大象传媒

Dear Evan,

I have just listened to your R4 program on housing.

The issue of the reduction in the number of social homes built each year dropping from 100,000 to about 10,000 was clearly stated. However the link between this and the Tory Govt's policy of ring fencing proceeds from council house sales, was left untouched.

Even Roy Hattersley was seeming unable to remember that while the ability to purchase council houses is now pretty much universally accepted as 'a good thing', the injuction on Local Authorities NOT to use the proceeds of council house sales to build more social housing has led directly to the paucity of social housing in the UK and has applied a consistant upward pressure on house prices generally.

Does that mean, then, that we will see the economy overall perform well - but property prices stagnate?

Regarding the banks and their profits, is it not the case that their enormous profits are down to their equity trading arms (i.e. they have been profiting from a rapidly rising stock market). Perhaps with a falling stock market, that profit source dries up and we will see that the bad debt in the housing market may be a real problem for the banks. After all, it is only when the tide recedes that we see who is still wearing their shorts!

Dear Evan,

I enjoy all your programmes, and the clarity with which you cut through complex economic issues.

I wish to ask why you did not challenge the Leeds Coulcillor on two statements she made:

1) That a local council has any business "delivering" a "balanced community" - issues that beg so many questions, yet taken as read by far too many. Where is there any manifesto for such an agenda that we may vote on?

2) That a community divided geographically by house price created "huge costs". What huge costs would these be? Economic cost, or some subjective social cost somewhere in her socailist mind?

Best regards, Richard

Surely no one is stupid enough to believe a billboard claiming house prices double every 6-7 years just because some may have done so in the past 6-7 years? Anyone mindless and greedy enough to mistake such an anomaly for a permanent trend deserves to lose their money.

Hi,
An interesting piece.
Am I right in thinking that the only way you get an increase in housing prices, is ultimately an increase in demand[either from people wanting shelter, or thinking they can make money from it].
If demand decreases[using your example of central europeans going home], isn't this likely to cause a decrease in prices.
Also are leverage, and the decrease in demand from investors whose confidence is dented in any pull back, likely to produce an exaggerated fall.

Dear Evan,

I thought the Government had passed legislation( Empty Dwellings Management Orders) allowing Councils to take ove management of empty properties after as little as 6 months so keeping properties empty could be a big mistake because if you rent your property you can choose who lives there if the Council controls who goes in it could seriously reduce the value of the property.

The Government introduced legislation last year to try to stop buy-to-sit landlords. Empty Dwelling Management Orders (EDMOs) give a local authority power to compel a landlord to rent out empty properties. Ultimately the landlord could face a Court Order and an effective repossession of the property if this is not done.

as an ex-pat living in Poland (one of the rare breed who have gone the other way!) I am intrigued by the state of the Polish property market at present. It seems to be copying the British practice of very high prices - and repayment of any loans required to purchase such properties will only be affordable with earnings from abroad. Average pay here is only about 拢400 per month - yet property prices in urban areas at least seem to be running at levels seen in the UK as recently as about 2000. So there has become a strong link between the economic situation in Poland with that in the UK (and Ireland). An interesting subject for a 大象传媒 programme, I think!

Thanks for another interesting comment and new R4 series. I look forward to the other programms.

At the end of the day, no-one knows whether or not there will be an asset price correction (perhaps there has just been one in shares) - but anyone with half an ounce of intelligence (which seems to be most people on your blog) will not panic, ride out any correction and not lose any money at all.

It will not be long before those assets ought to rise again (OK, I admit I cannot 100% guarantee it - but history has 100% guaranteed it!) Over any medium term in living memory, assets have recovered and gone on to deliver more value than before.

No-one questions why wages, the cost of eating out, cinema tickets, repairs, insurance, food, all keep rising, but so many people make a firm statement that asset prices cannot keep rising. Why do they do that? Why do they not say ''the price of a loaf will not rise any more''.

There may be a period for a week, 2 weeks, 2 months or even 2 years prices stagnate; but then it all moves on.

The key to it all is an investors must learn to rise above the day to day chit chat and enter any investment for the medium to long term.

Over on ''house prices''(blog) I am constantly getting lectured on ''low rental yields'' that only refer to the current year - no mention of my yields must also include strong capital value increases, (Ok this is not cash - but nor is a pension!) no mention of rentals increasing either! (60% in the last 10 years - DCLG.gov.uk).

