Good reads from around the Web.
Back before we argued about Brexit, we used to debate whether young people were being shafted by the oldies. Perhaps in the years since you’ve become an oldie yourself?
For my part, I read articles about middle-aged men having a mid-life crisis and desperately hope the author will have thoughtlessly jotted down an age that’s somehow a couple of years older than my own. Clearly this is evidence that I actually am having a mid-life crisis, but let’s leave that for another day…
I’m still down with the kids, of course. Not only because I still have all my hair (touchwood), I’m prone to pretentious hipster-style urban foibles (discuss), nor even because my serial monogamy has left me washed up in the Tinder-era like Charlton Heston stumbling awake in The Planet of the Apes.
No, my calling card of solidarity is I never bought a property.
That’s my own stupid fault, as I’m old enough to have done better. But as I’ve said many times, it’s almost impossible to overstate what an issue it now is for 20-somethings in the South East without sufficiently wealthy and generous parents or City salaries. I still believe many older people who long ago made the leap simply don’t understand the gulf.
I was at an office recently where the Spice Girls came on the radio, and I lamented to the room in general that I remembered being in an office just like that one when I first heard the song playing some 20 years ago. (You’ve got to love the creative industries, in case you’re wondering why there’s a jukebox in every office I’m at…)
A passing Millennial shot back that she was three-years old when the song first came out, which made us all feel so ancient we could barely retort. After a few snarky comments from the others about her inexperience at life, I reminded my peers that she’d likely have 20 years after we were cold in the ground to get that fixed.
“True,” she conceded. “But at least you had the chance to buy a house.”
What a telling comment. Can you imagine a woman in her early 20s engaging in banter based around home ownership even a decade ago?
She didn’t riff on her expansive romantic possibilities, her health and youthful looks, or her freewheeling lifestyle compared to the shackled 40-somethings shambling around her.
Not sex, drugs, and rock and roll. Property ownership.
Just a little comment, but I think a revealing one.
The numbers of the beast
The good (bad) news is we don’t have to rely on anecdotes from 60-year olds about how when they first bought a house they had to sell a kidney and eat their dinner sitting on packing crates – and that yes, the three-times salary multiple on their mortgage then for a three-bedder in a nice part of town is somehow directly comparable to your ten-times salary multiple for a bedsit – because the numbers are proving the inter-generational divide is real.
Sticking with property, an article in The Telegraph this week cites LSE research that found:
Homeowners in their 40s and above who hold on to former homes and rent them out are largely to blame for Britain’s crisis in housing affordability, an academic report has found.
Research by the London School of Economics found that older people are keeping previous homes when they move on, leading to a lack of availability at the bottom of the housing market.
…which has long seemed obvious to anyone watching the market.
I do understand why this buy-to-let phenomenon happened – and I certainly don’t think landlords are individually greedy parasites or worse, as the extreme rhetoric runs – but I do think housing is a special case asset, given that there’s a fixed supply of it and that, rounding up, everyone would like to own their bit of it.
Governments should I think therefore favour owner-occupiers over cultivating a landlord class (already numbering two million as of 2014, and owning on average 2.5 rented properties each, on top of their own homes).
Happily there’s been some movement on this since I gave my own ideas on fixing the housing market in February 2015, including higher stamp duty and a change in the rules for tax relief.
But I wonder if the new chancellor Phillip Hammond will bottle it in the face of Brexit in the upcoming Autumn statement, and reverse George Osborne’s buy-to-let tax changes? Changes that were long overdue, in my view, but that are much reviled by those affected.
Fantasy land house prices are the biggest bugbear of the under-35s, but you also hear them complain about the impossibility of saving a pension. I’ve less sympathy here, given how little research the ones I’ve talked to have done into what’s possible. But new numbers from the Institute for Fiscal Studies (IFS) suggests there is some truth to this lament, too.
Indeed The Guardian reports:
The IFS said that less than 10% of private sector employees born in the early 1980s were active members of a defined benefit scheme, compared with more than 15% of those born in the 1970s and nearly 40% of those born in the 1960s.
Recent changes have seen workers automatically enrolled into defined contribution schemes, which has meant younger cohorts have higher membership of pension schemes than their predecessors, but on less generous terms.
And adding it all up, the IFS has put figures on the gap in wealth accumulation:
People in their early 30s had average net household wealth of £27,000 from equity in their homes, the value of their pensions and other financial investments.
The thinktank said that those who were born in the early 1970s had accumulated household wealth of £53,000 by similar stage.
It added that children of the 70s were themselves notably less wealthy than those born in the early 1960s.
All somewhat depressing given our society’s presumption that we should be getting richer through the generations. With higher education fees making university unaffordable even as the triple-lock makes pensioners richer, I can’t help thinking more levers need adjusting. Brexit could be the tip of the angry iceberg, otherwise.1
Of course, I’d happily trade my entire portfolio to be 20 again. So if you’re young and miserable reading all this, please remember you’re already rich.
The game is trying to stay that way, by building up your financial and other assets as time slowly takes its toll.
Good luck!
From the blogs
Making good use of the things that we find…
Passive investing
- Diversification versus delivering alpha – Longboard Funds
- How do ETFs work? – Vanguard
- On international exposure [US but relevant] – Wade Pfau
- The quality factor [Canadian. Just skip the ETF specifics] – Canadian Couch Potato
- In defense of bonds [Old-ish, but debate recently re-flared in our comments…] – MD
Active investing
- Five lessons from the legendary Peter Lynch – Latticework
- The US market looks expensive enough to warrant sitting out – Meb Faber
- How interest rates affect US stock market returns – A Wealth of Common Sense
- Secondary market VCTs for income – 7 Circles
Other articles
- When the best of times are the worst of times – Vanguard blog
- Invest or die – Investing Caffeine
- Interview with Jason Zweig [Podcast] – The Investor’s Field Guide
- It’s hard to sell down your capital – SexHealthMoneyDeath
- A report that shames the European pensions industry – Evidence-based Investor
- Managing finances as we get older – DIY Investor (UK)
- Earning and working are different things when you’re financially free – SLIS
Product of the week: Interest rates on savings continue to fall. ThisIsMoney reports that a Best Buy three-year bond from Principality Building Society now pays 1.44% (though the Principality site claims 1.45%) whereas to 12 months ago you could get 2.5% for such a long lock-up. Regular savings accounts – loathed by some as a faff, but still useful if you’ve small amounts of cash to sock away – are seeing rates fall, too. The Telegraph notes that M&S Bank has just cut its regular savings rate from 6% to 5%. You can still get 6% from First Direct on up to £300 a month, if you’re prepared to jump through the hoops.
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.2
Passive investing
- ETFs are the new way to be a dumb investor – Marketwatch
- Why you shouldn’t just buy Buffett for your US exposure – MutualFunds.com
- Perhaps you shouldn’t swap your 60/40 mix for an Ivy League portfolio – Bloomberg
Active investing
- Asset managers are finally worrying about their future – Institutional Investor
- Hunt for elusive income turns to niche investments [Search result] – FT
- Robert Shiller likes UK stocks – Morningstar
- Manchester Building Society cancels interest payments on PIBS – Telegraph
- Could one of these six mid caps be the next Fever-Tree? – Telegraph
- The US heavy truck sales recession indicator is flashing – Bloomberg
- Being like Buffett: Easy to say, hard to do – Morningstar
A word from a broker
- The state of the bond market – Hargreaves Lansdown
- What impact does Presidential policy have on stock markets? – TD Direct
Other stuff worth reading
- Millions in the UK have less than £100 in savings – BBC
- £10K in equities earned £90K more than cash over three decades – ThisIsMoney
- Be wary of a very equity-heavy retirement portfolio – CityWire USA
- How to do a midlife financial health check – The Guardian
- How Vancouver is tackling its high house prices with taxes – The Guardian
- Brexit jobs exodus ‘has begun’ – ThisIsMoney
- The new global superstar companies [Special report, menu top-right] – Economist
- The economics of America’s $250,000 speech circuit – Priceonomics
- Algorithms can tell how employees are feeling – The Atlantic
- The link between carbon emissions and GDP growth may be breaking down – Quartz
Book of the week: Is it time to read J.K. Galbraith’s The Great Crash 1929 again? It’s been a while…
Like these links? Subscribe to get them every week!
