Good reads from around the Web.
One of the big frustrations of the ‘priced-out’ generation – which is fast becoming anyone under 35 in the South East, or at least those without access to Feudal leg-ups from their parents – is that older generations really don’t get how tough it is to buy a house under your own steam now.
“It was equally hard in my day,” some 60-something property millionaire next door will say.
“We ate baked beans for three months and used toxic waste drums for furniture. To get a mortgage I had to marry one of my girlfriends just to look respectable to the bank manager, and she still had to take care of him behind the golf clubhouse to seal the deal. Interest rates were 8%, and I had to sell my LPs.”
Even I’ve underestimated the younger generation’s despair, and I’m not a complacent home owner.
Rather, as a conscientious objector to high house prices in London and hence a deliberate renter, I’m on their side, too.
So I really shouldn’t have opined to some much younger friends over email that their unwanted office relocation out of Central London to Zone 2 at least put them within shooting distance of cheaper property they might eventually buy.
One bombarded me – as is the way of the under-30s now – with animated movie clips of the clinically insane cackling and of cars being deliberately driven off cliffs.
The other emailed: “Twenty three minutes on and I’m still laughing at the idea of ever buying ANYWHERE myself.”
I did the maths. He earns about £35,000 a year. He’s doing okay, by ordinary late-20s standards.
He’s screwed.
The dirty dozen
On this point, The Guardian has come out with some new statistics that show how stretched the market has become:
A homebuyer earning the median salary for their region in 1995 would have had to spend between 3.2 times and 4.4 times their salary on a house, depending on where they lived.
In 2012-13, the last year for which complete data is available, the median house price had risen to between 6.1 times and 12.2 times median regional incomes.
Prices have only pushed higher since 2012-2013.
And as those of us foolish enough to live in London keep reminding everyone else, it really is a madhouse down here:
In 1995, the median income in London was £19,000 and the median house price was £83,000, meaning that people were spending 4.4 times their income on buying a property.
But by 2012-13, the median income in London had increased to £24,600 and the median house price in the capital had increased to £300,000, meaning people were forced to spend 12.2 times their income on a house.
Now, this data does overly exaggerate the escalation in house prices to incomes over the past 20 years.
That’s because prices in 1995 were still in the dumpster due to the last big house price crash.
(Yes, we used to have those, even in London.)
I know that well, because that’s when I first took an interest in London property. The sticker shock of seeing prices well above those lows just 4 or 5 years later definitely discouraged me from buying, even when it was still a sensible thing to do.
Nevertheless that doesn’t change the thrust of the argument.
I’d imagine the median pre-1995 would still only have been around 5 times back to the mid-1980s, and probably lower before that.
But regardless of how much it’s grown, a price to income ratio over of 12 times in London is far in excess of what’s prevailed throughout history.
You’ve got to fight for your right to party walls
So younger people aren’t just moaning like every generation before them when they say that property is almost hallucinogenically expensive.
It is.
The wonder of it is they’re not rioting on the streets every day, like some previous generations would have.
Certainly the baby boomers of the 1960s would have been making their voices felt.
But then, they could afford to take a six months leave of absence to drop out and rabble rouse.
At least as far as the men were concerned, they lived in a world of full employment, free higher education if you could get in, good blue collar salaries if you couldn’t, and social mobility was peaking.
And though the fun wore off in the 1970s, by the 1980s they could begin amassing the property wealth they have today – aided enormously by the right-to-buy and buy-to-let booms that the current Government is only just applying the brakes to.
People obviously weren’t evil in doing this (despite what some bitter Internet warriors say).
They were just trying to improve their lot.
If Monevator had been around in the mid-1990s I am certain many of them would have been reading it – and for that matter I’m sure we’d have been making the case for getting into property for those double-digit yields.
But that was then, and this is now.
We know the consequences of all that, and something has to change.
A European problem, too
For me, it could eventually be the country I live in.
The gulf between what you can buy in the UK and in the great livable cities of Europe is staggering.
True, it helps enormously that I don’t rely on those famed London office-based salaries for my income – and that I’ve saved a fair wodge along the way.
So really all I’ll be doing if I was to move to Spain or Portugal or Italy is arbitraging how far my savings will go.
The indigenous youth of those countries actually think property is a pipedream, too, according to a report in the FT this week [search result]:
The affordability gap has widened so much that 72 per cent of Europeans questioned in the ING survey believe that society would benefit if house prices fell.
This is felt most sharply by renters, with 93 per cent of Spanish, 75 per cent of British and 74 per cent of French tenants citing expensive housing as a block on their path to home ownership.
Of course, in most of those countries a sickening proportion of the young haven’t got jobs at all.
That’s not the cure for high house prices that anyone wants.
You can’t swipe your first flat
Bottom line: If you know a young person, be kind to them.
Yes, they have iPhones, Tinder, and they live in a more tolerant, flexible society.
But the majority of those without wealthy parents foresee no chance of ever owning a place of their own.
And rightly or wrongly, in the UK we all want one of those.
Note: Constructive comments are always welcome, but I will be deleting abusive ones or anything that sounds like it was written by a die-hard in a newspaper comment section. If you’re going to be snarky, be elegantly snarky!
From the blogs
Making good use of the things that we find…
Passive investing
- Where are the customers’ Porsches? – Evidence-based Investor
- A crazy idea for managing market uncertainty – Rick Ferri
- Have bonds failed? [US but relevant] – The Irrelevant Investor
- Slowly moving over to the passive approach – diy investor (uk)
Active investing
- Q&A with Lasse Pedersen about market efficiency [Podcast] – Covel
- Emerging market rout continues – A Wealth of Common Sense
- Paying for hope is not confined to football – Value Perspective
- Fighting the Fed fear factor – Musings on Markets
- 12 things learned about Ben Graham from Charlie Munger – 25iq
Other articles
- 2016 dividend tax hit will be worse than expected – IT Consulting
- Ten downsides of early retirement – SexHealthMoneyDeath
- Baby steps for future millionaires – The Escape Artist
- The ‘fascinating’ history of safe withdrawal rates – Retirement Cafe
- Your financial adviser may be part of the problem [Video] – E.B.I.
- How to register for / fill in a self-assessment tax form – FIREstarter
- A year of riding electric bikes – Mr Money Mustache
Product of the week: TSB has bank accounts that – used together – The Telegraph reports could see savers earning up to £238 a year (with a cashback bonus) on relatively modest balances. There are, of course, catches.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- Swedroe: Beware the death cross! (Or not..) – ETF.com
- Felix Salmon: Ban daily stock market reports – Fusion
Active investing
- DeGiro will offer free trading in 2016 with ‘DeZiro’ – ThisIsMoney
- Don’t even think about trading places in markets – Bloomberg View
- Value investing – you’d be crazy not to [Search result] – FT
- Defensible reasons to go active – Morningstar
- The decline of the trading desk memoir – The New Yorker
- 3 ways UK shares are cheap [Though author seemingly doesn’t understand what a P/E ratio is, he’s citing solid third-party research] – Telegraph
Other stuff worth reading
- Longevity gains could mean State pension at 70 by 2050 – ThisIsMoney
- Is this global slowdown different? [Interesting graphs] – Bloomberg
- The financial case for studying at a university in Europe – Guardian
- How Bitcoin may yet transform finance – The New Yorker
- Room to rent in London is a garden shed… in a room – Metro
Book of the week: The podcast interview with Danish finance professor Lasse Pedersen I linked to above prompted me to look up his book Efficiently Inefficient
Like these links? Subscribe to get them every week!
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
That is exactly my plan. Have enough of a balanced portfolio to FIRE plus enough cash for a family home. Then spend a few months in each of my preferred European countries to find the right one for me.
I first bought a home (rough round the edges flat above a shop next to a Chinese takeaway) in 1997, my mortgage payment was 50% of my income, I moved in with a mattress and not much else slept on the floor as no money for furniture – it was not easy, but despite low rates it is so very much harder now – not just because of the asset price rises, but the increased rents that put brakes on saving a deposit prior to that, and the high hurdles for mortgage eligibility. Low rates help, but the capital still needs repaying, so even with a deposit it may mean a 30-35 year term.
With London though I do think it is important to remember how much more appealing London is now. It’s not that long ago that it was dirtier, less appealing, with less opportunities, and not the international city it is now. Some might argue London is “affordable” in the broadest sense as despite the absurd prices people stay. I’m not that brave, but I do think it’s not just about low housing supply but also super-high demand for positive reasons. I can’t believe how lucky I am to live in this amazing city with so many opportunities and things to see and do.
Hopefully in time more construction will take place because it’s not good for anyone that younger folk have such little opportunity to own their own home. Though the construction needs to be in the right place, along decent transport links or the younger folk just end up encouraged to buy on the outskirts with a nightmare commute that takes all the pleasure out of their new home.
I know many portfolio landlords and it seems to me that I increasingly hear talk of getting out. I think BTL (especially for fresh purchases) with increasing regulation, tax costs, and yields compressed by capital growth, is becoming less attractive. This is likely no bad thing for FTBs and the economy more generally. If it makes more sense for a FTB to buy a property to rent out rather than live in, something is wrong!
I couldn’t agree more. House prices are insane, and the only reason we were able to buy was due to an unexpected inheritance… And since we bought 3 years ago, the local house prices have appreciated by over 40%
I don’t understand how anyone can be expected to ever save up for a deposit. And the rental market is a shocker too, despite landlords still having access to cheap money (obviously the new changes may affect this greatly).
