affordable when interest rates are at around say 5%. But what happens if they should jump to 15% again? Roughly, your repayments treble!
- Salary £20,000
- Mortgage £80,000
- Interest only on mortgage at 5% – £4,000 – 20% of salary – leaving £16,000 (disposable income post mortgage – ignoring tax etc.)
- Interest only on mortgage at 15% – £12,000 – 60% of salary – leaving £8,000 (halving disposable income)
- And you still have to fund the repayment of capital!
People will default, house prices will drop as people try to sell to avoid the crippling costs, and then we get the dreaded negative equity again. The situation is unsustainable.
So, what is to be done?
- Increase salaries to make mortgages affordable – this will probably fail as increased salaries will probably fuel house price inflation – never mind the other impacts on the economy! But house prices have to be a significant cause of wage inflation.
- Peg interest rates at an “affordable level”, say 5% – the banks will fight shy of taking on the potential liability of the difference between that 5% and what-ever wholesale rates might go up to – and government cannot underwrite household mortgages (can it?)
- Control house prices and bring them down to about 3x average earnings. This would mean that many people sitting on some nice capital gains will see them vanish – my retirement income would be massacred. I would have to be feeling exceptionally generous to vote for a party that advocated such a policy.
- Subsidise first time house owners – however reintroducing Mortgage Interest Relief at Source (MIRAS) will only take away 20% of the cost for low earners – and that will probably immediately translate into an increase in the price of homes (as with the first point above).
- Accept that the young cannot get onto the “house price ladder” – this means an increase in the supply of property for rent but in an open market the rents will be linked to the cost of capital – i.e.the mortgage rate! If you subsidise starter rental homes, someone else has to pay – and you still do not address how the young (once they have a family) can get onto the housing ladder (when the first step will necessarily be a bigger step to buy a “family home” rather than a “couple home”).
Something has to crack because the current situation is distorting the entire economy and fuelling debt bubbles. We are all enslaved to the current housing market.