- Yes, I understand you voted for Brexit for right-minded constitutional reasons. But I don’t believe the majority of the 52% did. [↩]
- 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”. [↩]
Stamp duty is a progressive transaction tax. It is unsurprising that increasing stamp duty reduces the number of sales and maintains status quo on prices.
Housing prices for first time buyers will come down when supply goes up, either through new builds or through increased turnover (i.e. making it easier for people to move on rather than convert their loft).
Deregulation of planning, redevelopment of inner city dormant industrial areas, farmland, greenbelt and reduced stamp duty will all help.
Prices are always driven by supply, not demand. Stamp duty increases punishes those who made rational decisions and does little to alleviate lack of supply.
Post BrExit house prices were supposed to crash? I voted exit on that basis alone!
House prices rise because there is more demand than supply (this market is no different than any other). The economy boomed and created opportunities this sucked in a lot of demand. An an extreme example take Greece, 50% youth unemployment economic policy being forced upon them which is designed to pinish rather than solve. This is a situation mirrored to a lesser extent over most of southern Europe. Net impact if you’ve got any brains at all you emigrate because nothing good is happening in those countries (for the yoith anyway) for another decade, Greece two decades. That last point was the real reason I voted exit, it’s possible BrExit will force change here. Anyway that illustrates the demand side of the equation.
The supply side is even more intractable, we have limited land. Even woods which are little more than a vanity purchase have increased in value substantially. Land that can be used for agriculture even more so as we all know anythign you can build on carries a stratopheric price tag. Add in plannig laws design to protect green spaces and a legal system that canbe used to frustrate any planned development for years and at great costs and you see can why prices have risen.
Fixing house prices requires demand reduction – BrExit offera chance to do this bit by forcing the EU to stop punishing it’s member states and instead attempt to solve their issues and even should they fail allow the UK to control entry numbers – there was no chance of either before. Still this not enough the pent up demand is such that it requires we make more supply, this means making more land available at affordable prices and making it easier to build upon it. The price we concrete over more and more of our country.
Personally I don’t think any sort of demand supply balance is going to be reached anytime soon, hence houses prices will remain subbornly high.
@Fremantle – I think prices are driven by supply and demand. And the point here is there’s massive *demand* from landlords as well as first-time buyers, but one of those two groups is far better able to buy, not least because they’re already in the game.
Given millions of young people want to own their own home and can’t do so because affordability has become so stretched — to a great extent according to this LSE report because of the enormous boom in landlords — I think we should change the way the system is tilted to encourage home ownership instead of landlord-ism. It’s a disparity that is driving generations apart, increasing inequality, and reversing many decades of financial advancement from generation to generation. It’s not like they’re asking for an opportunity their parents or grandparents (who are now landlords) didn’t enjoy themselves.
Of course we need to build more houses, but given there’s five million-plus homes owned by landlords, I have no problem imagining 2-3 million could be released back into the ownership side of the ledger, which would significantly improve matters.
Let’s remember the buy-to-let sector didn’t really exist until the mid-1990s. This was a boom and this is the fallout.
Housing demand has been pushed by population growth and lifestyle change leading to more people wanting more space each. Population reduction is the only reason I could see for voting brexit (I’m otherwise heartily against), but I’m not sure it will ever happen. So I want planning laws relaxed to improve supply, and the costs of owning housing increased, especially on landlords, to make owning housing as an investment unattractive, and drive down prices. I was impressed that Osborne went against BtL Tories to improve the situation, but I too fear Hammond will cave to pressure.
Its not just a generational issue, all those 16m people with less than £100 savings, across a wide range of ages, are tenants forced into the private sector by council house sales. I want councils to leverage their control of the planning process to build loads of council housing, so the poor have a clear rental path through life, and private landords only exist to service the young middle class who can aspire to owning their own home. Then anyone saving for retirement should look to invest in the equity markets, where the money actually works to begat economic growth rather than being tied up in unproductive brickwork.
@TI We’ll have to disagree on what drives price, but demand is almost without limit if price wasn’t an issue. Who wouldn’t say yes if asked whether they’d like to buy their own home? But there is a simpler way to measure actual demand, look at the number of transactions actually taking place. This is where real supply meets theoretical demand and determines price. Unfulfilled demand will remain unfulfilled until real supply is brought to market.
Landlord demand will only drop when yield or capital gains dry up. Taxing landlords or increasing borrowing costs would reduce yield and may force landlords to sell, but it would also reduce supply of rentals for lease, forcing up rents. This might marginally increase housing supply and reduce prices, but it would not shift the equilibrium very much and at the cost of increased rents.
The government can make this choice, but we’d also have to accept the unintended consequences. Better for the state to reduce regulations and taxes and let supply meet demand with minimal interference.
Capital gains should be applied on all housing, landlord or owner-occupier. Its problem is the allowance is single year, and housing transactions are lumpy. If you had a £5k a year allowance (after inflation) which you could build up over time (across all asset classes), and an income tax like progressive structure, then a downsizing granny would have £100k to play with, but housing prices would be curtailed as they would not be viewed as a leveraged tax-free investment. I’m not sure how housing owning companies should be treated, as I generally prefer rental stock to be managed my professionals than in dribs and drabs, but I guess standard asset depreciation/appreciation rules could be applied.
A non-tax sheltered equity portfolio could earn £7.5k in dividends, and £5k in capital growth, so £12.5k, which at 4% SWR means £300k, which is a lot.
TI great post as usual. Those links will keep me busy.
I share your pain but don’t think I’ll buy a property in the near future. My dad is a landlord and he’s drowning in stamp duty, factor fees and tenant problems. Even with leverage I don’t feel property really beats tracker funds after all the costs and headaches.
Why not just chuck all your savings into P2P and S&S ISAs and live off the income instead?
ERP
Couple of points about housing:
a) there is no national market; I was in Bradford the other day on business and a small house there really does cost £70k. So not so bad if you a decent head office job at Morrisons etc. It’s mostly in London and big parts of the SE prices look high in comparison with average wages
b) it’s far too early to assess the effect of Brexit on the Uk economy (which will in turn ultimately drive house prices). In reality we won’t have the first inkling of the real effect until 2030 ish
I agree that at least in London’s zones 1 and 2 houses nowadays are unaffordable to someone in their early 20s, even if they earn a good salary for their age group. There’s a sense of urgency amongst people in general to “get on the property ladder”. Get On The Property Ladder. The phrase itself is loaded with impetus. This urgency is hardly surprising, given that property has been a remarkably good investment over the past couple of decades.
