Hubble bubble, rubble trouble
The Prime Minister on yesterday’s Andrew Marr (BBC1 29 September 2013) show says that in respect of the housing market it is not a problem of prices and supply but of the mortgage market not operating properly and he wants to do something about it. Hence the new home-owning subsidies that are being brought forward to create headlines to “decorate” this week’s Conservative Conference. Does he understand?
He has also been critical this week of another leader who wants to sort out a market “that does not work”. That other leader wants to hold prices down whilst the market is being reformed – the sellers have to take at least temporary pain. Cameron wants to pump more taxpayer’s money into the housing market – meaning the money lenders, house builders (and householders who plan to downsize) gain and as prices rise the first time buyers (and those up-scaling as their families grow) have to take the pain. It is an interesting comparison when criticising another leader; one who stands-up to a powerful industry whose behaviour is in many ways cartel-like, the other who pumps more money into the producers’ pockets.
A major trouble with our housing market is that to many of us (myself included), our house is our major investment and we have a vested interest in rising prices. Yet as an investment strategy it is ludicrous to put all your investment eggs in one commodity basket and then to only have a single big egg in that basket. It goes against all the investment rules that say hold a diversified set of investments and be wary of holding a large proportion of your wealth in a single volatile investment.
On the other hand when other investments are so opaque that they are hard to understand (see, for instance, recent revelations about the effect of management charges on defined contribution pension schemes, or the shenanigans of some investment advisers) it is easy to see why “bricks and mortar” are so attractive. Other investments are not subsidised like housing, other investments do not have supply controlled by government policies like housing, other investments are not almost totally tax-free like housing.
When I bought my first house, it cost be about £10,000. It was not fancy, the kitchen and bathroom were a bit grotty, but could be cleaned. There was no compunction to automatically replace kitchens and bathrooms and this was (as can be told from the price) before the advent of house improvement programmes like Changing Rooms – and even if it was, I did not have a television – feeling that a cooker was more important. My salary was £3,600 p.a. (well below “average”) and the building society (they were a sort of mutually owned retail bank) would lend me 2½ times salary or £9,000, so I had to find a deposit of £1,000, some of which I found by taking a return of my pension contributions from my first job. Yes, even in those days it was worth knackering your pension to get on the housing ladder. I furnished my first home from second-hand shops and cast-offs from friends. Expectations were different in those days – but houses were fundamentally affordable (just). Mind you when during the Thatcher Government interest rates went up to 15% (apparently, according to the Conservatives, interest rates had to be kept high to “protect the economy”) it hurt and I was glad my mortgage was only 2½ times salary.
On the Andrew Marr Show, the Prime Minister said:
The problem we’re trying to deal with is this – Today, the average family can’t afford the average house and that’s not a problem actually of the housing market, it’s a problem in our banks and our mortgage market.
Now as Prime Minister I’m not going to stand back while people’s aspirations to get on the housing ladder, to own their own flat, to own their own home are being trashed. That’s why we need to act and that’s why it’s good news that we’re bringing forward the help to buy scheme …
BBC News website 29 September 2013: Transcript of Interview with Rt Hon David Cameron, Prime Minister, Leader, Conservative Party
The Help to Buy initiative wants to “rig the market” to make it easier to afford a deposit for a property.
The government will guarantee 15% of a mortgage, allowing lenders to provide up to 95% mortgages at reduced risk.
In an interview in the Sun on Sunday, the prime minister said he was eager to get young people on the housing ladder.
Mr Cameron said: “The need is now. I have always wanted this to come in and frankly the earlier the better.
“What concerns me is that you can’t buy a house or a flat even if you are doing OK, you have got decent job prospects and good earnings.
“I am not prepared to be a prime minister of a country with caps on aspiration.”
BBC News website 29 September 2013 Conservatives bring forward second phase of Help to Buy
On an average salary of about £20,000 p.a., 2½ times salary would give you £50,000; add £5,000 (to represent approximately a 10% deposit (I am trying to keep the maths simple) and you could afford a house costing £55,000 – which will not buy you very much even in a “developing region” (where of course unemployment is higher, job security is lower and salaries are even lower than in the Conservative shires!). To cope with this we have seen mortgage multiples rise to 4 or 5 times; at 5 times you can then spend £110,000 (assuming you can raise a £10,000 deposit!). In some regions that will allow you to buy a home of some sort. However if mortgage rates were to move to 15% again, this householder on a £20,000 annual salary (before tax) will find themselves paying 15% of £100,000 or £15,000 a year in interest payments!
This is how bubbles burst. Free marketeers will say that this is OK, it is the market working:
- as mortgage costs rise, those who cannot afford the payments, make “distress sales” at reduced prices (or, if in negative equity, throw the keys back over the building society counter and walk away – to be pursued for the rest of their life for the outstanding mortgage, or until they go bankrupt).
- as prices reduce others can afford to buy
- so the system self-stabilises!
Apart from being unspeakably cruel – this is peoples’ homes that we are talking about, it is also unreasonable because it is not a “free market” – it is a rigged market. And in any rigged market, one side (usually the powerful producers/sellers) take the profits, and the rest of us take the losses.
We have to get away from this ever-inflating house price spiral and that means those of us with houses have to get off the crack of using our homes as the main investment vehicle for our futures. Increasing the supply of houses – even if it means the Conservatives having to swallow hard and funding the building of more council houses – is essential to stabilise prices and to start to try to bring them slowly back down.
You should be able to buy a “reasonable” (two up, two down – including workable kitchen, plus bathroom, no damp & single-glazed) house or flat for no more than say three times median salary – does that sound so very wrong? If you are on mega-bucks it probably sounds strange because you could spend three-quarters of your salary on a massive mortgage and still have sufficient disposable income to not just live on, but “live it up on” with foreign holidays, flash cars, dining out several times a week, big screen TV’s in every one of your four reception rooms,in all six bedrooms, in the kitchen and probably in each of the bathrooms as well! But if you are on median salary you do not have much left over after paying the mortgage. I don’t think some of our lords and masters realise this.
Perhaps if we were not pouring so much money into our “housing investment” we might invest in more useful assets that could help the British economy.
Those of us heavily “invested” in our houses, will take a hit – but perpetual cycles of housing boom and bust are not sustainable and could hit us individually if we are caught out by a bust just when we want to “cash in” (down-sizing on retirement, selling when going onto care, or dying). The impact that ever-increasing prices has on society will hit us as we have more homelessness, split families, poor people traveling long distances between where work is and where they can afford to live, or even our children refusing to move out when they become adults!