h2g2 The Hitchhiker's Guide to the Galaxy: Earth Edition

House prices continue to rise in a simple example of supply & demand. In Edinburgh, the average house price is now £210,000 whereas the average wage in the city is £23,000. The old mortgage lending guideline of 3.5 times the salary is obviously not enough. People are forced to borrow up to nine times their salary which is unsustainable, especially if interest rates rise.

The brutal fact is, if you don't own a house already, you may never be able to own one.

Measures taken to address this include a drive for "Affordable Housing", developers are obliged to provide a percentage of develpments at lower prices, but this misses the point. What is needed is more affordable housing *to rent*, council housing in other words. However, gone are the days when Labour & Tory Governments would vie with each other to build the most council housing. There is no longer a political will to do so and voters may be unwilling to see taxes rise to pay for it in any case.

In Europe, there is not the same clamour to own your own home. In Scotland, there was never the same desire for ownership as existed in England.

What practical steps can be taken to address this growing problem?

Aah, the failures of capitalism, eh?

One of the main driver in house price rises is the lower number of people per household, thus necessitating more houses. This is something that governments are powerless to prevent. Or maybe not..

Through tax breaks/incentives, I'm sure there must be some way to promote flat-sharing, or to somehow dampen the desire for home ownership. This would be pissing in the wind while there are such enormous incentives to buy your own home though.

Another reason why buying is so popular is because investing in a house is incredibly tax-efficient. You don't pay any when your house increases in value.

Really, it's a very complicated question which can only be solved by reducing the incentives to own a home. This would be a pretty radical shift, and one I can't see any credible politician pursuing in the near future.

The reason for this is that it would impact on present homeowners, who would have a disproportionate impact at election time, in the 50-100 seats which decide who wins an election.

http://business.guardian.co.uk/story/0,,1984814,00.html

A very interesting article from yesterday's Guardian.

"Land has a scarcity value when it is in desirable locations. That value is not down to individual effort but derives from the community, and often from schools, hospitals and parks provided by the public purse. Therefore, as the economist David Ricardo explained, land has a rental value that can be taxed."

I'd like to throw this into the pot: http://news.bbc.co.uk/1/hi/business/2027576.stm

It's a new story from almost 5 years ago. It predicts the possiblity of 50-year mortgages. Though it does sweeten the pill with news, and this is the bit I've spent the last ten minutes hunting the web for, of Japan's 100-year mortgages. Mortgages in Japan may be paid of by the grandchildren of the people who take out the loan in the first place.

And, as I say, it's a 5 year old story.


Geggs

'Waht goes up must come down'.... It does seem to ahve been an awful long time building up compaired with the 80's boom and then bust on teh housing market, but for the very reason people are so overstretched in terms of how much they're borrowing in relation to their annual income, that it might not take the largest hike ever in interest rates to begin the chain reaction ending in the long-awaited housing market price crash... I'm evil, I've already earmarked a bunch of my savings to take to an auction once the sticky brown stuff hits the big wirrly round thing... I think one of the big problems that puts people off renting in this country is the rental law system; It always seems weighted in favour of the landlord/lady rather than the tennant, mind I know a couple of people who work for letting agencies who go in to 'sort out' when tennants move out, leaving months of rent unpaid, and having distroyed pretty-much everything except the bricks and morter of the flat/house Rental prices seem pretty extortinate too rounds here anyhow, proportionally they'd most likely cover at the current morgage interst rates the repayments if you'd just bought a house/flat of simular value

"One of the main driver in house price rises is the lower number of people per household"

I think people are looking in the wrong area for a cause.
IANAE but (there's always a 'but' following IANA* statements) this is how I understand things. I've probably got a few terms wrong and such like so this is posted in the expectation of corrections.

A while ago the mortgage rates/industry were removed from the calculations for inflation as I understand it. Might have been the RPI or something, not sure.

What this has done is to effectively decouple the houseing market from the general retail economy. Which, given it is such a huge market I'm not so sure is a wise thing. So house prices can go up and up and up without immediately affecting the inflation rate. The BoE are left to try and calm the houseing market after the fact with interest rates, but these also affect the whole economy.

So to my mind we have one sector of the economy that has been (and still is to a large extent) running away uncontrolled. There's no 'value' per se in the properties other than what people want for them. And the market (estate agencies/vendors/buyers) determine the price. So it is running out of control with only secondary restraints on it, but employing those restraints causes problems for the rest of the economy.

Is this a reasonable view of things? Have I got it wrapped round my little toe? And if it is a reasonable view, what would happen if house prices or mortgages were added back into the calculations?

And there was the news yesterday: the average house price in every town in the country is in excess of 100k.

http://news.bbc.co.uk/1/hi/business/6581737.stm


Geggs

Massive amounts of cheap housing need to be built. Either for rent or to buy would probably have similar effects in bringing down prices. I suppose the young, who are looking to get on the property ladder at the moment, might appreciate the flexibility to move around of cheap houses to rent.

My rent is about half of my total living expenses (not including my student fees) right now. For me, that's money just thrown into a hole. For my landlord, most of that will go straight into their pocket minus taxes.