It’s hard to argue that the rise in BTL has been one of the main culprits when it comes to squeezing the supply of properties available for purchase by owner-occupiers, mostly because of the imbalances in how BTLs are taxed. The monetary policy of the past 8 years and the weakness of the pound (which makes London property an attractive investment to foreign buyers) have probably had something to do with it as well.
But let’s consider for a moment an alternate universe where property prises on an inflation-adjusted basis are expected to remain static pretty much indefinitely. I beg leave to submit it as my opinion, that under such circumstances this general sense of urgency would evaporate virtually overnight. Then we’d be left with the baseline demand, which should grow in line with household formation, plus the demand generated by any imbalances deriving from taxation. The latter could be fixed by aligning the taxation of investment property with that other fixed income investments.
And when it comes to limiting house price rises to more or less inflation, it wouldn’t be such a ridiculous idea if only the government were to unequivocally withdraw the Bernanke hedge they’ve got going for the property market.
House building rates peaked at 420,000 in the mid-1960s.
In the year to June 2016, the building of 144,280 homes was started, 2% up YOY, but seemingly well below demand.
Local Authorities Housing Associations Private Total
1950 180,000 20,000 25,000 225,000
1955 200,000 20,000 120,000 340,000
1965 200,000 20,000 200,000 420,000
1980 50,000 30,000 120,000 200,000
1995 zero 50,000 150,000 200,000
2000 zero 40,000 150,000 190,000
2005 zero 40,000 180,000 220,000
2015 zero 40,000 100,000 140,000
NOT TO EDITOR : Table will probably need straightening out a little?
To get a meaningful grip on the data (supply/demand discused) would need population figures.
Housing affordability in Canada is reaching crisis levels. In Toronto, there is absolutely no way that a fresh college graduate can afford a house without landing some extremely lucrative job on Bay Street. This is very different than my father’s time – as a farmer in rural New Brunswick he had no trouble qualifying for, and paying his mortgage.
Looking back historically a real break on property prices was actually borrowing the money. My parents bought their first house for I think £400. It was a end of terrace probably worth 170-200K today. But it wasn’t the house they wanted. The house they wanted was another £10. They building society would not lend them anymore so they were forced to go with the mid-terrace.
Ridgedly and leagally enforcing the borrowing limits would be one option to choke price growth.
Looking back at my home buying it’s also not entirely a one way bet, my first house cost £75K in 1987, the person I bought it off paid 84K so lost money. Given pricing today the risks many are inadvertantly running would have far reaching consequences if realised.
If renting is the problem (and I don’t think it is), then it’s easily solved. A person may not own more than 2 properties, that would cover off holiday homes etc, but would end the private landlord who has a fleet of properties.
@Fremantle — Well by your way of thinking I could as easily say “there’d be no net demand if supply were infinite.” I am not convinced this proves very much! 🙂
You are right of course that anyone would like to own if price were no issue, and before that the cheaper the better.
But I think that’s a straw man. Long before we get to that point we could say people should be able to aspire to own roughly at the same level as the previous generation. We’re a long way from that, in great part because previous generations own extra properties.
We don’t live in an island that will take massive amounts of additional supply, that’s clear. For whatever reason. Fully agree we should build more — I’ve been following the under-building since way back in the Barker report days — but realistically we are not going to go from now to say 500k homes a year.
This is very different from, say, cars, where any realistic level of demand can be met by supply. That is, housing is clearly a special case.
I agree government meddling is sub optimal but we do a lot of sub optimal but pragmatic things — and as government is fully involved setting tax rates, planning etc, seems arbitrary to rule them out now.
Rents might increase a bit if landlords sell up but I think this is mainly overblown.
Firstly, 1-2 million buyers would leave the rental market! (People rarely mention this..) So that will curb rent increases.
Secondly rents are far more flexible. Eg It is trivially common for 2-4 strangers or vague acquaintances to share a house. It’s a special newspaper article if they buy together. So if rents really did increase a lot, which I doubt they would, I feel people would respond in ways other than just paying more.
Cheers!
Re: landlords “owning on average 2.5 rented properties each, on top of their own homes” – this is a trifle misleading, as mean averages often are. According to HMG very recently, nearly two-thirds of landlords have just one property (as well as their home) and all but a small minority have five or fewer (source:point 1.5 on p4 of https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/545704/Business_Income_Tax-Simplified_cash_basis_for_unincorporated_property_businesses-consultation.pdf).
@ho simpson
Re: “Get on the ladder”
Its not so much a desire to “Get on the ladder” as a desire to get a huge slug of money from their parents or grandparents
How many 25-35 year olds do you know who actually save the deposit and expenses themselves vs. how many get given most of the money by their family?
These kids wouldn’t get given this money to invest in a ISA or start a business by and large, but their parents will give them a five figure sum to fund the deposit for a property
Therefore it appears a one way bet
@TI – I think the young will continue to get shafted because they don’t vote, so each cohort every decade will have it even harder as those delayed austerity measures already passed kick in.
We live in unusually rapidly changing times and there’s more than one gulf, my siblings and I are in our 30’s and deeply insecure about our futures, but our baby-boomer parents who grew up with such certainties and justifiable hopes can’t understand why we are too afraid to settle down by having kids. They don’t understand our fears that in the near-future creeping privatisation will mean paying for schools and healthcare, while jobs are more volatile than ever in our lifetimes and the dream of homeownership as ever-distant as a mirage.
Even just trying to look after yourself is a worry for a lot of ordinary childless people, in that you wonder if your pension will be enough to see you to the end in dignified comfort.
@Investor
“We don’t live in an island that will take massive amounts of additional supply, that’s clear.”
What rubbish. 93% of the UK is urban. Within urban England 54% of urban space is parks, sports pitches and allotments. Fact check:
http://www.bbc.co.uk/news/uk-18623096
@FI Warrior
Actually life is getting better and better for every generation of young people in most countries (e.g China or India), just not in Western Europe or the US
Globalisation, innit
I hope older people are not being blamed for inadequate house building, triple lock on pensions, free university education, work place pension system, Pensioner bonds.
@oldie
You forgot blaming older people for Brexit
@Neverland, Agreed, I meant the youth are being sacrificed in the countries of the ‘old west’ and yes, it’s the way globalisation was played. I also was really surprised to find out that the vast majority of the UK is actually not concreted over and that is what fed my belief that the primary reason for the housing crisis is deliberate restriction of supply using the planning laws by those who are doing just fine the way things are.
The false impression that so much of the UK is urban land is helped by the fact that most green areas are off-limits to the majority, as noted you only really get to appreciate that when flying overhead vs travelling by road or rail. The elite effectively keep us coralled in a network of concrete patches where we live, work and play in various brick/glass/concrete rabbit hutches or shoe-boxes, while public areas also increasingly become pay-per-view.
“Firstly, 1-2 million buyers would leave the rental market! (People rarely mention this..) So that will curb rent increases. ”
Arguably true, but assuming it caused a drop in rents it would simply make the economics of coming to work here stronger. So pushing them backup.
I just don’t think supply and demand can be ever be made to align sensibly in the UK house market. I’ve never seen taxation being used to goose behaviour not also having unforseen and annoying collateral consquences (Brown was worst, but Osbourne was giving him a run for his money).
You end up being left with “legislate explicitly for what you want to achieve.” But again be careful what you legislate for.
@FI Warrior
Milton Keynes created only in 1967 now has a population of 0.25m: https://en.wikipedia.org/wiki/Milton_Keynes
There is no shortage of supply that isn’t political
@Neverland – I often wonder this. Globalisation feels like it is dragging the west living standards down. Even free movement within the EU could be argued that it was needed to compete with countries like China but that this has dragged living standards down. This feels like one of the drivers for increased protectionism we have been seeing across the west. Pay packets and job benefits are relatively smaller than they were say 20 years ago even ignoring things like housing.