''Sharp falls'' in assets are often only viewed by commentators as they happen; investors; rise above the day to day.............

The Government could easily moderate the housing market by changing the tax status of housing - property owners (especially occupiers) have a tax-free guaranteed well-ahead-of-inflation investment thanks to G Brown. The rest of us have to make do with limited ISAs. I will be interested to see if Evan tackles the Treasury on why they are happy to promote this growing inequality. I suspect there is a rather sinister explanation: the Government's actuaries want baby-boomers to accumulate property assets so they have something to pay the younger population with when the demographic wave realises it has one foot in the grave and starts to need nursing care etc... Also, Evan mentioned owner-occupiers and social housing tenants this morning, but nothing on the growing "third class": people "stuck" in private rented accommodation with neither the financial cushion of ownership nor the security of a social tenancy - I wonder if this group will get a look in in Evan's programmes?

Irrespective of the pro and cons of property investment, it is immoral to allow people to buy property and purposefully leave it empty. What a shocking waste!

Empty Dwelling Management Orders sounds like a cumbersome and expensive means of trying to address this issue.

Why not replace Council Tax, Non-Domestic Rates, Stamp Duty and all other property taxes with a Land Use Tax (you pay tax according to how much 'land' you own/occupy)? This might go a long way to encouraging developers to use land space efficiently and it would automatically penalise the buy to sit brigade. Of course, there needs to be exemptions for areas like farmland and open space but it sounds to me like a good basis to work from.

I've not heard any mention of the relationship between earnings and property prices. It stands to reason that once the market is approaching the maximum people can afford prices must slow to at maximum the wage inflation rate.

I predict a slowing of the rate of increase in house prices and a widening of the gap again. This may come as a result of a loss of confidence linked to falling markets and or unemployment. Once confidence returns watch as the gap between earnings and house prices decrease once more...

Dear Evan,

There is one thing I admit to not understanding about house prices, and which nobody has really explained to me. Perhaps I'm just unusually dim!

One house is much more useful than having none, because you've somewhere to sleep that's yours, and that's really important to human beings in this cold climate!

There seems to no similar advantage to any individual in having two houses. There are some advantages, sure, like being able to stop off somewhere nice for the weekend, but that's not nearly the same magnitude as owning your own shelter.

Most people I know who rent (myself included) would buy if we could afford it, and so have secure shelter.

As supply of houses is very inelastic, I find it hard to think of buying-to-let as being anything other than akin to hoarding, exploiting this non-linearity in utility, and as a kind of private-sector regressive taxation. I suppose, to be fair, it's strictly optional, if you don't need somewhere to sleep at night!

Sometimes this stuff about capital return, and the like, starts to really annoy me, because it seems to be something like a veil drawn over what's happening underneath, which is people needing somewhere to sleep, that's the machine driving all this. If it was over tulips or jewelry, or something, then it wouldn't really matter.

"Buying to let" seems to be pulling up some kind of class "drawbridge".

I'm sorry that this isn't really economics, which I find a fascinating and valuable discipline. (I know this sounds old fashioned in a thirty year old but) the obsession with this market increasingly strikes me as frank usury.

The pursuit of extraordinary profits for minimal effort is not a new phenomena. For historical precedents see, "Extraordinary Popular Delusions and The Madness of Crowds" by Charles Mackay, Volume one, 1852. Includes descriptions of, the Mississippi Scheme, The South Sea Bubble and Tulipomania. The latter recounts a time when you could purchase a house in Amsterdam in exchange for a tulip bulb.

David Ireland's comment is interesting. If true, it means "buy to sit" is happening in areas where poor planning has led to too much housing stock, and in which, therefore, houses are a poor investment unless you are sure an influx of people is about to happen. Are the owners buying in some doomed attempt to prop up the price, or just because they can't think of anything other than houses to invest in?

Evan, fascinating program, thank you. It made quite a few comments that chime with my own experience of the last few years. In particular, I have moved house within London a couple of times in that period, and I have yet to see the shortage of homes that John Prescott was using to justify the mass expansion of building in the South East. As I am renting I am in the happy position of being in a buyers' market, there are plenty of places to rent, just not that many to buy. In fact, the flat in which I currently live was originally advertised at a rental price approaching 25% more than I am actually paying, and when I made what I thought was a fairly low bid the landlord took me up on it straight away. I just wish that I had offered even less.