The problem is what should we do? My personal belief is that we should NOT be building houses, but vast amounts of flats in cities (reclaiming brown field sites) and making them decent (high ceilings, large enough rooms) with communal courtyards like in central Europe. They’re pleasant to live in and you get a mixture of convenience and privacy from being centrally located but inner facing rooms being away from the street.
Another thought about this comes to mind when thinking about Toronto, Chicago and New York, which all have a vast supply of rental apartments with fully inclusive services and on-site facilities that often cost far, far less than if one were to buy. I expect London will expand in this direction and many young professionals would very much prefer to stay in a funky, modern apartment with a concierge, gym etc which avoids them having to find a deposit, means they can live more centrally, and save a lot of money. Of course whether this is financially a good idea or not probably depends what they do with the spare cash. If they squirrel it away and grow their net worth then long term they can continue renting or buy later. I’ve stayed in some of these rental apartments in other cities and I have to say they can provide a really very pleasant standard of living. In one there was a small plumbing problem, it was all dealt with by the block management team with no hassle. I think it’s true to say some in younger generations are more used to renting (music, cars, films etc) rather than buying and for some the natural progression will be to extend that to their home too – keeping their costs down, a better quality of life and providing a high level of flexibility.
So true…I am always surprised at how accepting young people are of their situation. I know a lot of young adults and they are remarkably aware of their disadvantaged position, current affairs, social and political trends without being bitter, unlike many 40 plussers I know (despite having had many advantages like free university education, good pensions, property and mortgages – they are still moaning!). I think the payoff, as they may see it, is that they do feel they own the exciting realm of entrepeneurism, youth culture (which is massive) and innovation especially in the digital/ social media arena. They ‘get it’ in a way that wrinklies can only pretend to. It’s their thing. It’s probably the only thing, along with having time on their side (energy and beauty is relative). And they are good at it, damn good, so let them fly with it, I say. They can make some good money, have fun and achieve some recognition and success. But it’s extremely competitive out there, so many will remain mobile and rootless with not so many prospects and little security apart from their childhood bedroom at their parents’ (if their parents are still together or haven’t sold up and are living in a downsized broom cupboard to fund their retirements)
I feel a bit guilty, to be honest. I had a grant through uni, had four jobs so I could get a mortgage on my own and bought a house in London in 1995.
I was very lucky but I’m not smug about it. But I don’t have a buy to let, I struggle with the principle based on all the above. I know those who do, but they are all moaning at dinner parties, how they could have timed the market better on sales, their properties are now worth over a million. Tenant tribulations, sagas over agas and frantic freehold fracas. And they all encourage me to buy to let! Every one of them. I would buy for me and my family and if it doesn’t quite happen before my boys flee the nest which is not long, I would consider elsewhere too..
http://www.telegraph.co.uk/finance/economics/11844576/Money-does-buy-you-happiness-study-reveals.html
“The size of assets such as bank accounts, shares and children’s’ savings – which together comprise net household financial wealth – are most strongly related to personal well-being, the study showed.
By contrast, there was no significant link between net property or pension wealth and well-being.”
Liquid wealth > illiquid wealth. Options and autonomy…
Great post and spot on about the intergenerational housing divide which continues to worsen. All bubbles deflate eventually, but this one seems to have more sources of air being pumped into it than most – be it foreign oligarchs parking their cash, the Government’s ‘help to sell’ schemes insuring high house prices with taxpayer money, the BTL craze, rapid population growth, lack of housebuilding etc etc…
Perhaps it will only change when renters become the majority of the electorate, and political parties are forced to take account of their needs and not merely those of the (mainly property owning) greybeards.
Enjoyed the SexHealthMoneyDeath early retirement post – very amusing with more than a hint of truth!
London always has and always will be expensive; we’re only debating by how much.
Recent house prices have been out of control since the early 2000’s when Brown should have raised interest rates to curb the runaway housing market but didn’t. Collapsing interest rates during the “economic crisis” helped absorb the immediate shock. But the biggest mistake was then not raising again a year or two later. This has sent the message that it’s OK to overextend yourself because the government will bail you out. No matter what. Free money for home owners. The government has been underwriting the housing marking for (at least) the past 6 years FFS.
The Thatcherite dream has morphed into something perverse. From being a symbol of personal independence, it is a now a one-way gravy train.
It’s Schiller morale hazard. It is only in the interest of a disenfranchised under-financed minority that house prices should fall. Everyone else is too high on cheap credit and fast gains to care.
Like all bubbles, it is driven by greed. Most people won’t admit this, even to themselves but ask yourself and answer honestly: do you like seeing the value of your house go up? Of course you do.
The only cure for greed is loss. And large loss. Like a 50%+ crash that puts the Daily Mail off for a generation or two.
For those with the means, it takes balls or stupidity (jury’s still out) to keep renting in the face of such stacked odds. For everyone else, well, sorry but the lifestyle you ordered has been discontinued.
On the moral hazard front, several of the newspapers have stories this weekend about the million or so interest-only mortgage owners who have NO repayment vehicle.
Citizens Advice is calling for the banks to treat them “fairly” as is the word always used today, but warns the may be “forced” to leave their homes.
“Fairly” in my world includes the concept that if you don’t buy something you don’t own it, but in the post-PPI culture who knows?
I couldn’t bear to include the links but I am going to rant about this trend in a post soon.
Thanks for this – I agree with the sentiment wholeheartedly. But there are good reasons we are where we are.
The key argument you omitted (for space reasons, I am sure) is affordability. Price/income multiples are not that relevant when interest rates have fallen so much. Dual incomes are much more common than 30+ years ago and the mortgage industry is, despite its woes, much more competitive and flexible than it was in the baby boomers’ generation. So most baby boomers would recognise the monthly bank statement of most FTB households – many FTBs would see housing costs of around half their income, as they would have seen in mid 1980s.
For many present-day FTBs the hardest thing is not the price/income multiple but the deposit. Changes (which I hate) to the inheritance tax regimes and pension regimes will increase the flow of Bank (or Estate) of Mum & Dad funds onto the first rung of the property ladder.
Moreover, the politics all points to sustained high prices.
With national debt of £1.6tn, historically normal interest rates would add over £50bn to government spending. Any government will want to avoid this like a hole in the head. Its only sustainable position if interest rates rose, say, to 5% would be to inflate its way out of debt. This will be political suicide, and probably wouldn’t help the house price conundrum anyway.
Finally, any housing policy change which delivered, say, a 20% cut in house prices relative to incomes (which the Living Wage may yet do, if house prices stay flat) would have unknown political and economic consequences. It is hard to see the Tories supporting this. And it is hard to know what the alternatives are to the Tories, one week before Labour’s Corbynation. So the politics support the status quo – stable or rising house prices.
We are where we are and it’s better than where we were. We all need to get over it.
Interest only will be dealt with like this:
the banks will not repo as there are too many. At no point can fair price discovery occur. Together with the govt (who implement artificial scarcity through planning) they will carefully drip feed slightly less than the number of repos they can get away with. After all repos are very profitable for banks.
The UK is run for The City, not the people.
Contrary to what the BBC/Media commentators seems to think – the world doesn’t end at the M25 or even at Birmingham.
I can also confirm that there are even jobs north of there in the UK that don’t involve 25h a day down t’mine, where you can afford to heat up your gravel for your breakfast without paying t’owner for privilege of working there etc etc that also pay a respectable salary too.
I live in place where you can get purchase a flat/small house for 80K.
Equally there are jobs, a fair number paying around/over the national average.
People are allowed to move in this county y’know ….. 😉
@TI “….. those of us foolish enough to live in London …..”
I’m sorry but no one makes you do it, whatever you might claim. If you choose to, then you live (no pun and without malice) with the consequences.
> I couldn’t bear to include the links but I am going to rant about this trend in a post soon.
Bring it on 😉 I don’t think you can save people from their own stupidity, and if you’re going to try, then hit the supply side first. We used to have credit controls, we used to have maximum income multiples, we used to make lenders take a primary charge over the parallel investment vehicle to an IO mortgage. Prevention is always better than cure, whereas now we seem to let it all go titsup in the interests of the free market and then have the no-win-no-fee legal people fight over the spoils of war when we decided that perhaps fools always will be parted from their money (and in housing I have much fool in me, though I’m out of the danger zone and well clear of the BTL temptation 😉 )
This bubble is the story of BTL and deteriorating lending standards, interest only being the most nefarious. Looks like Osborne and Carney are going to do for BTL, so lets see how it lands.
https://drive.google.com/file/d/0B24wHuyDETj3dzNzS1E5V1lfNkU/view?pli=1
http://www.amazon.co.uk/goodbye-all-that-buy—let-ebook/dp/B014N2E9H0/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1440894112&sr=1-1
Young people do protest they invaded parliament, heckled Prince Charles and wrecked observative party headquarters
Then they get kettled, identified by CCTV and then they get criminal records which means they can’t get jobs
By contrast many of those same rebels from the 60s, e.g. Branson, are now part of The Establishment
Another good Monevator article, as always.
While I’m not for a moment suggesting buying a property is easy for young Londoners, there are cheaper properties out there than the £300k median price. I am just about to sell a studio flat in Putney (Zone 2, rather affluent area) for £220k. Since a newly qualified solicitor at a big London firm makes £45k, this is within easy reach if they have a £20k deposit – admittedly probably from Bank of Mum and Dad.