Of course one could counter this with the argument that a decrease in living standards should cause asset prices to drop not bubble up. So someone has money somewhere. And it does look like older people but it could be argued in the really bubbly places it is driven more by sheer numbers and rich foreigners (and cheap finance QE). I find it hard to believe that the bubble in London is caused solely by old people buying up all the properties.
@Richard
The London apartment developments from companies St Georges and Berkeley are marketed heavily in the Middle East and Asia. I *think* roughly half the buyers are foreign
Even apartment development in Liverpool and Manchester are marketed heavily to these areas
Every quarter the UK’s balance of payments is about £25bn negative: this is all funded by foreign direct investment which includes UK government debt and property sales
@Neverland – but decreasing prices by building more mean all those smiling buyers who bought with government help will be wiped out. Prices can’t drop, it would destroy the economy and the government with it (even more than Brexit). I think the government will do all it can to keep prices up.
@TI just buy. The longer you leave it the more you will have to pay. This is not advice by the way, just an opinion 🙂
@Richard
12 months ago no one thought we would vote to leave the EU or that Donald Trump could be president. Stuff happens
@Neverland – are you suggesting house prices could drop? Witch, burn her!!!!
What about pensions? The low growth since around 2008 has pretty much put a nail in the coffin of decent pensions for young people. I worry they won’t realise this until they are in the 40s or 50s!
Could things have been done differently in 2008 in response to the crash that would have prevented this? Or where the DB schemes always unsustainable?
I do believe private companies have used the move from DB pensions to DC pensions to cut their day to day costs rather than just their long term commitments.
Well I am 63. Real interest rates were always negative for me. Goodbye debt, hello nice expensive house asset. Today’s low rates don’t compensate. That is the difference, we need 2.5% inflation.
Firstly, we simply do not have a progressive tax system. Graduates earning £21k+ have a marginal rate of tax of 54.8% (made up of 20% income tax, 12% employee national insurance, 13.8% employer national insurance and 9% graduate repayment tax). Pensioners, on the other hand, can earn £99K from pensions with a marginal rate of 40%. I’m sorry, but that can’t be considered a progressive tax system however anyone tries to spin it.
Secondly, it is an absolute fallacy to say that house prices can’t be controlled by the government. They can, without a single new dwelling being built. All it takes is to introduce an annual land tax based on current property value. Charge 0.1% per year, prices may not be influenced, charge 1% they will be, charge 5% and then they will absolutely crater. Those who can’t pay can defer, with an interest cost of RPI + 3% (same as students). If the government can vary fuel duty as it sees fit, then why not a property tax? Hold a house for 20 years and you pay the entire capital value of the property in tax. Do that, then we can see who actually wants to own property, how much they are prepared to borrow (and banks lend) and where prices would be. We would also see how prudent the banks have been in advancing the sums they seem happy to provide, which out of necessity is predicated on very low taxation (and low interest rates). I think it is often forgotten that people don’t buy residential property, debt (+ equity from previous property, either stepping up the housing ladder or the bank of mum and dad) does.
Then for the BTL brigade, make CGT payable on an annual accrued basis, rather than on sale (or what I increasingly expect will be death and then outside of CGT and possibly inheritence tax free).
The biggest problem isn’t lack of supply, it’s the fact that successive governments have done everything to encourage huge tax free lump sums being generated through zero taxation on residential property. Isn’t it rather telling when David Cameron is chided for owning an offshore investment fund (which hardly any money invested), when literally months later no-one bats an eyelid when he mortgages his home to release £800K tax free – more than his entire net earnings since 2005, whilst his home has gone from £1M -> £3.5M valuation.
Thirdly, why isn’t the State Pension just a loan, on broadly the same terms as Student Loans, that would show we are all in this together:
– Charge RPI + 3% in interest.
– Repayable at 9% tax on earnings over £21K.
– First charge on estate prior to being assessed for inheritence tax.
– Deferment on the death of the first spouse.
What has happened thus far from politicians is just tinkering. Much more radical changes are required, otherwise the iniquity will just get worse.
I also think it is time for those who rent to get together en masse, concurrently default en masse in huge numbers, then let the courts sort out the civil logjam it creates. It would go to the top of the political agenda and the banks would get jumpy about those loss default models on BTL property.
@JonWB
I read your piece and am minded to quote Juncker (my opinion remains he’s a charlatan with a drink problem). However he did once say..
“We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
The context being debt mutualisation, make tax payers of Northern Europe pick up the debt for those in Southern Europe.
However the thrust applies, implementing the policies you’ve outlines would destroy the party that did it.
I moved to London at 33 in 1976 when the car industry in the Midlands collapsed. My Mortgage trippled, I took on two jobs and my wife started to work part time. With two children and a career job in Engineering it was hard.
Even when I moved in the mid 1980’s I could not borrow the amount to buy a modest detached house in Croydon and needed a 5% bung from my parents.
This seems to be a SE problem as back home none of my family had or has these problems then or now.
The cost of renting and buying should linked and converge to equilibrium unless distorted by lack of supply and demand and Government fiddling with lending criteria for families and all the consequences that the abundance of credit has caused.
I haven’t forgotten but should have kept borrowing but my spare cash went on educating the children and helping them with property purchases in the south East. Its always been a problem it’s just much worse now.
Pardon me asking, but what should the young vote for? I genuinely want to know, I’m not british, but we have the same conundrum where I’m from, and no political parties are pushing this issue. On the contrary.
@Tom I guess you want to vote for taxation to move from income to dividends and capital. The young’s key advantage over the old is time remaining in the job market, so you want government spending to boost the economy and hence wages, funded by taxation on accumulated wealth and unearned income.
“housing … there’s a fixed supply of it “: you’ll say few dafter things this year.
“Is it time to read J.K. Galbraith’s The Great Crash 1929 again?” It always is: damned near a laugh or gasp per page.
Rotten economist, excellent economic journalist.
@Richard “What about pensions? The low growth since around 2008 has pretty much put a nail in the coffin of decent pensions for young people. I worry they won’t realise this until they are in the 40s or 50s!”
I think they do realise this, and are stuffing what funds they have into other savings like ISAs and whatever else they can in order to reach the 50-100k necessary for a house deposit.
Recent articles have noted that millennials have higher “savings” rates than previous generations. I suspect this is not retirement savings at all, it’s just whatever is left over after paying 30-50% of their income in rent + more to service their student loans.
@Neverland @dearieme — Throw the shade, but the facts speak for themselves. The minimum number of houses that needed to be built as per the Barker report was, in 2003 from memory, 200K a year. We got close before the financial crisis for one year, if I recall correctly. Overall we’ve built millions below target. And Barker’s target was considered a minimum, not a “restore sanity” setting.
I understand that you guys have all the solutions and know exactly what should be done to get millions more homes built in the UK.
But the practical evidence is whatever your theory, it’s extremely hard to get houses built in the UK, probably because that suits huge swathes of the population, and because nobody (and I’m sure I’d be the same) wants it in their backyard / favourite hiking spot / pleasant drive home / childhood memory / whatever.