Buy-to-let or -sit is a classic bubble. With more and more people jumping on the bandwagon, house prices are going up simply because house prices are going up. There is no shortage of places to live in London. If you pop into a letting agency (and heaven knows there are plenty to choose from) you can overhear them turning away new landlords and talking of market saturation. Prices should be coming down, the only thing stopping them is people's timidity in haggling properly. When the agents do get round to serving you they will each have half a dozen to show you, then and there, that are sat empty.

Once again, thanks for the great program. I look forward to hearing the rest of the series.

Evan notes that he is not a particular fan of JK Galbraith. Yet there is a lot of Galbraith's slashing through economic mumbo jumbo in Evan's writing.

Why are people so afraid to acknowledge that Professor Galbraith was often 'dead on' in his observations? JKG didn't feel the need to obfuscate issues by hiding them in clouds of maths. He knew that economics is largly based on assumptions that can be very much driven by the politics of the day.

That said, it runs in cycles that are quite consistent decade over decade - what works in some years may not work in others. Humans must avoid the complacency that comes when things are working out well - whether it be tweaking the economy or enjoying a spell of good weather. It is imperative to always be scanning the horizon for signs of storms.

Despite government pledges, there is no significant increase in housing supply in this country - but the number of dwellings required is rocketing due to immigration and family breakdowns among other things. Hence, prices will continue to go up, and people will have to work harder to afford them. In many ways, keeping a lid on housing supply satisfies no only the nimbies who don't want new developments on greenfields near them, but also the government who wants to increase output and productivity. However, it means that those at the bottom will always be consigned to house sharing, being forced to live where there are no jobs, or being housed by the council after waiting 15 years on a list.

The UK housing market is currently fueled from the bottom of the ladder up - in the normal way. The only problem with this model is that the bottom rung of the ladder is no longer a 1st time buyer but a 4/5th time buyer purchasing a buy to let property for investment potential. Are these investors likely to stick around during future rate rises that are already squeezing out their profit margins - i think not. This will drop the bottom out of the whole market, a correction in prices is overdue.....and it is coming !

Dan -

Actually, it's worse in some ways, since the Buy-To-Let person can offset the mortgage interest against tax, wheras the Buy-To-Live person can't (MIRAS being abolised a long time ago). Just getting rid of that loophole would even things up a bit.

I know that rents in my area seem to be around the same as the interest on a mortgage of the same value, so presumably any new buy to let people would have interest only mortgages and be hoping for house price appreciation.

I'm 27 and came to london when I was 21 following a job offer.

I was forced to rent property for 6 years, during that time my rent increased from 50% to 70% of my take home pay.

The new baby-boomer landlords have the ability to force my generation to pay a private form of taxation to their generation.

The lack of social housing means, that when starting out in life, young people have no chance to save up for a deposit for their own home, or for a pension. My money went straight to my landlord.

Since all political parties believe in chasing after the grey vote, then they will not adapt their view of social housing from "safety net" to "affordable housing for all".

The increase in house prices above wage inflation, means that Buy To Let landlords require greater rents, and those rents are increasing faster than wages. This means tenants are facing a bigger squeeze as time goes on.

Whats worse is that given I currently cannot afford to have children, then as I'm "squeezed" more and more, my ability to afford to have children decreases with time.

The legacy of no social housing, coupled with BTL and BTS landlords is that our birth rate is about to nosedive.

Evan, non secured lending may be reducing (eg Credit Cards) but secured lending (consolidating debt) is still rising so it may be too early to say we are over the worst of the debt cycle.
In my local County Court (Kingston upon Thames) where I have worked for the last 10 years helping defendants in Mortgage Possession proceedings, claims have been rising 22% per annum since 2002. This is being driven by the sub prime lenders whose hard core accounted for 40% of the 2006 claims and 70% of the increase 2006 over 2005. Many are self certificated mortgages applied for with exaggerated incomes, often encouraged by commission hungry brokers. These then turn out to be unaffordable. What is noticeable is the high proportion of failing mortgages that started post 31 October 2004 (FSA Regulation start).
Evan, I have masses of data and several articles (Roof, Quarterly Account) if you are interested.
Great programme this morning.
Howard Springett

No doubt many of these investors have been encouraged by the plethora of property related television programs shown by the 大象传媒 and others. Who gloss over the details that property can be an illiquid investment with large transactional costs in selling and the costs associated in servicing debt.Not to mention that prices do not allways go in a single direction. Just like the technology internet boom it some times pay for investors to go in a seperate direction from the crowd.