In my view part of the problem has to do with expectations. This studio is 25sqm: smaller than many hotel rooms. I am in my early 30s and have adjusted my lifestyle to make the flat work; I suspect many younger Londoners expect to be in a one-bedroom with spacious entertaining areas, within walking distance of Shoreditch.
MH
Those who keep saying London has always been expensive therefore just deal with it… You are wrong…
My parents have a 4 bedroom detached house in Wales – in 1992 the price of this house was £90k. My flat in London (that I rent) was also sold for £90k at that time. Today in 2015 the house in Wales is now worth £180k-£200k… The flat in London is now worth £600-£650k.
Therefore the huge premium in London is a relatively recent phenomena.
I’ve listened to friends of mine 5 years older (I’m 30), and on the one hand they go on with a holier and thou attitude about how they have scrimped and saved in order to get on the property ladder… Well that would be great but then I realised they would not have got a £50k deposit together as when they bought their house they were living in London zone 2 on a £25k salary (so not possible to save enough)… But then I realised the reason for their housing market success was not great ability to save… But of course rich parents who give them the money for the deposit… Now they talk about how much money they make through rising house prices with no thought of the fact that they are only there due to their parents…
Younger people are angry… But many younger people don’t care as they are benefitting from the situation themselves due to their rich parents helping them… I can’t see how it can go on and on like this indefinitely…
Cheers
@Underscored I enjoyed your book – FWIW
> In light of this it is a bit weird that investing in shares using leverage hasn’t yet caught on.
Take a wander over to igindex.com and they will be only too pleased to help you rectify that little problem 😉
🙂 Hi Ermine, not my book, that level of writing is beyond me.
But certainly a nicely researched “rant”. I think that Faisal Islam explains nicely that there has been a total media failure to accurately report too. No support for the BBC licence fee here.
I’m 32 and have worked myself into the ground (in the new media sector) to get enough capital to buy a house outright. Looking back I wish I’d bought 10 years ago, but I was too principled (you may term it stupid): I didn’t believe houses were worth what they cost, expected a correction, and couldn’t support such a racket. Oh boy.
We still rent as we’ve been relocating every 2-3 years for work; I think not enough credit is given to how mobile our generation is when looking for work, which also makes buying difficult. It’s expensive to keep moving.
Where we currently are (south Midlands) rent has gone up 20% in 12 months. London is somewhat to blame: the train service is just 65 minutes to London, and people are commuting from here now.
Sods law is when we finally buy in 12-24 months it will be top of the market. Just like my active investing 😉
Thanks for the interesting piece and, as ever, the comments have made for good reading as well.
I have only been ‘following’ the house market since about 2007 and have been consistently wrong / surprised by how it has turned out – in London anyway (and I understand how those not in the South East must be sick to death about London media obsession with the issue). On the one hand I think these ridiculous prices and rents indicate a market imbalance and that there will be a slump soon. On the other hand, as has been pointed out, the Govt has underwritten this boom for the last 6 years. Why would it stop given the political strength of the home owning constituency versus young renters? I assume that some Conservatives still believe in a ‘home owning democracy’ and might even recognise that the growth in private renting by younger people is against their long term interests. However, they have too short a time horizon to act on this.
A few points too stop this becoming (too much of) a rant:
– Keen to hear Investor’s thoughts on how interest-only will play out. In the latest edition of Finacial Ombudsman News they have a case about someone who didn’t pay back the capital on their interest only mortgage. It is an individual case and the reader doesn’t know all the facts, but some key points are: the borrowers soon stop paying into their repayment vehicle due to ‘debts’. Unfortunately the husband dies and the widow cannot pay the capital at the end of the term. She is given a further five years to find it, but cannot. The lender then seeks to reclaim the property and the case goes to the FOS. Outcome: FOS tells the lender that they have to let the borrower stay in in the property for the rest of their life as long as they pay the interest. The lender cannot ask for the capital back. Clearly, these cases are individual, but if I read this and had an interest only mortgage I would be tempted to take a punt and not bother with capital repayment, arguing that I need to be treated ‘fairly’, esp if I am a pensioner at the end of the term. I’m not arguing that banks should kick widows out onto the street. But one of the reasons why property is unaffordable for younger people today is that for the last 20 years people have used interest only (with the connivance of the FS and housing industry, for sure) to buy houses they cannot afford, so pushing up the price for everyone else. One thing go that might help FTBs is for interest only borrowers to sell the houses they could never afford at the end of the term (which, after all, is a much sweeter deal than just renting for 25 years). But Let’s see….
– I can’t agree with the comments that ‘its always been like this’ and ‘just get used to it’. The Guardian stats cited at the beginning are just other indication about the new (and “hullicinatagenic”) levels of unaffordability in London and the South East. Also, the housing situation has got worse across the spectrum – private renters, those in social housing (via bedroom tax), those waiting for social housing, those living at home, and homeless.
– What can be done (apart from wait for a slump)? I’m no Corbyn fan, but to my mind policies that would really bring in house price stability would emanate from his end of the political spectrum. Rent controls, stronger tenants rights, land value tax, council tax re-evaluation etc. I cannot see him getting anywhere near power, but at least the housing crisis would get more of a hearing.
– Those that are really interested might want to read ‘all that is solid’ by Danny Dorling. I don’t buy all his arguments but he makes the point that housing inequality is tied up with income inequality. People that are concerned by unaffordable housing often argue for more house building (me included). Dorling argues that it would make little difference to FTBs as any desirable new housing would just be bought by the BTL brigade and others who already have housing wealth.
– From a FIRE perspective I also need to engage in some arbitrage. My partner and I Selling our flat in Zone 6 when the time comes and using half of the proceeds to buy a similar flat in Europe and the other half for income. Unless we get done by the great house price crash of 2027 of course!
Thanks again for the blog and sorry for the screed.
I am sorry but I do not agree people are totally to blame for London house price rises. This is not a market set just by supply and demand, lending criteria has a large part to play and this is dictated by those lending the money.
if people could not borrow 6-12times salary then they would not be able to buy houses at that price and hence they would not be at that price.
London may be a little distorted by migration and foreign interest but I would suggest this has only a marginal impact over local buyers and local lending criteria. So I do blame the banks and Government once again.
Bu t its not only London its anywhere that has become desirable to live forcing out locals.
If we reduced lending criteria today it would stall the housing market as only those that could afford to loose equity would be able to see, maybe this would be a better solution than the free for all that we have now?
It would be better from everyone’s point of view if Zero interest rates were simply stopped
The normal BoE lending rate now would be about 2-3% depending on which inflation measure you use
Base lending rates should be 5-6%
I’m sorry but this story is rubbish. Who buys a median priced property as their first property, absoluty nobody, so why are we even talking about it?
My first place was a flat, as was all others in the SE, friends further up north got houses. Guess what, people in the next generation are following exactly the same trend, the only difference being a few ideas like shared ownership are now thrown in.
As a London escapee, I often count my blessings. Rented for a couple of years in 2008/09, realised that I would never be able to own a home and came home to Scotland.
Now I live near a major city and am about to take my second step on the housing ladder to a (tiny) family home in a posh suburb. It still stresses me out, but at 3.5x combined incomes for the mortgage, we are blessed vs. Londoners.
Is the metropolis really that attractive for so many people? Really? I sometimes wonder if it’s simply a collective lack of imagination re. anything different that ties so many people to the city.
Mmmm, I’m detecting quite a bit of effort at indifference to London here. Love it or hate it, it is the biggest player at the table-with all the history, character and diversity to boot. That may well be challenged in time on some levels but not all. It depends on what you want for your life, work and family. That changes over time too. For some, like me, it’s my birthplace and home, so I have many memories, a home, friends and family here and I love it. I have lived abroad too so I don’t have tunnel vision either. My dad marched a naval parade for the Queen’s Coronation here and my parents met here in Bayswater in the swinging sixties. Emotionally and financially I have always been invested in London and I think that is the key difference. And yes there are elements that do worry me too, pollution, crime, travel etc. I may choose to leave if it were practical to do so but I think at this stage in my life I would be bored living anywhere else. I might consider other lively towns or even a more simple existence somewhere random but I don’t think I could ever give it up fully..
I always read the site and comments section with interest – it has really improved my understanding of investing.
I was hoping someone could explain this article to me… I’m guessing some sort of “lies, damn lies and statistics” but the numbers the article quotes are so out of line with what I’ve come to understand from Monevator (and lots of other sites for that matter) that it’s confused me.
http://www.fundexpert.co.uk/research/news,triggers-tip-the-silent-crash-and-the-death-of-index-trackers-dynamic-fund-selection_616.htm?pg=1
Great comments everyone, and thank for keeping the “landlords are evil” / “first-time buyers are wastrels” name calling to a minimum. It really does help the quality of the discussion.
I’ll just chime in with a few thoughts in response to reading/moderating the replies as they came in over the weekend.