In contrast, a huge landlord boom has been conjured up from nothing in two decades. I have far more confidence that it can in turn be dialed back down through changing the incentives than that Neverland Dearieme and Sons can get ten Milton Keyneses built by 2025. 🙂
@monevator . I’m sure I read somewhere that Philip Hammond said he would not reverse Osborne’s new BTL tax policy
@TI: follow the money. A third of Tory MPs is a private landlord. Many more have shareholdings in property firms. And then there are many more again whose partners are landlords.
@JonWB “Graduates earning £21k+ have a marginal rate of tax of 54.8% (made up of 20% income tax, 12% employee national insurance, 13.8% employer national insurance and 9% graduate repayment tax) […] however anyone tries to spin it.”
Speaking of “spin”, the marginal tax rate you posted looks shocking but is so far from the actual tax picture of a £21k gross salary earner that it detracts from the other points you are making.
A £21k gross earner with student loan repayment and 4% pension contribution pays 22% of their gross salary. Here is the full breakdown: https://listentotaxman.com/21000?plan=1&pension=4%25
Comparing marginal tax rates in the way you quote them is not a useful tool. The various allowances make so much difference to the bottom line tax rate that the marginal rate says very little.
I think this article about “How to pay yourself a £98,100 income salary without paying any tax” makes your point better than relying on misleading marginal tax rate numbers:
http://www.telegraph.co.uk/finance/personalfinance/pensions/11979259/How-to-pay-yourself-a-98100-income-salary-without-paying-any-tax.html
@the investor. I don’t understand why you are so against a policy of allowing more property building? We are all agreed that over the years there has been a huge increase in demand – single adult households, immigration, longevity, BTL investor demand for yield etc De-restricting planning regulations would solve the problem in a straightforward way without distorting the rental market. I certainly agree that the unaffordability of property is a huge problem but having a bouyant rental sector of good quality stock is good too. It needn’t be a zero sum choice between home affordability and a neutral BTL fiscal policy and it doesn’t make sense to penalise the rental sector directly when there is a market-based solution (build more) IMHO at least.
The NIMBYism of my age group (50+) is to my mind the main example of generational short-term selfishness. It may well come back to bite us in two ways. First when there is no-one to buy our properties at the over-priced figures we have come to think of them being worth. Secondly home-ownership and capital accrual are a bedrock of a stable, democratic society. When whole swathes of people feel permanently excluded from this life-choice they are looking likely to turn to unsavoury demagogue politicians – Trump – Corbyn – Le Pen etc
I see lots of talk here about supply, but little about credit. It’s the banks willing to lend to high ratios of salary and to BLT buyers with small deposits, and free money schemes like “help to buy” which is likely pushing up prices. There’s too much easy money in the system, allowing people to borrow enormous sums with tiny interest rates.
If banks only lent with 3x income ratios and 20%+ deposits (and to BTLs with strict profitability and lending ratio requirements) then prices would have to fall substantially. Foreign owners wouldn’t be impacted at first, but they’d eventually feel the effect as the changes moved through the system.
@investor
In the 1960s the U.K. was comfortably building 350-400,000 homes a year. Go look it up
The governments of the time prioritised housebiilding
Politics, innit
@PassiveInvestor — I am not against more home building. 🙂 I wrote in this very thread:
“Of course we need to build more houses…” and “Fully agree we should build more — I’ve been following the under-building since way back in the Barker report days — but realistically we are not going to go from now to say 500k homes a year”
I follow the housebuilding sector closely, and have made very good profits from my investments in it, too (300%+ in some stocks) so I’ve put my money where my mouth is.
e.g. http://monevator.com/buy-shares-in-house-builders-not-a-new-build-house/
But the fact is I’ve watched calls to build more homes since I’ve been following the house market. It never happens.
I could write a post saying “we need to build more homes!” or agree with the likes of Fremantle or professional troll Neverland that it’s the solution, but the reality is it isn’t the solution because it never happens.
If we get to 200k homes a year that’d be a huge improvement, but that is still well below what would be required to bring down the ratios in any reasonable length of time (assuming a hard Brexit doesn’t lead to massive population loss, which nobody seems to predict currently).
In contrast, turning landlord owned homes into first-time buyer owned homes — essentially just undoing some of the swing of the past 20 years — is clearly entirely doable without anyone’s backyard getting built on etc.
@Stefan. You have left off the Employer NI in the example provided so it’s nowhere near as low as 22% for the Graduate at £21K once you include that, which you have to do – it doesn’t matter who pays the NI (employer or employee), it’s a direct payroll tax which in most cases, if it wasn’t charged as a tax would flow through to the employee.
Put it another way. The pensioner on £99K pays £28.8K in income tax, whereas the Graduate with a gross salary of £60K pays around the same payroll taxes of £28,719 (including the Employer NI and Student Loan repayment).
Whichever way you slice and dice it, the pensioner gets a fantastic deal, the graduate a rotten one.
@TI – exactly, squeeze the landlords out. This seems to have been Osbornes plan. Obviously house prices can’t drop so you need to make being a landlord unpleasant enough that they start to sell at current prices (or don’t buy anymore) and provide plenty of methods for young people to be able to afford these houses landlords no longer want. Maybe Osborne knew what he was doing 🙂
Everyone is a winner! Well, unless you want to buy a house at a reasonable income multiple. But I think we have to accept that those days are long gone (or else a massive crash that doesn’t bear thinking about).
There is, understandably, a lot of comment on house prices being dependant, or not, on the numbers being built versus the perceived demand to buy.
However, there is a time at the top of the credit cycle, which is not limited to houses, when it is almost impossible to sell a house to anyone except the foolish or fearless.
The phenomenon begins when greed gives way to fear after asset prices have risen and companies and individuals have jumped on the bandwagon, often at any cost, lest they miss out on the bonanza. When prices are perceived to have peaked, there is a rush for the exits. Emotion rather than the availability 0f houses rules for a period.
The credit cycle, rather than subprime mortgages, etc., is thought by some to be the real cause of the Great Financial Crisis.
Even in these days of the lowest credit costs in 300 years there are many who have overextended themselves. The cycle has not disappeared.
@Jon WB
University participation rates: 3.4% in 1950, 8.4% in 1970.
School leaving ages: 14 until 1947, 15 until 1972.
Today’s pensioners will have been born before 1952.
So the great majority of them didn’t have the chance of choosing whether to take up that expensive opportunity, a university education, and therefore don’t have a loan for it to repay. Instead, they’ll have had to have been in the labour force for decades since leaving school as 14 or 15 year-olds – perhaps working for as long as half a century before being able to retire – and will have had to have been paying NI throughout that time. They are now just getting back in the state pension some of what they have paid in.
I suppose one of the downsides of globalization is that the wealth of the world can inflate London house prices and by extension the SE. I like the idea of investors (domestic and foreign) being clobbered with taxes that cool the market. I speak as an owner of a BTL by the way. It cant happen at the moment with Brexit mania – i can see the headlines about more anti foreigner sentiment etc etc, but Vancouver has done it to great effect.
I do wonder where the idea has crept in that everyone has an entitlement to buy a reasonably priced house. This is contentious I know. I obviously get why people want one, but I dont quite see how the moral or social entitlement arises. If the argument is people feel they should be able to buy a cheap house because their parents did, im not sure they would want the rest of their parents existence back in the 70s and 80s. Just a thought. The 25 year olds that love London because its so cosmopolitan and hip and groovy and wonderful etc, could reflect on the fact that 30 years ago it was a run down, grey and depressing place. Perhaps there was a link with houses being affordable.
And another thing (….victor meldrew), what is the endless fixation on living in London and the SE? If i was starting out today Id either emigrate or buy a home outside the SE where a degree of house price sanity prevails.