What's IANA mean?

Ictoan, I'd say your analysis is basically spot-on, I just meant that fewer people per household was a demographic trend independent of left or right wing govt policy.

House prices don't affect inflation, but I don't know if or when they were decoupled from inflation measurements.

In practice though, people buy houses but pay mortgages, so the interest rate is a major factor in determining house prices. We've had low interest rates (and steady economic growth) for over a decade now, which *is* a huge reason for the boom in house prices.

This poses a problem for governments, because interest rates are the only tool used by the Bank of England to combat inflation. Presently, the low interest rate and steady growth has encouraged people to borrow as much as they can to a)get on the housing ladder, and b) use the unearned wealth derived from their rising house values for something else.

So, as inflation creeps up, as it's doing now, even a relatively small change in interest rates has a disproportionate effect on the economy, as people are stretched so thin.

<>

If the BoE put rates up to stop inflation by reducing GDP slightly, then it could lead to a recession and negative equity, and Labour losing power. It would be *much* worse if house prices were included in the inflation figures, because to stop house prices rising at 15% a year the increases would have to be commensurately higher. This *would* lead to the dreaded house price crash, which is political suicide, so it won't happen any time soon.

Incidentally, I wouldn't say that this is due to govt incompetence: any policy towards housing is going to have good and bad side-effects. Choosing an essentially Thatcherite goal might be something to brickbat Blair & Brown about, though.

If building affordable/social housing is ruled out as the OP suggests then I can't see a solution to the problem other than letting the market decide and price some people out of the market.

The private rented sector (after the Tories stripped tenants of many of the protections they used to enjoy)is totally inadequate. For the most part the best you can hope for from a landlord is benign neglect. Rent paid would usually cover a mortgage for the property being rented so the only people using the private rented sector tend to be those who can't get a mortgage.

Yes, I aggree with the opening title



'You may never own your home.'

I am lucky enough to own my own home but worry about my 3 childrens future. I am considering altering the house so that they may continue living with me but with a greater degree of privacy.

To give an idea of how this raise has effected my town
I purchased my first home in 1986 - A brand new 2 bedroom mid terraced house in a new estate in my town. I purchased it for £42,000 Borrowing 36,000.

We sold this 2 years later for £72000 - making a profit of £30,000 in 3 years

In then moved to a nicer area in the same town. I wanted to be near good schools and transport as I intended to start a family and I dont drive. A 3 bed semi for £86,000 was purchased. Our Mortgage was £54,000 but still to be paid off in 2011

In 1998 we sold our property for £99000 not much of an increase in 10 years but perhaps more reasonable...and if this trend had continued for slower rises housing would be more affordable to the young couples and families needing a home.

We purchased our current property for £139,000 in 1998 - a 3 bed detatched in one of the best roads in my town. It was a place we thought we would never be able to afford...but this house was a renovation project and very cheap..it hadnt been updated since 1960!

Anyway we converted it to a 5 bed detatched and updated the bathroom (s) kitchens etc..spending just over £60 000 on it

So in total we spent £139,00 + 60,000 on this property = 199,000

It has this week been valued at £550,000 ( A rise of £350,000 in 9 years!)

We stil have a mortgage on this property £80,000 which is due to be repaid in 2011 with the exception of our endownment shortfall.

Now we are only a 'normal' family earning average wages and raising 3 children. I was lucky to be able to take 9 years out to raise them before returning to part time work.

Is it really feasible that if we were starting out now (a part time receptionist and an electrician) we could really achieve the same? I very much doubt it.

My loft is a possibilty for a conversion so my eldest can live their, then we can build over the garage for my middle son....not sure about Sophie..although I will let her loiter around oil rigs in the hope she meets a nice arab!

lol (only joking)

In reality I will probably downsize and divide my money from the proceeds of the sale up between my 3.

My eldest is planning on teaching
Middle son who is 14 wants to work in IT (Has already been offered work to design web sites)
Daughter dosnt know what she wants to do yet

I cant see any of them earning enough to buy a home without substantial help from their father and I..

renting isnt an option either - no council houses unless you are pregnant or just arrived at the airport with 17 children!....and the private sector is £900 a month

Well that is the way a lot of people get onto the property ladder. I know plenty of people who inherit or get a gift/loan from their parents which help them with a deposit or straight out pays for their home.

This is not the situation for lots of people but why should it have to be?

Why is there this sudden mania for owning ones own home. Round my way generations of people were born lived and died in social housing. There were always people who were moving out to buy homes and those starting out who moved in with their families genrally after a few years of living with the in-laws first. In the 1980s this changed and a rapid increase in private ownership of homes ensued the party political reasons for this change arent important. What is significant is that now the over riding ambition is to own your own lump of bricks and mortar has coincided with a reduction in social housing stock due to council sell offs which werent matched with new stock for cheap rent. So that as well as being desirable and economically prudent it is now almost essential to buy if you want a decent roof over your head or a roof at all in some places.