Firstly, on a personal note, I didn’t mean “foolish enough to live in London” to be heard in a tone of righteous and entitled indignation. I meant it more as a world-weary sort of wry aside. A bit like how I say I’m foolish to be an active investor, but I do it anyway. Like stockpicking, living in London may or may not ultimately come good for me, but in my line of work / attitude to life the odds were never great (again like active investing) and there are ultimately much easier ways to get 90% of the way “there”, with less risk. No one is holding a gun to my head. 🙂
There’s no point in us debating why people would or would not want to live here, I think. Or maybe it’s a nice discussion, but we have to accept no views are likely to be changed. Even I have a love hate relationship with the place. I was on an artisan baking course in the City on Saturday afternoon (yes…) and leaving me out of the picture, not one of the three instructors and the eight pupils was born in the UK, let alone London. And I’m an immigrant to this city. The poncy nature of the course, the hyper-international mix of people and all their wildly interesting careers and lives, the swanky expensive low-fi bakery cum kitchen, the near-silent streets around the Bank of England where even speedy Londoners like me get mown down at 5pm on a Thursday by the hordes of City workers if I don’t go with the flow, the history, the warren-like streets, the fact that miles and miles of this stuff with all its bars and Wren churches and restaurants and secret cellars and Tudor halls and hidden underground night clubs and Eurotrash spotted partying on the roof and a corner you turn and suddenly you’re in an inland marina is all here, in this corner of London, totally oblivious to me and my life unless I come here — and that there are dozens, hundreds of such ‘corners’ in this inexhaustible city… well, you love it or you hate it.
I worked for 18 months or so outside of London, and everyone in the town I moved to congratulated me on leaving — almost to a person! So I get it.
Equally, I could probably live in the deep countryside, if I had a family (i.e. Wife, kids, dog).
But I don’t.
Anyway, it’s my decision to live here, and that’s fine. My personal view or poor heuristics doesn’t make property cheaper or more expensive. 🙂 (More on that in a moment).
Sorry, I’m rambling. Just quickly…
Arguments about this data being for median houses but first-time buyers don’t buy median houses are missing the mark.
The data isn’t based on first-time buyer salary, it’s based on median salary. So yes, first time buyer property is cheaper but obviously they earn less, too. The point is the salary multiple has increased from say 4.5x to over 12x — and that this happens up and down the scale.
When it was 4.5x people thought it was very expensive. Now it’s 12x. Not an extra year’s salary — it’s an extra eight years salary, as a multiple. That isn’t a linear progression, it’s a geometric progression. It’s nuts.
I live in a nice 2.5 bedroom terraced house in an okay part of a nice zone 3 suburb (nice suburb, less nice end of it). This house (which I rent) would sell for £750,000. On the old 4.4x multiple, you’d have to be earning £175,000 or so to buy this property, or perhaps a couple earning six-figures. Now, plenty of people do earn six figures in London, but that did not used to mean they end up living here.
Yes areas will keep gentrifying and getting nicer — I am factoring that into my thinking. (I have lived here 20+ years and seen many many areas up and come).
It’s curious how interest rates are used both by the “this is all rational” side and by the “this is all irrational” side.
Clearly very low interest rates do make property more affordable in terms of monthly payments, but even without going into money illusion type arguments, there’s the practical fact that rates do not stay fixed forever.
It’s possible that somebody who bought in the early 1990s and who came to the end of their mortgage this decade could have seen the interest rate paid go from 10%+ to close to 0% depending on how nimble they were, and how much they could be bothered to chase the last few quid savings on what by then would be a small mortgage (on a retrospectively once-in-a-lifetime cheap) property.
Will rates stay near 0%? For the next 25 years? Who knows, but I am pretty sure they aren’t going from zero to MINUS 10%.
I do agree young people can have lofty expectations. Not being The Highlander I am not sure if it was ever thus; I can believe it’s been made more acute by social media, the Internet etc. I know my own over-expectations didn’t help my own property search back in the day, before I withdrew from battle.
But again, it doesn’t change the numbers. Somebody with lofty expectations on a median salary could buy a two-bed in Clapham Old Town in 1995 (sorry about all the London references, it’s just the area I know best. Clapham/Battersea is a nice now gentrified area in South London, especially that bit. Not top of the scale). Now they could buy a one-bed flat in West Norwood, a run down and borderline dangerous area in Zone 4/5.
Same people, same salary, even if expectations have been inflated. I presume the inflated expectations in 1995 were that they couldn’t buy a mews house in Chelsea or similar!
A couple of people alluded to my personal situation, and I deleted a couple of comments that added nothing but just said “you’ve got the money to buy so what’s your point, what’s the problem” or words to that effect.
Firstly, there is no way the majority of people can live, save, and invest like me, and if they did the economy would grind to a halt as GDP collapsed under the onslaught of 40-50% savings rates. It’s a non-starter.
Secondly, this is a blog discussing various economic and financial matters. I understand the format is personal and we also personalize our take on things too, but ultimately I don’t think the fact that I can buy, after saving 40-50% for 20 years and learning to be a mini-George Soros / Warren Buffett in my own spare bedroom changes the reality of the housing debate.
I can diversify a portfolio and find a cheap broker — no problem — but we still write about that stuff, too. 🙂
Finally, I can only emphathise with those who have had to be preached at from people who bought years ago with parental handouts. I have even managed to have multiple lectures from not one but two good friends of mine who bought their entire properties from either inheritances or huge parental handouts (i.e. not just the deposit) and yet who still told me things like “you just have to go for it like we did”.
The first part is fine, I will happily hear their advice and I’m glad of their concern.
The second part is ludicrous. They have not been faced with either gambling their life savings of multiple decades and multiple six-figures and/or been asked to pay 12x their (London) modest £35-40K salaries for a one bedroom flat in a nice bit of Zone 3.
Again, that doesn’t change the numbers, which are undeniable. Just a bit of empathy for fellow veterans…
Sorry if I haven’t replied to things or have rambled, late and post wine, friends and last BBQ of summer!
@BB — You’d have to read the whole blog to see why that article is nonsense, I can’t answer it all in comment. (You could try this video series: http://monevator.com/tag/investing-cost-video-series/)
In short, he’s found 96 funds better than the market — but he omits to mention that there are literally THOUSANDS of funds out there, and there have been many thousands more over the years that were either closed down or merged. That’s a trivially easy tack to refute. 🙂
Second we have his “magic process”. Perhaps his fund selector method does work, but it will be at the cost of other active investors whose “magic process” it takes the gains from. And investors across all these funds will pay more for it. See this article:
http://monevator.com/is-active-investing-a-zero-sum-game/
There is no doubt and has never been any doubt in my mind that some people can beat the market. (I am on a journey to see if I can do just that myself).
Even some funds.
The trouble is identifying them in advance (not afterwards like your author does, which is something a six-year old child could also do!) and also deciding the risk of failing and not even getting the market return (the overwhelmingly likely result) is worth the small chance of doing better.
For nearly everyone it’s going to be better to use passive funds, and skip a daily latte (or whatever your mileage is) to save an extra 10% a year or whatnot, then to try and do better with active funds.
Hope this helps.
Thanks
The zero sum observation is why I couldn’t get my head round his stats… I didn’t clock the small sample or consider survivorship bias. Thanks for the reply.
@TI
A friendly challenge – show those of us amongst your loyal-to-the-death readership who wouldn’t touch London, or any other large city, living with a barge-pole, that you can go from now until Michaelmas without including any more London-centric stuff in any of your posts. Old Bert down our village local reads your blog all the time, or so he says, and he reckons you’ll never do it!
@Topman — Hah. Well, I do live here. 🙂 Interestingly more than 27% readers of the blog are located in London. The second placed percentage is Birmingham, with less than 2%…
I doubt anything like a quarter of the articles are London-centric. Perhaps I should up the quota!
(Just kidding.)
@BB — You’re welcome.
@TI Good work, and it’s nice to see understanding from a member of the selfish generation, rather than the usual “my anecdote counters your mountains of data” tripe.
Remember, while London gets all the headlines because that’s where it is most ridicuous, salaries are correspondingly less elsewhere. The other thing is that we don’t have inflation to make the initial pain go away – now a 35 year mortgage will still be a burden decades later! (Not you don’t already know all this.)
(I still read every post here on monevator and push friends in your direction, but don’t seem to have much to say these days. I also don’t really want to get sucked into things which I feel end up as one side just trying to repeatedly squish the same zombie arguments spouted by the other.)
Greg
@Investor
There is something very Victorian about people who have just been handed a bunch of money by their parents lecturing you on”business” and “investing”
We have been doing a lot of work with startups in London and the south east for a good few years now
At first, I did wonder where such a bunch of 20 and early 30 somethings came up with the money to start these businesses (one of these was a seven figure fit out…)
To a man and woman its all mummy and daddys money
We’ve started calling these people “inheritpreneurs”
Here’s my most concerning picture of the housing market.
Post-WW2, the state entered a massive housebuilding program. This continued even past where it should have (had the market been left to its own devices). The result was an unprecedented subsidy for housing across the UK.
Once housebuilding by the state collapsed, that subsidy ended. We’re now returning to what housing actually costs – and it turns out it’s expensive. It wasn’t so long ago anyone not in the upper echelons of society would be unable to afford more than a single room. Whole families on the poor end of society would share a room, while a family (often multiple working generations) would share a house. We’re returning to this situation today. It’s not going to end: it’s going to get worse. Property will become more and more expensive, and the market will react not by building more houses but by cramming more people in fewer properties.
With little tax on property, particularly on inherited property, those families who own property will become richer. We’ll return to the days of massive inequality that dominate the history books of the UK and much of Europe.