“Staying put is a lot cheaper than moving around. For 20 years, I lived in the same, easily affordable house in New Jersey. Looking back, I realize that was crucial to my portfolio’s growth, because it allowed me to save gobs of money. “http://www.jonathanclements.com/home/2016/7/23/moving-and-shaking
An authentic thought about happiness. “What would you rather be? Happy or rich? You know, unless you’re a sociopath, you’d rather be happy.” http://www.cnbc.com/2016/09/29/sam-adams-founder-unless-youre-a-sociopath-being-happy-is-better-than-being-rich.html
I don’t really understand why BTLers are blamed for the housing shortage. From personal experience I would say that rented property is far more efficiently utilised than owner occupied property. Anecdotally I know plenty of people who own more property than they need, me included. Spare rooms as the children have moved out and under-utilised second homes. Of the people I know who rent, I cannot think of anyone who rents more property than they actually need.
What is needed is more carrots/sticks to encourage owner occupiers to downsize and/or sell off second homes. Perhaps a land tax of some sort might help.
Punitive taxation of the undeveloped land that housebuilders are sitting on might incentivise building as well.
I am not on the BTL bandwagon by the way. I would rather push pins in my eyes than deal with the hassles of being a landlord.
@SurreyBoy, you make a good point about London. I moved here in the early 80s – I “Got on my bike” to find work as some politician got into trouble for saying at the time, and London was a very different place then. Quality of most of the housing, rented and owner occupied, was poor but still expensive. As for the coffee and standard of take-aways back then…
Excellent point by @ Naeclue about property being more “efficiently utilised” within the rental sector. Many of the nice family homes which my parents could have afforded to buy have been turned into houses of multiple occupancy shared by 4 to 6 or even more individuals. If the owners of those properties were forced to sell them to wannabe owner occupiers then we’d have a few more lucky home owners, but at the cost of a far greater number of highly mobile young workers unable to find anywhere to rent. This the reality of massively expanding the UK’s population without building enough new homes. No point in blaming landlords or suggesting we treat residential property as a special case. You could make the same arguments for water, gas, electricity, food, etc, but the experiences of nationalising and trying to fix the prices of those things have generally ended badly.
This is an interesting perspective on American housing:
http://www.nber.org/reporter/2009number2/gyourko.html
I’m not sold on the policy of increased owner-occupier home ownership, particularly amongst lower socioeconomic households.
Ownership ties people to place, unfortunately capital and employment are not so immobile. Consider coal miners or textile workers, or right to buyers stuck in Liverpool or Hull or Dundee. Is home ownership working for them?
In London, if you increase home ownership at the lower end of the market, it necessarily reduces available rentals at that end. Making it easier for teachers, nurses and police officers to buy in London, makes it more difficult for cleaners and postmen to rent.
Further, reducing available rentals in London would likely damage the ability of London to attract mobile talented workers, which would lead to less employment for said teachers, nurses, police, cleaners and postmen.
Legislating to pursue populist housing policy is fraught with danger.
Almost everyone who can’t understand the negative side of renting in the UK can’t have done it, or has enough money to be treated with respect. For most renters the reality is being at the mercy of venal, greedy, barely-regulated letting agents, landlords who do minimal maintenance and massive, massive insecurity. You are not fully an adult in that having too many friends over, putting up a picture or having a pet may not be allowed, while you live in fear of arbitrary eviction when the owner wants to sell or jack up the rent.
Constant moving is not only obviously stressful, time-consuming and expensive, but it makes aspects of normal life harder, like keeping kids in the same schools for example. You have less general rights than homeowners, as society judges renters as losers in the property racket, which in the UK is really the only game of consequence in town.
One of my current income streams is managing the maintenance aspect of rental properties, so I see it directly, it’s a horribly wasteful industry. Tenants for the most part are understandably resentful at having to spend almost all their income on the unavoidable expense of a roof over their head, but can never win. When they demand a new item of furniture for damage that homeowners would ignore, the rent goes up to compensate. Electricals are thrown out and replaced with new if it’s said they’re not working because the repairs costs are the same as a new machine, perfectly fine furniture can be chucked out at the end of tenancies. But this unsustainably disposable style of living impoverishes us all sooner or later.
@Naeclue — yes, I agree that one major benefit of property being rented rather than owner-occupied is that it’s more efficiently used. I know of a couple who are leaving their house empty for two years while they go abroad (they don’t want the hassle of letting it out, risk of damage to their possessions, etc.); if they had been renting I’m sure they’d have given up the house, thus allowing someone else to live in it. And I very much doubt that my parents would still be rattling around in a four-bedroom house if they were paying full market rent on it every month (rather than having paid off their mortgage).
There’s also probably an economic benefit to having a workforce which isn’t tied down by home ownership.
Tend to agree with FI Warrior. It’s even worse in NZ. Instability is stressful, inconvenient and expensive. Rental viewings are only ever within business hours, so when you have to move, you need to be able to take time off work to go see places and compete with many many other people. Rentals are cold and damp (studies show they are overall in worse condition than owned homes) which have serious health effects. And rents just keep on rising infinitely.
Some important context that I missed may give a wrong impression that I’m against all landlords, I have met decent ones who just want a secure income for a pension they don’t trust the govt. to not steal. They get screwed by the agencies as well as the tenants, the difference being that for the tenants it’s a guarantee, while sharper landlords can hold their ground and the criminal ones wouldn’t waste a fraction of their profit on agents anyway.
I have a buddy in Germany who’s raised kids in a rental property over the last 2 decades and would never buy (he’s wealthy by the way) because the laws there protecting tenants give them the best of both worlds, security and flexibility. You can’t be booted out on a whim at a few days notice, but can leave with relatively little hassle if you want to move for whatever reason. The legal protection/emphasis is on looking after human beings rather than salami-slicing ever more profit you can for powerful corporations who don’t pay taxes or serve any useful function to society.
So yes, a rental sector is necessary, but it has to be healthy, not parasitical and predatory. This is childishly easy to set up, if it’s not there, then that is deliberate. Follow the money.
@JonWB — your maths are wrong. If you include Employer NI in the tax then you must include it on top of the gross (ie the denominator). Taxes rates are defined in your instance by the ratio of what you get over what it cost the employer. About 48%. I am — by the way — a big fan of surfacing the NI costs. Although you ought probably to net off the equivalent for the effect of the increased state pension (you’ll have to make a a lot of assumptions, but you’ll get a better answer than the 0 you’re currently using).
@TI — I continue to not get these housing arguments on two points:-
— the public good is accommodation not house ownership. The critical thing is rental prices, not purchase prices. We live in an 85bp world right now , so no surprise that prices are sky high — although rents are really quite reasonable. I think we agree that the only thing that sustainably reduces rental prices is increased supply of houses — regardless of whether owned or rented, but as long as they aren’t empty. I don’t get the belief that we’ll build more houses if we make prices lower and make it harder for one class of buyers to buy them. That seems to fly in the face of sense. You might argue that –like 30-year careers — we should be like our parent’s generation and aim to have the millstone of property around our necks and careers. I might retort that plentiful rental accommodation is vital to a highly functioning job market and social mobility.