Anyone interest to know which directions the housing market is going should look not only at the prices, but also the volumes. I have seen several reports from the London area saying that prices are now being pushed up by a lack of properties for sale. This is of course another way of saying, fewer people are putting their properties on the market because they can't get the price they want for it (or need, in order to move to a better place), so they wait a year or two, hoping prices will continue to go up (ie. that buyers will miraculously get both richer and more stupid). Some of these properties will be empty. However, as the actual transactions dwindle to a trickle, you have a more illiquid market where only the richest/most desparate buyers are transacting with the poorest/most desperate sellers, everyone else is out of the market. On such volumes, even small changes in economy/interest rates can move the going price levels (and there will always be someone forced to sell). The big question is, what will make expectations turn, and what happens once they do?

Evan, I think you should follow up on your comment about the sub-prime mortgage market in the US going wrong (which is going to cost a lot of European banks a lot of money). I think one of the key mis-understandings about the housing market is how demand (is multiplied in an easy credit environment, and that demand will fall sharply when credit tightening takes place. Most people (I think) do not realise that their mortgage contract is probably sold on by their lender, 'securitised' in the form of a bond with a load of other mortgages, and then re-sold on to hedge funds, pension funds, and most importantly CDO (Collateralised Debt Obligation) Funds. This incredibly complex market has enabled mortgage lenders to lend unusually large amounts (based on Loan-to-Value), at unsually low rates, to unusually uncreditworthy people. The current implosion in the US mortgage industry is in its early days, but already we are seeing dramatically tighter lending criteria as banks withdraw credit lines and regulators start crying foul - marginal borrowers cannot now borrow or re-finance, exacerbating the problem. When people who have stretched their finances (or their buy-to-let calculations) find themselves unable to re-finance their discounted mortgage and revert to the Standard-Variable-Rate, and new buyers find it impossible to borrow the amount they want to because nobody is willing to lend, that is when problems will really start to develop in this market. Are we seeing it already? Maybe your next programmes could tell us?

Evan,

Seems to me, that people are willing to substitute long term savings schemes for house investments and are not so worried therefore if the rent does not cover the full cost of the mortgage. i.e. provided rent covers the lending costs + a wee bit extra, then they are not really losing anything in the long run.

What do you think?

As the most wealthy people in the world have always known, the most highly valued commodity is personal space. Basically, with an increasing global population, and finite amount of land, that is why there will not be a property crash.
What I mean to say is, how many people would not buy a bigger property if they could afford the purchase and ongoing maintenance. Think about it.

Dan wrote:

"There seems to no similar advantage to any individual in having two houses."

What about a man with a high-powered job in the City who maintains a pied-a-terre in the City while the wife and kids live in a big house in the country? This whole debate is being as if the entire property market is composed of individuals, not families. The couple maintaining a BTL flat to augment their pension, or until the kids need it.
Not everyone--and I suspect not even a majority--in the BTL market is interested in or dependent on short-term capital gain.

Couple of points I would make:

1. BTL stabalizes the property market - not crashing it. There are many investors with too much cash around who can afford big deposits. As stats on this programme show, most are in their mid-40's who don't need rental income and see their 1 or 2 properties as pension alternatives and won't take big risks on property speculation. These investors are better credit risks than FTB's and are less likely to default as statistics show. They are less likely to panic and sell.

2. BTL is overhyped by media. There are only 800,000 BTL mortgages of the outstanding 12m in UK. It only represents 6% of the market. Additionaly, ARLA estimates there are 2.8m rental properties in UK. That means 2m rental properties have no mortgage. Most probably owned by landed gentry like Duke of Westminster. If there is going to be a crash it will be caused by owner occupiers who can't afford their income-related mortgages. The BTL investors will then buy more property. In my area I am seeing more and more FTB's defaulting and BTL investors replacing them, again stabalizing market, and keeping prices flat.