I don’t know if the above is true. But it’s a sobering consistent interpretations of the facts.
Nice to see a new blog on the scene (SexHealthMoneyDeath). Its top-ten book list is original, not just the usual american investing bibles, self-help and diet books. The authors situation is slightly different to the norm as well. This one is possibly something other than a UK MMM clone, which is refreshing.
I did notice reference to Tim Ferris’ podcasts in one of the articles though so the jury is still out on whether it will become staple reading..
I can’t see a problem in having an interest only mortgage with no repayment vehicle beyond “sale of mortgaged property” and even have one myself. (Though only 10% of value of property, I’m glad to say!) How is this worse than renting? They’ll be paying less per month, have the freedom to improve the property as they see fit, and will (probably) benefit from house price appreciation. At the end, they might have to sell and switch to renting, but could also downsize etc.
BTW, our 10% mortgage is to let daughter get on the housing ladder. Courtesy of some lucky investing I did for her (20 bagger!), she had enough for 20% deposit and renovation budget, and we can borrow at 2.3% on our property, and we have a Promissory Note covering the loan onwards to her. She’s got lodgers in two rooms (fellow students she was previously renting with) and this income covers interest and enough capital repayment to get rid of loan in 20 years.
However, we are in the grim North where prices haven’t got anything like as mad as in the SE.
Regards house prices, what’s interesting is that the cost of building a house hasn’t risen by much above inflation over the last few decades. What has soared is the value of a plot of land with planning permission. So, we don’t really have a housing crisis as many people could afford to build a house, but they would struggle to afford the plot.
We bought a house in 1994 with a large garden that had outline planning permission to build a 5 bed detached. We liked having a large garden, so didn’t do anything for 7+ years, at which point someone offered us enough money for the plot to clear our mortgage!
@Brendan
What rubbish. Housing is expensive because:
– its largely untaxed
– supply is deliberately limited by outdated planning laws
– immigration is high
– interest rates are at an all time low
All this is simply reversible with an act of political will
More than 90% of the land in the UK isn’t built on. Build on some of that. Tax land value to force it to be used to its optimal value. Tax spare bedrooms in the private sector. Knock down some of the low density stuff and build tower blocks. Raise interest rates. Leave the EU
Each of these actions has consequences that create winners and losers but that is what politics is – choosing who should be winners and losers
The current system, certainly for the last 25 years, has deliberately chosen that young people without wealthy parents should be losers
Btw, I’m very middle aged
@ Brendan
” Whole families on the poor end of society would share a room, while a family (often multiple working generations) would share a house. We’re returning to this situation today. ”
This is a really interesting point. The occupancy rates for housing have decreased significantly since the post-war days of 7 kids in one bedroom. This equates to a rise in quality of life – more space for all. The post-war building boom helped achieve this as @Brendan points out.
More recently though, you can add increased numbers of split families needing 2 homes, not 1; larger multi-bed properties being retained by one or two retirees; and high expectations for living quarters and you get something like:
Fewer people in each house = higher demand for houses (with stable population) = higher prices. Price increases reflecting demand, not supply?
However, surely the availability of credit and its take-up is further boosting today’s pricing levels. Everyone is competing to live in the best properties they can afford, so if one can borrow an extra £10,000 that will make the difference, why not? The lowest-common denominator, or most willing to borrow absurd amours, drives the price.
There are historically slack lending practices which are to blame, making available much more credit than older generations could borrow. A combination of macro-economic decisions on interest rates and subsidies have exacerbated this, as have naughty banking practices. Its difficult sometimes not to see the plight of the poor old first-time buyer as a rather useful marketing tool for banks who are looking to expand their loan books by reducing regulatory standards on capital requirements etc. Perverse implication that the increased credit supply will actually increase prices – not so helpful.
However, borrowers and aspirant borrowers are also to blame as well for following the herd rather than living within their means, whatever that actually means in practice.
First time commenting so should start off by saying thanks for the always thought-provoking read and the consistently interesting comments!
My rudimentary take on the interest rate question is to side with the market monetarists. Yes, rates are historically low but raising them pre-emptively would presumably tighten the supply of money and potentially cut off the economy before it’s even fully recovered. See the reaction to the ECB raising rates back in 2011. I’m not sure why people are so focused on the interest rate.
Besides which, what difference would it make? Yes it makes lending easier and higher prices more affordable, but so what? This is a supply/demand issue like any other. If interest rates went up prices may well go down but they may not be proportionately any more affordable for the have-nots (just for those buying all or mostly in cash). It wouldn’t make any “real” difference to people trying to get on the ladder.
If it is a supply/demand issue then my equally rudimentary understanding of it suggests we approach it either from the demand side and artificially restrict demand (e.g. by raising rates, imposing stricter lending criteria etc.) or by boosting supply (council house building, looser regulations, brownfield builds, allowing higher buildings in central locations etc.).
The downsides to the demand side approaches are that you’re not solving the real problem, you’re just trying to tackle the symptoms. Take a few examples:
-If you raise rates, prices may come down but housing is still unaffordable for most, plus the economy may worsen, which usually impacts the worst-off first
-If you impose stricter lending criteria, prices may come down but the cash-rich will benefit most – indeed there’s already a very high % of cash-only buyers – while again, those who are trying to just get a place of their own will find it even harder.
-If you introduce rules limiting or targeting buy-to-let, the rental stock may degrade and there’s no guarantee that this on its own will lower prices significantly. If it doesn’t, those trapped renting are now even worse off in poorer conditions.
-Introduce rules targeting how tax-efficient property is as an investment. This for me has the most promise in the long run in combination with supply-side adjustments.
If you tackle supply, as the supply-siders would say, you’re tackling the root cause more effectively:
-Reduce or streamline regulation and the planning process. Improve planning flexibility (e.g. this comparison of American and Japanese planning: http://urbankchoze.blogspot.co.uk/2014/04/japanese-zoning.html). Should help the market react faster to increase in demand.
-As a result of the above, more effectively re-zone brownfields etc. for re-development
-In combination with the above, allow much higher buildings in central locations
All of the above changes to allow increased supply would take time to take effect, potentially allowing for a gradual reversion to affordability (whatever that means) instead of a crash which would hurt most people.
-Introduce similar non-recourse rules to the US to allow people to hand back the house and walk away debt-free (under reasonable restrictions). Again this could allow the market to be more flexible/liquid. Would be subject to abuse like any other process so would have to be implemented very carefully.
-Council house building: not a UK native so I don’t understand this whole area very well but it seems very odd to me that there isn’t a constant evaluation of means and people aren’t just given money towards rent as a housing benefit instead (key point here being that people are given the money directly to avoid setting an artificial floor on rents as happens in Ireland where I hail from). Purpose-built council housing is bound to distort any market and can also lead to ghettos or massive inequity e.g. with the right-to-buy schemes of the past. Again not really sure how this has worked out in the UK in the past.
It’s presumably all a lot more complicated than that but it seems to me that the supply side focus combined with changes to how favourably property is treated in tax terms should at least be more the focus of policy, whatever the actual implementation details arrived at. People who say there’s no land left are missing the point: there is always a certain amount of house-building required even just to regenerate/replace old housing. I believe the rate of building in the UK falls below even this mark at the moment (though am not sure on this point). With the above measures for example apartment blocks could replace terraced housing or unused industrial areas in central locations. In other words, supply could be substantially increased for no increase in land area used.
@Neverland
I agree with land tax, but a bedroom tax? So the state will tax me if I don’t take lodgers, and then tax me on the income if I do?
Land tax would mostly effect under-developed semi-rural properties and would possibly only work in conjunction with withdrawal from the common agricultural policy and freeing up of planning laws on green belts.
Compulsory acquisition of medium density housing to build tower blocks? Why not just allow planning to redevelop the ex-industrial sites? Our cities and towns are full of empty industrial sites.
@gadgetmind — I haven’t got a massive problem with interest-only mortgages (in fact I’ve written about some of their uses elsewhere on the site). What I have got a problem with is NGOs/charities/others starting to bang the drum about people being “forced” out of their homes at the end of their interest-only run, when they’ve done nothing to pay off the capital. If this ends up being another case of the imprudent being shafted by the prudent, like most of the rest of the past seven years, I may have to join the ranters in the Telegraph comments. (Not yet and not here though please! 🙂 )
@Brendan — I know two different young people who’ve moved into what sound to me like classy student halls of residence, only they’re aimed at mid-to-late 20 somethings in London. I also just heard an interesting report on Radio 4 about mini-sized homes (26sqm from memory) aimed at young professional types (I think renting / £600 a month, plus very low bills). So that might reflect some of the trend you predict, although while I wish he hadn’t written “what rubbish” to express his views, on balance I’d come down more on @Neverland’s side of the argument.
@Neverland
I hope you are right. The scenario you put forward is actually my ‘optimistic’ viewpoint – it’s better than my pessimistic one, because it is (as you point out) reversible by a political act. But we have had plenty of years where that has not happened, and the political mood has barely shifted.
For the record, I’m 30.