— Which brings me to point two — what’s the other factor at play here ? Is it lack of easily available credit? Is it reluctance to commit to a single large asset / location? There’s clearly more than just cold economics going on here — and I do not want to be taken as in any way denegrating to you — but you clearly know what the facts are, you observe the lack of construction and you can figure out that means rising prices on a phenomenal scale but you don’t buy. You’re clever about this stuff and you make money out of the housebuilders who are exposed to house prices. That suggests there’s more going on here — and I don’t think anyone who has ever bought a house would disagree that there’s a lot of stuff going on in ones head when you purchase such a large asset, over and above the numbers.
The “just buy, ffs” argument is a little hard to stomach. If prices keep increasing, and wages keep NOT increasing, then before long the current (absurdly high) 10x ratio of price to income will become 20x then 30x. What would society even look like when a house would take 120 years to pay off at rate of 30% of paycheque? Just Buy assumes wage growth – and associated inequality – reverts to 20th century norms. That’s a pretty bold bet given the trends emerging so far this c.
One issue I see with renting over buying in the long term is the payment commitment. Once the morgatage is paid off in say 25 years, there are no more payments (except maintenance). With long term renting you have to be saving the equivalent capital along side to service the rent forever more (or never stop working). The owners morgatage payments decrease as a percentage of salary as wages increase (I know we haven’t seen a lot of this recently) and eventually vanish while the rents are likely to stay similar as a percentage.
Now the renter can set themselves up so this is never a problem (saving the difference in rents and morgatage payments) and benefit from being able to move around but it takes some planning/thinking up front. This is the advantage of owning, you are forced to save with little thought beyond initial affordability. Pretty sure there are plenty of articles talking about how owners have a lot more capital/assets than renters. What is going to happen to these renters in 30 years times, esp with pensions likely to be much smaller than they were? Will we see three or four generations renting a house together?
@Mathmo, I think we agree for the most part. When you see the speed budget changes can occur at, like when pensions were recently radically freed up, it proves that if the political will is there, the system does allow rapid and significant change. What I am saying is that being a tenant could be made a pleasant experience with just a few tweaks to the current legislation in comparison. This will only happen once renters start voting as some kind of block that the politicos pollsters recognise.
As for other variables influencing homeownership vs renting, rental and house prices etc., yes, there are many and it’s not so simple, my point on simplicity was that it is not hard and therefore a choice on the part of our rulers that things are as they are since some European countries set the balance right.
One aspect I’ve noticed is the inflexibility through slow pace of change of the established lenders to recognising fundamental shifts in society. People are living longer, more likely to be self-employed or an older renter through divorce say, yet the mortgage providers are slow to respond to these trends, continuing to see them as more risky despite that fact that it’s not necessarily true and they are too numerous now to discount. There are signs of improvement, some building societies extending ‘mortgagable’ ages into the older end of the spectrum, but a meaningful difference will probably only happen when disruptors jump into the opportunity created by that vacuum.
Just quickly (busy busy Monday! 🙂 ) this isn’t my own inherent bias-driven theory about rising landlord numbers being a factor behind rising prices (though I certainly sympathise with the perspective), it’s the finding of LSE research. Sure it could be flawed research but it’s presumably not been plucked out of the air. 🙂
Perhaps I should ask for a copy of the research: http://www.lse.ac.uk/newsAndMedia/news/archives/2016/09/First-time-buyers-priced-out-by-the-accidental-landlord,-says-new-LSE-research.aspx
Also, similar to the debates we have about asset allocation (where the arguments have an ‘either/or’ tenor more than they should) surely all the various factors people are putting forward are in the mix. It’s fun to cheer for our own underdog theory, but I’m sure there’s a Lollapalooza effect.
Finally, re: biases etc, no doubt at all I have them, like everyone. But I grew tired a long time ago of owner occupiers (and often BTL landlords at the same time) lecturing me about how great it is to rent. 🙂
Yes, I agree we need a rental sector of some size. But the newspapers haven’t been full of ever greater numbers of shut-out young people for 5-10 years because renting is hard and buying is as it always was. Literally quite the opposite!
Denying people even the aspirational feelings to achieve what previous generations could aspire to (and achieve) seems to me to add insult to injury. 🙂
With housing in short supply, most people are at the limits of affordability. As most housing is bought on credit, people just look at the monthly payments, not the vast absolute numbers. This is true when base interest rates were 10% or 0.5%, so its credit that determines prices. The prudent borrower/lender might run the numbers if rates were to rise by 2%. This is a relatively small change when you were paying 11%, and a very large one if you are paying 1.5% What is completely impossible is to handle the transition from 1.5% to 12% So people just don’t consider the scenario, there is no point.
So house prices are defined by credit, and very small changes to it. The key question is whether that trust in ultra-low interest rates forever is justified. and how to prick a credit bubble so it deflates without it ripping, as the economy could not survive the vast defaults of not the baby boomers, who have paid off their housing, but Generation X, and even worse the incredibly stretched millennials we want to help.
My first mortgage was at 14.5% I’d never sign a mortgage now at high LTV as that figure would haunt me. But of course having ridden the boom and exited it, I would now buy for cash, and its the %age of net worth that I consider, much as it does buying a car, and the numbers sound so different.
@Richard — Indeed, this is why so many did well with housing in the old times. (Now, in the South East at least, it’s also because they won the asset price lottery with a leveraged investment…)
See this article: http://monevator.com/10-why-houses-are-a-better-investment-than-shares/
@TI sounds like you need a bottle of wonka-vite – but don’t take too many, you don’t want to turn into a minus.
Long time Monevator reader and lurker come to chime in:
I consider myself as being positioned right in the middle of the aggrieved bracket of millenials being discussed: a 25 year old with a good degree renting in London with a moderately well paid job.
From my peer group there are only two individuals who have managed to get on the housing ladder (or have any hope to in the next decade): A banker on a 6 figure salary who lived at home for two years upon graduating to save for a deposit, and a management consultant also on a 6 figure salary.
I’m in the fortunate position to have also been able to live at home for two years upon graduating and save enough for a deposit on a London flat, however the ability to save is not the real issue here (I am still able to save a reasonable amount while renting in London by being sensible with my money). The issue is the absolute price of housing. Even on my not-too-bad salary I would only be able to get a mortgage that would cover a parking space. I would need to somehow stump up a 60% deposit to be able to buy a typical one bed flat in a not particularly central location.
As a result, I forsee all of my savings going into my equity tracker for at least the next 15 years and hoping for the best.
@Mathmo – Yes you are right, re: my numbers are wrong, but the gist is right and I agree, not many seem to realise the impact of employer NI or how it has risen massively since the 90’s and how for most, this has been at a direct cost to increased wages.
@Learner – In Sweden they do have multi-generational mortgages – the average mortgage term, if not interest only, is actually 140 years.
See: http://www.fi.se/upload/43_Utredningar/20_Rapporter/2013/bolan_2013eng_2.pdf
“In the sample of new loans only four out of ten households with a loan-to-value ratio of less than 75 per cent (bottom loan) amortise. In addition, the average actual repayment period for bottom loans that are being amortised is very long (more than 140 years).”
I’ve always wondered why the massive increase in university participation is never associated with BTL and the housing shortage. You essentially have a huge demographic now living in share-houses in university towns, funded by the tax-payer, whereas before they’d probably stay at home and work locally until they could afford a place of their own.
I’m not saying what we have is worse or better. Just that I’m surprised the effect on house prices and the growth in BTL is never discussed.
Anyway, with regards to risk and London/SE, with prices this high it becomes very hard to justify. I could afford a mortgage on a small property here in the SE, just, but the bank won’t let me enough to cover the purchase! It doesn’t take much of a move for these sorts of prices to wipe out any and all gains I’ve made since starting work. That’s terrifying. In a low-interest environment, these financial choices are never going to get wiped out by inflation. I think the prudent choice is to rent (ideally below one’s means), save hard, and then move somewhere house prices are not six or seven times local earnings.