3. 5 properties. It's a tiny brigade of property entrepreneurs. BTL landlords want their properties rented not empty because they have a mortgage to pay. Buy-To-Sit would be madness in most people's books unless you are awash with cash.

4. BTL Landlords are needed. A lot provide social housing accomodation to the council who can not provide housing. Without these Landlords, local councils would be flooded with homeless problems. These Landlords have to manage a boatload of problems that come with Social Housing rental. We should be thanking these people not
critisizing them.

5. You only have to look at Germany to see which way UK housing market will go. Renting will be the norm. and house price inflation will stablaize. Property investment will commoditize into Gilts!

Many contributors here appear to be renters, many of them also say they 'cant afford' to buy.

OK, given that is the case, if someone else had not bought the property you are living in and you 'cant afford' to buy it - where would you live?

Perhaps the appearance of a higher proportion here of renters, reflects the fact that not many owners would post such comments. Most have seen & heard them all before, for decades.

Its no good moaning at investors (that on here are even accused of hoarding) that are providing ''affordable homes'' that require no thumping great deposit and stamp duties!

Also, are investors in Pensions, Isa's, Bonds and such also hoarders, because they view investments are for the medium to long term?

I have every expectation if BTL investors went in and came out of the market in 5 minutes they would be accused of profiteering as opposed to hoaders.

We cant win argument on this basis, but we do win in the investment stakes - thats where it counts.

Evan

I enjoy this blog immensely - thank you. It is entirely legitimate to be concerned that the Uk economy may be overheating but the fact that some people involve in private equity say prices are getting out of hand is not good evidence of that. Traditional investors in private equity are rich individuals and not mainstream pension funds, insurance companies and the like. These investors have sought returns in the mid 20s (%) despite the fact that interest rates have been under 5% - a substantial premium and they have mostly been able to secure it. Now more mainstream investors such as pensions funds etc have also been investing but these parties are willing to accept much lower returns than traditional investors. Why? becuase these investors have long positions in the equity market with no possibility of going short. They can diversify their risk through private equity investments. These investors given their size cannot seek such a premium from PE investment so they bid up prices to secure assets. You can see that what is going on is that the market is getting more efficient at pricing listed securities and the supernormal profits in PE are being eliminated. What happens in the long run is that private equity managers will find they cannot make above average returns without taking commensurate risk..... plus ca change

Share Dan's logic (post 18) about second homes and buy to let.

What I find even more curious is that politicians of all parties have spent 30 years quite rightly persuading us money making through inflation and speculation are con tricks but think it is OK for the most basic commodity-housing.

I do not blame individuals for wanting to make a sound inverstment through buy-to-let but this has no benefit to the economy.

It is time that second homes were banned without planning permission to flood the market with vacant property.

It would encourage wider home owenership which of course all our post-Thatcherite prudent politicains think is more important than making people feel good through inflation!

I don't think it will happen because forcing the middle classes to stay in caravans, holdiay chalets and B&Bs on long weekends will be seen as an appalling threat to civil liberties!

Why are you "not a particular devotee of J K Galbraith"? You should be. After Keynes he was the greatest economist of the 20th century and identified problems well before most economists had even thought of them, through books such as "The Affluent Society" and "The New Industrial State". Galbraith may not be fashionable amongst trendy economists such as yourself, but he was right about most things. He was also the most successful critic of the lunatics who were running the asylum in the 1980's, such as Milton Friedman, and he did it with a wit unimaginable to those right wing fanatics.

This radio programme is too focused on old debates around property and social class i.e. the social housing sector vs. private owner-occupied housing. The real divide is between those who rent generally and those who own, often more than one property. This is a divide between generations, not social classes. If you were born before 1980 you had a chance to cash in on the huge boom; if not, tough luck.

The private rented sector is actually worse than the social housing sector because tenancy laws have been stacked in favour of the private owner ever since "reforms" in the 1980s. That means tenants in the private sector have no fixity of tenure and little protection against rent hikes or eviction. The private rented sector is growing faster than the social housing sector due to a.) the lack of social housing and b.)the limited criteria on who can occupy social housing. Yet Evan Davis completely ignores this political issue and focuses on debates from the 1970s that are now largely irrelevant.