@Freemantle
The people who own homes protest to stop new homes being built for others to live in artificially reducing supply
It is only right and proper that they pay taxes for overuse of a scarce commodity
The government seem to have grasped this concept in the social rented sector, so I think its only right and proper to be applied to the rest of the UK’s scarce housing stock – particularly in central london
If that would force pensioners to downsize then good
The problem knot of the problem is that the people causing the problem, existing homeowners who stop building are benefiting and not suffering from selfish actions
Well, it’s not just London and the SE with a housing problem; I took a call from a 33-year old lady this morning who is married and has 4 kids, aged 13 down to six weeks. Hubby is a scaffolder and earnings are not great. They live in his grandfather’s house – a 2 bedroomed ex-council property in a village in Somerset; that’s seven people. There is no debt and, as the grandson & his wife are kindly being added to the deeds by grandpa, they sensibly want to extend the property to provide (barely) adequate accommodation.
“Bank says no” as grandpa over 70! Whilst I’m sure I can help when the legalities have been sorted, the lady was, quite understandably, feeling rather glum.
There is rather more rural poverty than meets the eye in the UK what with low wages, “second homers”, B2L, etc. etc. removing what little chance young locals had to buy or even rent a suitable property.
Something must give and I am not advocating the further growth of ghetto-like “affordable housing” developments.
And don’t even get me started on the “forthcoming downsizing catastrophe”!
Best,
Thanks for the post, TI. Unusually, I feel more inclined to comment on the post than the links. And if the conclusion is that we should be more kind to more people, then of course I’m a huge fan. Although there is the troubling idea of all the stuff about house prices that went before that conclusion that really requires more examination.
* * *
House prices are terribly high! Noone can afford to live in London! Blah Blah Blah! These headlines appear to have become accepted wisdom — propagated perhaps by journalists who have seen an unprecedented slide in the standing (and associated income) of their profession since the internet came and ate their lunch. Sadly the story is often presented without the kind of facts you need. (The discussion of median salaries above highlights this: the fact required is that of first time buyer salaries).
I don’t know the answer, so I went and took a look at the ONS to see what the facts were. Since 1985 the UK house price index has risen 6.73 times in the South East (8.5 in London). That’s growth of about 6.5%.
But wait: the FTSE100 started out at 1,000 in 1984 and that’s grown about the same amount over that time. Dividends? Well neither are included: the dividend of living in the house is around 3.3% in London (net rent around 2.5%) — a bit below the FTSE’s 3.x% yield but not that much.
How about gold? 1985 an ounce cost $300 and now its around $1,150. So that’s just under 4x growth. Not quite there with equities or housing but over a longer period (1950-2015) the price of an average UK house has been between 150 and 300 ounces. Currently about 239. A bit above par, perhaps. Same as 1965-75.
And bonds? Please don’t make me check the returns of best performing asset class of the last 30 years.
So like many other assets, UK housing has increased in price at not a spectacularly different rate. So why the fuss? We don’t see headlines suggesting the poor ickle graduates of today can’t afford the FTSE100, do we? We don’t have commentators suggesting that “something must be done” ™ to lower share-prices to allow youngsters onto the equity-ladder. “Put interest rates up today”, the Mail doesn’t wail, “so that the youth can afford gilts”.
I think it’s a confusion of the true social good: somewhere to live — something which as society we ought to care deeply about ensuring is available to all — with a completely different concept: something to own. Rental yields have been falling in central London — a return on capital of 2.5% (lower in larger properties) is only just justifiable with highly leveraged ownership and low interest rates. Many owners are taking huge risks in order to provide cheap accommodation. Renters have never had it so good, and increasingly buying housing assets looks like a mug’s game.
So should there be some sort of intervention in this market? For liberals, usually intervention is justified where commercial operators are concentrated and able to manipulate prices to their advantage (ie price-fixing), there is some tragedy of the commons to avoid or the market is otherwise failing (a weasel-word used by politicians to justify meddling). Is there a Landlord cartel? It hardly seems likely given the number of landlords and the ease of transportation between different providers. If you want to live in Kensington & Chelsea — a desirable suburb of a city that has seen spectacular growth a rising of its star over the past 40 years — then yes: it will be more expensive than in the 70s when there was rioting on the streets. But you don’t *have* to live there. What about the tragedy of the commons? Well that is exactly what the planning laws are there to avoid: to provide a consistent (if not always right) framework through which new properties can be developed. More houses are needed so let’s put some up, but not just anywhere, anyhow, and end up with something ugly or dysfunctional. Personally I’d love to build in the green belt, but I realise the restrictions on me are probably good for society as a whole.
Would we be better off as some commentators suggest by smashing the landlords in the wallets, bringing house prices down and making it all cheaper? Well who would bother building the new houses we need if ownership of one is subject to political whim? That would be a risky venture indeed. I’d want rental yields into double-digits to take that kind of risk. In the long run, is it more important to have good property rights or rights to cheap property?
* * *
If there is change to be made, it should be gradual and well signposted. If the issue is that houses are too big for individuals to start owning them, then let’s see financial product innovation which allows part houses to be owned. If houses in one tiny area are a bit expensive, let’s fix transportation into that area from the cheaper places.
@Mathmo
There is very little green belt, you should really go look at it someday. There is however a lot intensively farmed rape seed fields, some pony paddocks, golf course and some scrubland. It is obviously vitally important that is not built on
And actually while we are it I think interest should rise precisely to decrease asset prices (near zero interest rates just benefits the already rich), avoided uncontrolled credit growth and just plain stupid investments (burrito bond anyone?)
@Neverland – I took a lovely walk in the greenbelt at the weekend, out of 500 acres of woodland, along some secluded paths which led me past ripening blackberries in the hedgerow. I sauntered through a newly planted Millenium oak wood whilst being inspected by a fine herd of Charolais and dropped down to a burbling brook which led to a fine village pub. A pub, which — being within striking distance of London — served the kind of food that you could only have dreamed about being offered in a rural restaurant 30 years ago, but all the while with friendly local service. All for less than a day’s rent in zone one per head.
So I’m afraid I disagree with you, and your suggestion that we throttle the country’s productivity in order to conduct politics of envy against providers of housing services.
I will be brief as I feel I’ve had my say, yet I remain inclined to comment because there’s a surreal quality to a certain strand of the discussion here.
The reason we are having this debate, the reason newspapers write “house prices blah blah”, and the reason I titled my post as I did — because I’m all too aware of the tendency to house price revisionism — is because houses are much more expensive than they were, particularly in London.
As the data I provided shows, median prices have gone from 4.4x to 12+x median earnings. That is an absolutely enormous move.
If we want to say that 4.4x was a cyclical low I have some sympathy for that. So let’s say 5-6x to 12+x, in London. Still a huge move.
This red herring argument about first-time buyers not being relevant to this data is surreal. This is a blog post, not a 300-word Phd dissertation; I naturally assumed we could also see that a move of this magnitude for median prices would indicate similar movement across the spectrum for all but the outliers on the distribution curve for a mass good like housing.
If people want to provide data series that shows that first-time buyer earnings to FTB housing has not increased similarly (not an anecdote about their cousin Vinny who found a flat going cheap last Tuesday etc) particularly in the South East, which is where the problem is most acute, then please be my guest. Having followed developments closely for a decade, I am overwhelmingly confident you will find quite the opposite is true.
Comparing the growth of house prices to other assets is an interesting contribution. However I’m not sure it gets us too far. Firstly, because houses *are* different, as I’ll get to in a moment. Secondly, because assets are pretty disparate.
To give an example, from memory median US house price growth over the past 100 years or so in real terms is only a little over 0%. Real terms growth in the US equity market is closer to 10% than 0%. Clearly we have different factors at work in the UK; I’d say our housing market is more different to the US than our equity market. This is pointing me into continuing to believe it is the UK housing market that’s the issue.
Leaving that aside, I’ll concede that what house price to earnings ratio inflation might also be signalling is a low earnings growth rate compared to asset price growth rate (see Thomas Picketty et al). We do know that is an issue, rightly or wrongly, so there is probably a bit of that in the data.
Finally, housing is different to other assets. It is a truism that we all need to live somewhere. Moreover we all have nesting instincts, and the ownership of your own home and aspirational feelings about it have so long been a part of our culture that it is just stubborn to try and deny them, or to suddenly expect young people not to feel aggrieved about the current status quo.
Nobody (well at least not me) is saying that everyone should be entitled to live wherever they want at a price they can afford. Clearly pie in the sky.
What I am saying is at the least we should recognize how wildly what’s attainable by a young person has changed (assuming as ever no parental assistance — crucial for me, though I know moot amongst much of the middle class who is happy to argue “Why cares about high house prices, the kids will inherit” and social mobility be damned).
This thread has shown that even this is still — bizarrely to me — up for debate.
I used to have a lot of debates like this, online and offline. I don’t anymore, as they go around in circles. But when I did I was always grateful for the genuine and honest 50-60-something who would say something along the lines of “Yes, when I bought my first two-bedroom flat in a nice bit of London I had to save for a year before and didn’t go on a holiday for a year or two afterwards. It cost me three times my then-low starter salary. Now my son would need to find 20x his salary” [I’m making these figures up but they are about right. “I admit it is far more difficult.”
Finally, on the “nobody needs to own, they can rent” argument.
To me this has echoes of the “prostitution should be legal argument”, in that you will hear people arguing for that but then expressing horror and outrage if you ask if you can offer £100 for a quick one with their 20-year daughter (I’m being glib, but you take the point. The thought appalls them). Perhaps that’s a natural human reaction and it’s not the end of the argument (I don’t think X Factor should be illegal but I’d be horrified if a child of mine turned up on it) but it does have echoes for me here.