At the moment we just dont have the public funds to build more homes and more importantly if funds were released to do this it would put more inflationary pressure on the economy. At the moment the bubble just keeps getting bigger and the bigger the bubble the bigger the burst. Strategic spending and well timed interest rates rises could have avoided the present situation but Chancellor Brown could never have made it even *look* like the books were balancing without continued growth so we are where we are now. So come the time that PFI costs start to show up as companies demand payments from the government thing sare going to get even more squeaky because he needs continued growth to pay for those bills. Will something happen to pull us through or will the economy go into recession?

Im just glad that the mortgage Im paying on now is well within our budget. I dont hope that a recession comes and means we can move to a posher home on much the same money we are paying now but if it does Im not above being mercenary enough to take advantage...aint capitalism great!

one love

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In our case it's partly because we found it would work out cheaper to pay the mortgage on a three bed house than it would to continue paying rent on our one bed flat. Plus we were sick of magnolia walls and beige carpets.

I think one of the main factors in the increase in costs of buying houses is the chronic shortage of houses being built. The problem in a lot of places is the reluctance of the local authorities to actually allow land to be used for housing development. Now, we're not only talking about green-belt (which wasn't a policy designed to keep some nice trees and pretty countryside, but purely to stop the merging of towns in the 50s and encourage redevelopment of the inner cities), but greenfield and brownfield too.

There has been a sad reluctance within these local authorities to allow much development, and to actually meet the government targets for new housing, mostly due to not wanting to upset the local voters who like having a bit of a nice spot to walk their dogs etc. This has the knock-on effect of obviously driving up prices of the few houses that are already there.

I do think though, that over a long time, communication technology like t'internet for example, will mean that that having to live in/near cities will become less important, and house prices might relax too...

<>

Not even that, it's the shortage of good, reasonably priced houses being built... There are loads of houses being built in and around Swindon but they're all advertised as 'luxury' and are overpriced for what they are (i.e. soulless boxes) as a result.

Which is is sort of where the problems started time was when people could afford to take the plunge and buy a house it worked out cheaper because they had a decent sized deposit which meant that buying was cheaper. Buying stayed fairly cheap because there were enough homes to let, so the market didnt get too high demand/low supply. The lack of new social housing and chages in the divorce/separation rates put paid to that, then people started to want "their own space" too.

All of the above are factors but there are some factors peculiar to Britain which mean they had a marked effect here.
http://www.learnenglish.de/culture/britishhouses.htm

OK, guess no one agrees. So I shall expand.

Supply and demand does have an effect. But if the housing market was controlled and kept in with the rest of the economy (ie house prices/mortgages involved in inflation and interest calcs) then the huge rises in the housing market would have increased inflation which would have increased interest rates which would have dampened the housing market, thus keeping a cap on house prices and limiting the demand. Houses wouldn;t sell as fast, but they would sell over time and FTBs might stand a chance.

By having no cap or control on the prices except the market itself (vested interests and all that) has caused a large part of the problem.

Plus the mark ups mean no one really wants to build decent affordable housing, it's cheep as chips plasterboard extravaganze or big posh house (quite probably also a plasterboard extravaganza!) and nowt inbetween. And a lot of what is built cheap is bought out buy to let cos there's lots of people wanting to rent cos there's no houses. And there's no house cos they're being rented...

And until they sort it out it will remain a law unto itself and an unchecked market. Nothing will get better till they sort that cos the same thing will happen. There's no shortage of cash in the city for buy to let.

"There's no shortage of cash in the city for buy to let."

Spot on. I'd say roughly 80odd% (if not more) of the people i deal with primarily invest in buy2let.

People with the liquid capital to invest see it as the only really 'solid' investment. It's not just britain though, this is beginning to have knock-on effects across the rest of the world too... think Bulgaria etc, the new 'hot-spot' for a lot of UK investors....

I bought a couple years ago with my (at the time, but we shan't go there) girlfriend (a BIG mistake without a proper legal 'if we split-up' agreement...lesson learned) and although i dont think i'll see the return the guy who sold to us did (pretty much doubled his money in 5 years), still seen a decent increase..... but it does come at at a hefty price in terms of repayments as well as emotional stress and strain.
My point is i think one of the most worrying aspects of all this is the lengths people will go to to get on the 'Property Ladder'.... it's almost as if the mortgage lenders are marketing the NEED (as opposed to want....) to get into serious debt through Sarah Beeney et al.....

Cash you say?

Are you sure its cash Ictoan.

It's more likely credit that is available and credit and cash buy the same things but they are not the same thing. Releasing more money either as cash and especially in the form of credit into the economy isnt going to help with keeping inflation in check.

The mania for homeownership in the UK seems to me to be partly as part of an investment for the future. I think it wsa a political choice NOT to slower down house price appreciation because rich voters (albeit on paper) are happy voters.

onelove

hey blicky, you'd probably be amazed at the amount of private individuals investing in properties who DO have the cash, at least for serious deposits.... i work in investments, and people i deal with day in day out are in a position to invest 30/40K+ to add to their portfolios, which, as i said before, generally include a good few buy2lets...