I hope the other 3 programmes of this series recognise the fact that housing issues have changed completely in the last c.10 years and that serious political reforms are required as a result. In the current market, wealth is being transferred from the young to the old and it is the young who are being excluded from Thatcher's dream of a society of home-owners. It's not about social class, it's about what age you are. Why is Evan Davis ignoring this aspect of the debate?

Interesting press release from ARLA, which mirrors the bubble-think of the market in general: rents keep pace with inflation, while rental property values go up between 6% (flats) and 10% (houses), presumably per annum. Conclusion? Yields are "relatively static" (mustn't use the "f" word), but the rental market is "healthily boyant". Apparently demand outstrips supply for rented accommodation. Really? If values rise at 2-3 times the rate of rents, and interest rates are going up, that means yields are falling, surely? And that is IF rents actually keep pace with inflation, which mine certainly doesn't :)

Neil (posting 30), I agree with you and suspect we share many concerns. Like you I would encourage Evan to look deeper into sub prime mortgage lending. The CML is very relaxed "The vast majority of adverse credit borrowers successfully re-habilitate..." but offer no evidence.The bulk of the hard core of the sub prime mortgage lenders are subsidiaries of US financial institutions. What is going on in the USA is going to have a knock on effect in the UK. One of the big 4 (whose share of court actions is 12 times their share of mortgage balances outstanding) is going to Court on 2 plus months of arrears. Exaggeration of incomes to secure interest only mortgages is now commomplace. With the indices of Residential Backed Mortgage Securities (RMBS) falling so dramatically in the last 3 months, with the Federal Reserve , Fannie Mae and Fannie Mac stepping insisting on tighter lending criteria, the credit crunch has started in the USA. How long before it starts here and how serious will be the impact?

"As the most wealthy people in the world have always known, the most highly valued commodity is personal space. Basically, with an increasing global population, and finite amount of land, that is why there will not be a property crash."

The above was what was said in Japan, property prices are still only one quarter of what they were during their boom 15 years ago. It's always the same, not enough houses, tulips, dotcom shares. Its all about irrational exuberance as Mr Davis says in his piece.

Second, don't count on your BTL or house providing your pension. Just as there will be no-one left to fund your pension, supply and demand and demographics mean that they'll be no-one to buy your house. The over 60's are going to double over the next 15 years, they're all going to need to cash in their chips to pay for health and personal care.

What's going to be the economic impact of that for the NHS, taxation and housing?

Please, let's have less talk of "buy-to-let owners who don't rent out" and "landlords of empty properties". The definition of letting (and being a landlord) is that you have to have someone being let to. If the property's empty, there isn't, is there?--ergo, no "letting" or "landlord". Just as there's no such thing as an 'unmarried husband'.

While I have my own reservations about BtL, one thing that got rapidly wearing in 4 years spent in Govt private rented housing policy, was the obsession among some with the evils of 'landlords' wrt the housing market. Whereas one might imagine being the neighbour to an empty property in poor condition was bad news in its own right, when the owner was described as a "landlord" the ranting sometimes got hysterical--even if there was no sign of it ever having been tenanted, ie purely a case of an *owner-occupier* moving out!

I should also say that some of these rants were coloured by nostalgia for a history that never was. Contrary to a rose-tinted past of majority affordable homeownership (or social renting), the vast majority of people rented privately 100 years ago--and this sector only became a minority in the '50s.

Incidentally, I'm a private sector tenant myself, and hope to own my own place *some day*.

I live in northern Ireland where house prices have risen by up to 45% this year and the bank of Ireland predicts a 15% rise this year
the average price of a house is 180,000 pounds sterling
the average wage is 拢7.50 per hour
but we believe the Celtic tiger is about to roar here as political future stabilizes we will be able to get an another 25% on top of this, this year as the buy to let market come here from the republic where house prices are crazy

Evan!

Keep blogging - you are far more entertaining (and neutral!) than David Smith.

Ian, (post 39)
Although i dont entirely agree with your point on 2nd home possession what i'd like to see is a block on new build homes being bought to let or even bought and sold say within 6 month period. There are some schemes near Aberdeen where i have seen flats/homes selling before even the rest of the development is built to try cash in on the buy to plan.