I can’t recall anybody over 50 *ever* arguing “it’s perfectly fine renting all your life, nobody has a right to own” etc etc who didn’t own themselves. In numerous cases, further discussion revealed they either had or planned to help their children own at some point to.
So it was perfectly alright to rent, as long as they and their kids didn’t have to rent.
Wonder why?
Finally FINALLY I agree one can sit this out, enjoy the low rent to house price multiple, and save the difference while hoping for a crash. I’ve been doing just that for a little over 10 years now.
So far it’s been a bad financial decision that’s turned into a terrible decision. I would say the bad-to-terrible part represents the most frothy and ridiculous recent years of London house price inflation though. So perhaps we’ll eventually see a correction and I can go back to it being a bad decision. I can buy, but I refuse to. I hold no candle for ever undoing the ‘bad decision’ part — ancient history.
But really, my personal circumstances aren’t the point, nor why I posted the data. Clearly there’s something huge going on here. Even if we decide that the world has indeed changed — that owning your own home is off the table for 30-something middle-class average earners, despite their parents being able to buy family homes in a nice part of town at the same age — then we’re going to have to decide how best to structure society accordingly, not least to keep the incentives in place to make people bother getting up in the morning.
Ideas might range from building more lower-cost low-footprint high-quality mass apartment type housing others have already mentioned to changing the tax system so that non-home owners can get the same sort of capital gains tax relief enjoyed by those fortunate enough to have jumped over the chasm.
@Investor
“It is a truism that we all need to live someone.”
A weird mashup of ‘love someone’ and ‘live somewhere’, or a typo? 😉
Oops! Typo! (Wish I was that poetic.)
Annoyingly I can’t find the chart I saw only in recent weeks that showed the percentage of each generation who had bought their own home by a certain age. It showed very, very clearly that a far higher percentage of those in their 60s now owed their own home in their 20s than the generations that came later. The chart showed shockingly clearly just how few young people can buy now, and it’s not because they’re buying too much Starbucks. So sorry I can’t find the chart, I did try! Maybe someone else saw it and can post a link.
I used to be one who argued “yes, house prices have gone up, but rates are low and it’s always a struggle isn’t it?” but the data has changed my mind. It is stratospherically more difficult now than it ever was, especially in the south east, and huge numbers of young people will never own their own home who would have done if they were born a few decades ago.
I’m not sure median income is a great metric by which to judge house affordability. Those with low/no skills find it hard to demand more money as such skills (or lack thereof) aren’t exactly rare, so the low paid will skew both average and median.
Even in the grim North, we pay graduate engineers around £30k from day one as we have to be competitive. This is enough for them to rent, live fairly well, and to start saving for a deposit. After a few years, they will be able to buy a terraced house in a tatty area on their own, or something far nicer if they have a partner who’s also working.
I’m sure the situation is different in That London, but I guess that’s what fancy London salaries are for.
> Finally, on the “nobody needs to own, they can rent” argument.
To anyone making this argument I ask: when was the last time you rented? Let me spell out to you what it’s like renting from the most reputable agent in a market town:
1. We have a 33 page contract to keep to, specifying down to the number of picture hooks you can put up per room, and who can visit (we can’t have children over, even for tea).
2. I want to see walls painted something other than magnolia before I die.
3. The house is not cavity wall insulated; despite it being free the landlord has no incentive to do so. Ditto for other energy saving changes.
4. Problems reported are sometimes dealt with, usually not without being chased. And chased. And chased. We are still waiting on some, 18 months after moving in.
5. There is a 10 inch step up to the shed where the mower lives; my partner can’t even get it out to mow the lawn, let alone back afterwards.
6. The shed leaks.
And this is better than most rental properties. Small wonder people want to buy.
If something could align landlord and tenant’s interests, that would be a big improvement. Personally I can’t wait to get my own house and make it energy efficient, put in a decent hob costing more than £70, and make it feel like a home.
All of this depends where you live and if buying a house is a priority it is still possible for young people to do that if they settle away from the south.
In 2007 we bought 2 flats to support our 2 children through uni. We paid £160000 for a new 2 bedroom flat in edinburgh less that 1 mile from the science faculty of edinburgh uni, half a mile from the new edinburgh royal infirmary and 2 miles from another uni and 8 years later they will now sell for £130000. Our children are both at uni now so not long to go till we have to realise the capital, not looking great for people who bought 8 years ago,not so bad for people looking now.
Speaking from experience it has never been easy buying your first house. We bought our first house in 1992 and that was at the top of the market. It took all of my wifes salary to pay the mortgages every month and that was an interest only mortgage. Then a year later a similar house was for sale around the corner for 25% less than what we paid. Then everything about house prices was downward even books were written about how house prices would never recover (dont ask me the name of the author or the book). I sold the house seven years later for 5% less than I paid for it. The present discussion in the media and on this weekends blog is about high and rising house prices very similar to the discussion in the media up until 1992.
Fantastic discussion all, food for thought to be forced to consider this issue from so many different angles and perspectives. The argument that this is all somehow linked to the growing disparity between the capital rich and the income poor is a fascinating and compelling one.
It does seem, though, that anyone blaming low interest rates and irresponsible lending for high prices has to explain why houses are still cheaper than they were in 2007 in many parts of the country, despite mortgages being available everywhere. Clearly something different is afoot in London and its environs.
But what strikes me in particular is that, even among a wealth of data and in the midst of the situation, it’s still impossible to reach a consensus on what’s actually happening and the causes of where we find ourselves today. So how we can possibly predict the future or come up with solutions I have no idea!
I had the privilege of joining @Mathmo on the Sunday greenbelt experience and he is underselling it. And his data on asset prices since 1985 are fabulous – I hadn’t realised that FTSE-100 began then at 1000.
Globally, property prices vary by area. At their peak, they are ‘trophy assets’ (Mayfair, Kensington, St Tropez etc). At the trough, they follow replacement cost – which has got lower over the decades as manufacturing innovation has outpaced quality expectations. On average, in averagely-desirable-or-better neighbourhoods, they follow earnings over the long term.
The fact that the UK property market has closely approximated the highest returning asset classes, and not replacement cost, is testament to tight supply. But I don’t buy @Neverland’s argument that ‘only 3% of the country is built upon’, and in e.g. Melbourne/Sydney Australia where planning standards are far looser than in the UK, this hasn’t stopped the mainstream housing market rising practically in line with London. To me it is a simple question of supply/demand; we need a few million more homes, in London/South East to have the most impact, and whether planning law changes or not to accommodate this is almost moot.
After reading many if not all of the comments we may reach the stage where property is mortgaged on such a long timescale to reduce the costs that the mortgage and property has to be passed down through successive family generations.
I think this is the case in Switzerland where property is very very expensive and the mortgage is passed down the generations who end up effectively renting the property.
Just like our interest only people also discussed, why do these properties need to be repossessed, we just need a new provider of capital at economic interest payments.
@ investor
The central part of the problem is that many of those who already own houses in the uk are happy with the status quo
They can subsidise their offspring (or grand offspring) to give them a deposit to buy and give them a huge monetary advantage over the children of the less wealthy
Witness for example the raising of inheritance tax to £1m is an obscence number for anyone paying 40% tax
The answer is the weakening of current private property rights around land and inheritance to increase equality and opportunity…
… Or we can just have a Downton Abbey society
I’m certainly not happy with the status quo as I don’t see it as being healthy or sustainable, however, I don’t see knee-jerk taxation of privately owned and occupied property as being the answer.
BTW, I don’t think anyone has discussed the taxation changes towards BTL interest payments on this thread yet. A lot of BTL investors are saying they’ll sell up, which might be hot air, but let’s wait and see. This would obviously put more housing onto the market, but would also reduce available rental stock, so doesn’t really change the demand and supply issues.
@gadgetmind
I see the changes in taxation of BTL being the first in what will probably be a long line of changes removing the tax advantaged status of residential property in the UK
In days gone by the local rates were quite effective at capturing a reasonable chunk of the unearned increase in the annual value of a house, like local property taxes are in the USA
(in the USA you actually see people selling their houses are moving somewhere else because of the local property taxes, conversely the most expensive houses in the UK have the lowest council taxes)
When huge chunks of the population are excluded from owning houses, leaving only the richer sections of society owning them you can expect governments to use houses as a piggy bank
I say good, PAYE earners on £40,000+ pay waaaay too much of the burden for tax in this country
TI – you highlight the change from 4.4x to 12x earnings as a sign that housing is very expensive. You are even circumspect about the choice of timing to trim a bit off that to take account of the difficulty of timing the market exactly peak to trough — and even so that asset it is at least twice as expensive in expenditure terms.
It surely isn’t a surprise to this community that expressing capital in in expenditure terms has got more expensive. We all look at SWR rates as part of our FIRE thinking and we have an idea of what capital we will need to cover our expenditure in perpetuity. It won’t have missed anyone’s attention that we’re living in a low yield world and the plethora of articles here about whether the fabled 4% SWR is too low. Do we need 5%? Do we need 6%? Please not 7%. So it should be no huge surprise then that the amount of capital required to cover future rents has gone up. You can do this in one of two ways: by having an invested amount which you withdraw and spend on rent, own an asset that produces shelter at the rate at which you consume it.