@Brendan — Hi. 🙂 You write:
I’d agree, but that means moving abroad (which is only likely about to become harder, thanks to Brexit).
By 2014 house prices were already 8.8x average earnings. The really crazy figures in London are places like Westminster, where prices in 2014 were 24x local earnings. See: http://visual.ons.gov.uk/affordability-housing/
Regarding the growth in student numbers, it’s perhaps a factor, but rather than being “funded by the taxpayer” I’d see more the explosion of student debt as a key factor. Average £44,000 per graduating student according to this source quoted by the BBC: http://www.bbc.co.uk/news/education-36150276
Even in sane times for house prices it will be hard to save for a deposit when you start in a £44K hole.
@JonWB I was vaguely aware long (lifetime+) mortgages do exist. I’m curious how they work in practice, specifically in retirement. Are pensions in such countries generous enough to service the debt? What happens if the children – should they exist – want none of it.
@The Investor: I think there are still plenty of places in the UK where house prices are much cheaper. But there are very few jobs! It’s a rough strategy, but a ‘career downsize’ moving north, after a decade or two in the south to amass some capital and experience, might be the one I end up implementing. I had originally certainly considered moving to Europe but… well. Enough said on that.
The explosion of student debt is only slightly related to accommodation expenses. Still, it’s not hard to work out some rough sums. In Oxford, there are roughly ~50,000 students across the various universities, adding an additional 25% to the population. Assuming 5 to a house at 500pcm each, you quickly get into very large numbers – fueled by student debt, however you want to allocate that – being ploughed into the housing market every year.
@Learner – I think the problem in Sweden with 140 year mortgages is no-one really knows, since at that level of amortisation they are really just interest only when looked at over say 10-20 years and it isn’t as if the mortgages are running to term having been issued 140 years ago. I assume the plan is for descendents to take the asset and the liability, but some will surely sell and then any surplus is inherited and any defecit is, I would presume, written off by the bank (but the bank will say that is unthinkable, over a long timeframe, for the asset to depreciate). In the Netherlands mortgage interest was deductible against income tax, so everyone had sky high LTVs for that reason alone – they are looking or have reformed it.
http://www.telegraph.co.uk/news/2016/10/02/philip-hammond-and-sajid-javid-unveil-5billion-fund-to-build-ten/
Perhaps this will help…5bn doesn’t sound like a huge program given we’ll spend £60bn on foreign aid during the same period but changes in govt policy are slow, hopefully this signals a change in direction
Not many comments about student debt…My friend’s younger brother joined us at the pub on Sunday…lovely lad, just started this year as a “teach first” secondary school teacher, much like us at 24…except he’s almost 30k of student debt and houses now are twice the price they were when I was 24 (wages are NOT!)
… That goes beyond being unfair, it’s wrong
(assuming a hard Brexit doesn’t lead to massive population loss, which nobody seems to predict currently).
Maybe it will? We can’t really predict Government policy here, but going forward that decision is in London not Brussels…
I would also point out those paid by the tax payer to do predicting have so far not exactly been very accurate. I’m not paid by anyone and so far I have a better track record than say Carney for example.
I don’t we can have it both ways on student debt as commenters: it can’t be both a tax (JonWB) and a debt (Acorns).
It’s clearly an income tax: it is triggered by earnings and you cannot be bankrupted by it (and indeed don’t have to pay it back at all).
I’m grateful of course that my education was broadly free at the point of delivery (you get what you pay for, perhaps), but then I’ve given back more than students pay now to alumni organisations. I wonder if they suffer as a result of ‘student debt/tax’.
@Planting Acorns, love the breathless Telegraph article! 40k new homes by 2020, when the shortfall is more like 200k per year. “£5b find [sic] to solve the housing crisis” good grief.
I thought I’d chime in as this is a good conversation. I’m 32 and incredibly lucky that by working in the ‘creative industries’ I’ve managed to save £10-20k/year after rent to put towards a house. I had great plans when 22, but unfortunately it’s not been enough to keep up with house price inflation, and low interest rates make it even worse.
My own stupid fault for not buying a house a decade ago, due mainly to not wanting to tie myself to one location (and a misplaced assumption that prices must correct themselves).
Another issue not discussed is that as people buy homes later in life, they need more than a ‘starter home’. We’ve got to plan for 2-3 children (and a reduction to one salary for a while) which changes the type of house we’re after.
@FI Warrior is spot on in his comments about renting. It’s not a home, it’s a (cold) house you’re permitted to use. The lack of security is stressful, as is ensuring I get the full deposit back (a point of honour: I took a week off work in August to clean/garden before we moved. Not economic, but I will not be screwed unfairly).
As to “cheaper regions” of the UK being a simple answer… we moved west of Bristol this summer, thinking we’d buy as the house prices are so reasonable. Aside from the housing market being stagnant (“Price reduction” is the new “Sold”) it’s becoming apparent why people choose the south-east: wages here are very low (while rents aren’t much cheaper), driving 30min-1hr is normal, and culture/people are different to in more surburban areas.
A painful trade-off: we could have a decent house and a life of hillwalking here, or a small house, no beautiful hills, and theatres/universities near by. Currently v thankful our purchases fell through.
@rentedenough – yes, the issue is when in your 30s you want the family home, not the starter home. But in the SE at least people are stuck with the starter home. The next move is that much harder as the family home is still a lot more expensive (and as prices go up typically the more expensive house goes up more than the starter home). And maybe you paid stamp duty for the starter home which is money not going towards the family home. I just don’t understand how people not getting good pay increases ever escape the starter home.
Maybe by turning the starter home into a BTL and using that to get the money they need to make the move?
Therein lies the contradiction for the Remain side. We know for a fact that being part of the EU has led more people, both in and outside the EU, coming to the UK, buying and investing in property in London, driving up prices and making it harder for ‘native’ young Brits. And good luck with building houses every couple of minutes to match demand.
Londoners overwhelmingly voted to stay in the EU. Did the young and poorer Londoners have a clear view of what they were voting for, because, in contrast, richer (smug) liberals had an easier choice – keep things sweet with the status quo.
As for Brexit, we will have to wait and see if things get better or worse. My view is that until a politician with vision (no, not you Mrs May) understands how to balance the nation state with globalisation we won’t make much progress. I would like more people paying attention to how Denmark balances a socially cohesive and competitive economy, while Sweden embarks on an ideological social experiment, best observed rather copied.
@TI, just to add my thanks for another interesting (and definitely not boring, albeit very depressing) article. Very much liked your take on the typical Brexiter’s “isn’t it obvious?” condescending tone – maybe remainers are deluding themselves about the nature of the country we live in, but brexiters are also often deluding themselves by perceiving what’s unfolding as being perfectly clear. As if we’re now just witnessing the step by step enactment of a detailed manifesto set at the outset, as opposed to politicians now fervently trying to work everything out as they go along because no-one really thought it would ever come to this.
To be fair to them (the politicians), it’s one hell of a challenge. How to unite a country where 66% of people are angry/depressed/apathetic, and 34% mostly seem to think they’re getting what they want, but are in fact splintered into groups expecting drastically different things which can’t possibly all be satisfied, and will in any case likely still be very disappointed due to the more pressing matter of an inevitable decline of living standards.
What a bl***y mess.