Like several of the other contributers to this correspondence I am rather surprised that you are not a "particular devotee" of the late J K Galbraith. Your position on his contribution to economic theory surely calls for you to produce a mini-me blog, or something of the sort, just to reassure those of us who had judged you to be a level-headed, grounded kinda guy.

An interesting piece - 2 observations:

There are those who state that in the long term asset prices always rise. That is almost certainly true. The long term can be quite long however - the Dow Jones index took 25 years to recover back to 1929 levels after the Great Crash. Of course, in the long term, we are all dead so we might not be around to see prices recover. From the assumption that in the long term prices rises you cannot infer that there is no risk of a fall, indeed a significant one, in the short term.

On houses; the fact that first time buyers are having to borrow very significant sums to afford their first house bodes badly for future price rises of houses above "first time buyer" level. What happens when these buyers want or need to trade up? I wonder how they are going to finance the spread? I am lucky, I moved in 1997 and had to find 拢45,000 to fund the price gap between the two houses. That same gap is now 拢200,000. There aren't that many people around who can find an additional 拢200,000 (after all it is about 7 times average earnings).

In the long term, I expect price rises will be very moderate (in line with earnings and no more) but in the short term, there has to be a risk of significant volatility, just like in the 1930's and early 1990's come to that.

As a property investor and someone who also works in this market there are some fundamental points to make here.

1) The majority of investors are in this for the medium to long term - 8 to 20 years with a small portfolio of one or two to diversify away from pensions or provide eventual homes for children. Gearing and capital growth are the drivers and not income as yields have fallen over the years.
2) Without the private investors there would be no replacement properties for social housing tenants leaving the government/councils in a dilema as how to house them.
3) Britain still has a tiny PRS (private rented sector) with about 10% of all housing stock in this market whereas Germany has say 40%! I can only see this 10% increasing.
4) It is not just investors replacing first time buyers but divorces where the larger family home is sold to purchase TWO smaller properties.

Whilst property demand outstrips supply and there are incentives for investors such discounted off plan property the market will only continue in one direction. IMO only significant unemployment, another 0.75% in rate rises or world disaster will stop this market. You may be waiting a long time for "correction" in prices.

(post 37) I fear you are not as stupid as you make out. "OK, given that is the case, if someone else had not bought the property you are living in and you 'cant afford' to buy it - where would you live?" You see the answer is in the question, he can't afford to buy because the prices have been pushed up by people with more than one property. I'm not suggesting that is the main reason for our property prices, but it certainly negates your arguement which is based on the premise (pun intended) that the price would be the same if there were no landlords and therefore more house on the market. :-)

Ivan. A question if I may:
We are seeing more people now remortaging their house. So a house that was bought at 200,000 is remortaged for 250,000. The 50,000 can be spent on anything as the value is underpinned by the supposed price of the house on the market. But here is where my question comes in. How many house have been remortaged? If these house had been put on the market to gain the price and not remortagde, would they not have reduced the prices as they were valued at a price in a market they were not in? I hope that question made sense. Eagerly awaiting some input.

P.S. please forgive my dyslexia.

Post 52.

The house isn't being put on the market so doesn't effect the price.

The owner is betting that they stay in work with increasing wages and that interest rates don't rise so they can afford to pay the higher debt.

The lender is betting similarly and that they can make money from the differential between what they borrow from savers/the market and what they make from lending.

Of course, if unemployment increases or wages rise relatively less than expected and people can't afford their houses, let alone their heavily depreciating car/SUV, they will have to sell, increased supply with lower demand will rapidly lowering prices, it's a confidence trick just like paper money, once confidence goes down the plughole it can be hard to rebuild...take Japan over the last 15-20 years or West Germany after the war recovering from hyper-inflation.

Evan
I felt very sad today to listen to your excellent piece on Radio 4 .Why do I feel sad. The answer is simple there is now a whole generation priced out of the market. I live in a suburb of London where I have seen a small terraced home rise from 拢375,000 to 拢540,000. Its gone bananas. How on earth will my generation every get started. The point is that as house prices go up the next generation get pushed out.This is causing a great deal of anger and resentment.The maths doesn't work out either take the average salary- most of my generation would have to borrow 10x their income in London.Probably more.What will happen I just don't know but if it keeps rising then we will see a very unhappy society and social unrest. My personal opinion is that the banks really should be stopped from lending large multiples and Mr Brown who my whole generation wish to throw a custard pie at should wake up and have the guts to try and stop this madness.As for the bank of England I hardly consider them independent when a large number of them are selected by Mr Brown himself. They should raise interest rates by 1% this April and stop the situation before it gets to the point that the only answer is a massive crash.