But housing is different. It’s not just another asset. Why? It’s a little early in the year for a group of people to be chanting “oh yes it is”, “oh no it isn’t” at one another so I’d like to understand a bit more about what makes it different.
One really obvious thing is our common need for the thing it produces: shelter. It is a natural hedge against your future consumption of shelter to own the asset. But it’s equally valid to buy the shelter at market rate as you require it. I don’t, after all, own corn fields to supply my future needs for sustenance.
But as UK Investor Geek so rightly points out — it’s more than shelter — it’s got a bit of the shiny stuff attached. We’re not just talking about staying warm out of the rain, we’re talking about staying warm out of the rain on Cheyne Walk. We’re talking about being stylishly accommodated in one of the trendiest cities on Earth, Hounslow.
* * * *
My question to the non-owners (and this debate does seem to split along ownership lines) is how far would you like the price to fall? Are you after it becoming a regulated good, centrally planned and provided, perhaps? Or would a quick 50% crash do, followed by surging growth? Do you perhaps think a long bear market in housing would be a good thing?
And do you regularly look at other asset classes and think that they should be cheaper for your benefit, too?
@ Mathmo
“Are you after [housing] becoming a regulated good, centrally planned and provided, perhaps?”
It already is…
“Do you perhaps think a long bear market in housing would be a good thing?”
Yes
“And do you regularly look at other asset classes and think that they should be cheaper for your benefit, too?”
Yes and everything else I buy too
This discussion on house prices seems to imply that us Londoner’s have gained massive increases in equity on our houses. That may be so in recent time but not without its impact.
When I moved to London in the late 70’s from a relatively cheap Coventry housing area, my Mortgage triples, I took a evening job to subsidise the Mortgage and when the family arrived I did it all again and even had to send my wife out to work. Achieving what I have now was not without its costs.
On the other hand my brother and friends in the Midlands had far moire disposable income, a better lifestyle when I was struggling. Now I have achieved some benefits I would hate to be thought of as having had them just through rises in property prices.
I feel sorry for the young today that have to do the same and more than I did back in the 70’s and 80’s but as I have previously said you can only borrow or rent what you can afford to pay from income. The fact that some of us are sitting on high value property is not our fault but a fault of the system and I fully expect to give it back later when we need to pay for care fees or property prices fall, but not before I can sell and spend/give away the surplus.
I don’t resent landowners. After all, I’d like to be one some day. But I know it’s not going to be in London, where I make my living (let alone the absolutely bonkers Auckland, NZ where I’m from originally).
@Mathmo I’d like to see prices back down at a more realistic multiple of earnings so there’s more chance of raising a deposit for us folks without contributing parents. If that means a 50% correction, so be it. Prices will eventually return to present levels, though it may be 20 years from now, and hopefully incomes will have risen along with it this time.
The main appeal in owning a house – aside from being allowed to hang pictures on the wall – is to not be paying market rent in retirement.
I’d like to see a less volatile housing market overall. To hell with the housing “ladder”.
@Peter
I have to say after renting thirteen flats in Aberdeen, Norwich, Durham and Glasgow before buying, my experience of renting is nowhere near as awful as you depict. I’ve always had the best experience renting direct from a landlord more often than not via an advert in a shop window.
I place ‘lettings agents’ in the same category as ‘recruitment consultants’. I.e. Parasitic middlemen that have miraculously managed to convince society that a need exists for their existence .
@Bob — I have had similarly positive experiences, I can’t remember the last time I had a truly bad landlord. The ‘cons’ for renting for me are more the implicit ones in all such arrangements (uncertainty, inability to make changes to homes in the UK, versus say Germany) and the opportunity cost in terms of the gains I’ve missed out on, and that will mean I’ll need to find more money in the future one way or another to put a roof over my head.
@all — Thanks for the further thoughtful follow-ups, particularly from Mathmo, where we seem to agree property is expensive, just not on whether that’s unusual re: other assets or a problem. (Very well expressed comments re: low yield world). As I said earlier I feel I’d largely be repeating myself to comment further, but am enjoying reading the new contributions. 🙂
p.s. That’s not to say I haven’t had bad landlords, but I’d have to go back to the 1990s for them. Obviously I was poorer then too, so perhaps a bit of you get what you pay for. (And a sign that the poorer renters are perhaps inevitably more vulnerable to downsides of renting.)
If there is a big BTL sell off of properties as a response to the shuffling of tax benefits, another option to FTB catching a break seems to be rearing it’s head – big institutions/corporations buying en masse to get into the rental returns. This could be perhaps as an investment diversification strategy, as well as the steady regular predictable income being attractive for planning purposes….. think pension, hedge or other managed funds for example.
Even if today’s yields don’t look so good, they are essentially betting that property [in prime areas at least] will always pay off in the long run. Given the fact that current policy means the population is expected to rise significantly in the near to medium term, whilst new building is ever stymied, it’s not illogical.
If I was still young, I would seriously consider emigrating to any civilized place that’s still behind the inequality curve, to give myself a shot by turning the clock back just enough to get through before the door slams shut.
@survivor – would you be able to put names to any such civilized places? I am very curious as to where they might be.
@Peter It does sound like you don’t have the best deal there landlord wise. I rented for many years and most of that time was trouble-free. Now I am a landlord (an accidental landlord as I cant live in my home for the time being) and my property has been rented out for 6 years with only our second tenant in. The agency who look after it for us have full authority to rectify any issue immediately up to a certain cost and then any time something above that comes up its referred to me and permission is instantly given and followed up. I understand that my tenant by law has reasonable right to “quiet enjoyment” of the property – the only rules we have are no-smoking indoors and no pets. I find it staggering and possibly even unlawful that your landlord can dictate who can visit you. We have agreed to our tenant doing some minor décor changes, painting walls and replacing a carpet (we went 50/50 on costs as the old one was a bit thread bare). Why do we try and be accommodating (no pun intended) well a) because its the right thing to do and b) if the property is empty it costs me lots of money and the next tenant might not be very good. As it is if I have a tenant who looks after the property and pays rent on-time why don’t I want to work hard to keep them. They are after all my ‘customer’.
That said I still see your point. I miss living in my own property and the implicit freedom to do with it as you will.
I think there used to be strict limits on the size of the mortgage compared to household yearly income? Was it 2.5 times? Then a few decades ago that limit was scrapped, leading to unlimited upside for mortgage size? The chart at this link shows how the % of mortgages bigger than 3 times yearly income exploded in size starting in the mid-1980s:
http://www.cityam.com/1403775108/bank-england-imposes-limits-high-loan-income-mortgages
@Survivor “….. seriously consider emigrating …..”
Strapping on my “body armour”, my personal view is that the lack of affordable housing is simply one of the many symptoms of the extent to which our country is overcrowded; something that has been plain to me for many a year and which is worsening.
I welcome outmigration from the UK, for whatever reason, and its increase to a point where it eventually exceeds immigration to the UK is to my mind an inevitable eventuality, although I regret that it may not be in my lifetime.
@Topman
overcrowding can work in your favour as well though
it allows far superior infrastructure compared to somewhere that is undercrowded
trick is to use it all off-peak when it far exceeds the required capacity and it is awesome, think motorways, pools, parks etc. largely all to yourself (FIRE can be seen as an enabler to living off-peak in this way)
also specific population density is wildly different to average population density, perform ‘crowd-arbitrage’ to get the upsides of infrastructure without the downsides of overcrowding through judicious use of your physical location, think slightly, but not completely off the beaten-track (never on the beaten-track)
one example that springs to mind is the quality of road-biking to be had in the UK due to all the backlanes, b-roads etc. These don’t exist if you live somewhere like NZ because the population density can’t support the infrastructure required.
So its not all bad, if you exploit it in the right way I think..
@ The Rhino & Topman,
I have one Kiwi & one Aussie sister, they emigrated again because having already emigrated here as kids, they found it too crowded after becoming adult & looking for jobs/a decent quality of life.
They have comparative salaries way higher than when we were all working here in London even ….. & that still doesn’t take into account the differences in lifestyle possible there, they will never come back.
Interestingly though, in both Sydney & Auckland, the housing market is as distorted as London (not unsimilarly) due to mainly foreign [specifically Chinese] money buying up property for investment, thereby locking out young/poorer locals.
It seems the Neoliberal revolution in the US calls the economic tune, the UK is first to copy unquestioningly, then all the other Anglo countries follow too, so to answer the question ‘Where is still good?’ is quite hard.
I think it is still possible, but you have to be really creative. A buddy of mine is an accidental landlord & after a holiday in Spain post property crash, figured out he could rent a place for peanuts there & retire at 50 by letting out his place in the SE of England. (a standard 3-bed noddy house in an indistinguishable suburb, yielding ~ £12k a year gross) He now lives a much better life on that in the Med than his sucker tenant who ironically earns a multiple of that income sweating his life away on the UK corporate treadmill as a ‘professional’. Dreams can come true…..
If its acceptable for uk plc to take untaxed and often criminal foreign money, to inflate London housing, along with immigration, then surely its acceptable for Londoners to offshore their tax affairs. What’s the difference?
This crisis has a serious impact on our rule of law.
Won’t each young person simply just inherit all the wealth and property their parents accumulated?
You people don’t need to do more than average anymore b/c their parents hooked them up!
BTW, isn’t foreign money the one buying London property? Why compare to local salaries if locals are priced out?
Sam