Thanks for bringing this discussion to the fore, Evan.

I'd just like to say I quite agree with John Chapman about the London lettings situation - there is an abundance of rental properties on offer. I looked yesterday to find out if monthly rents for 1 & 2 bed flats had gone up and they are identical to those of 2-3 years ago (still between GBP650-850). This suggests that landlords have no bargaining power whatsoever when it comes to rents (2 years ago when I moved in to my rented flat, the landlord also accepted my first offer straight away, even though it was 10% under the asking price. I suggest that if IR's were to climb substantially that B-T-L landlords would find it extremely difficult to raise monthly rents to cover increases in their debt repayments and would be forced to sell their properties.

Its ridiculous - as some posters are saying - that buy to letters are not pricing out first time buyers. Buy to letters generally purchase new builds and 1/2 bed flats thus driving up prices in this sector of the market. These are precisely those properties which FTBs would have traditionally purchased.

I am amazed that politicians are so obsessed with introducing taxes to stop global climate change but do nothing to address over consumption of housing. People in the UK taking fewer Ryanair flights or using different lightbulbs will make no difference to global warming unless China/India/the US are on board!

Why not tax the biggest social evil in the UK more heavily - people owning multiple properties when others are living in appalling overcrowding - instead of giving it tax breaks.

A final message to David Cameron - instead of putting solar panels on your very large new house why not let several of the 200,000 families with chidren living in overcrowded accommodation in London move in instead. That would do a lot more social good than 'carbon footprint' tokenism!

Hi Evan,
Great programme on the housing market which as an automotive market analyst is of keen interest to me. Some current features of the market interest me from a professional and practical viewpoint.

I have always personally felt that paying ever higher prices and an ever higher proportion of disposable income on home ownership is madness! The reason for this is because I believe that many homeowners are misguided in thinking that they will one day be able to cash-in the value that lies within the higher value of their property.

Most people expect to downsize in later life, but whereas people before sought to retire to more genteel areas such as the south west, the growth in second and holiday home ownership in that region has meant that property prices there are now some of the highest in the country!

The only viable opportunity for people to be able to cash-in their investment in property is either to move to run-down urban areas in the UK where property is cheaper but quality of life is poor, or, purchase property abroad where the cost of living is lower than the UK's (this of course is already happening - but will it increase?)

The other area of interest in the housing market which is often overlooked is the impact that it has upon inflation in the economy. My belief is that while higher house prices contribute to inflation to an extent, the fact that homeowners are willing to pay a disproportionate and increasing level of income on housing is actually having the effect of holding down inflation in the rest of the economy. High house prices and mortgage repayments actually reduce disposable incomes thereby reducing the amount of income that homeowners have available to spend on other goods and services. Maybe high house prices are therefore creating or contributing to the UK's recent rate of low inflation?

There has also been much speculation that high house prices have enabled homeowners to withdraw equity by remortgaging and then spend the windfall on other products such as cars. We have been researching motor finance for years and ask car owners how they have paid for their car. Use of funds from a mortgage has never accounted for more than 2% of all the 31 million cars in use in the country! I believe and the BoE's research supports this, that a high proportion of mortgage equity release is being used to pay off more expensive forms of debt and credit card debt in particular.

Looking forward to the next programme!

Regards, Robert

I would just like to say I am amazed, I said most of these things in 2001 and 6 years later properties continue to rise. Only reason I traded up 2 years ago is that prices are sticky so I see a 15 year halt in growth more likely than a sharp 30% fall.

What do others predict?

Chris, house prices tend to be sticky because occupiers tend not to sell and move into rented accommodation.

However, a couple of things are different this time..

There is very little inflation. Previous real price-falls have been masked by higher inflation, this time even a small drop in real values will show up as an actual drop in nominal pound value, and this is the number everyone watches.

A much bigger proportion of housing stock is now owned by investors who are holding on to it purely for the capital gains (the rent doesn't even pay the mortgage interest). What they will do if prices start falling is anyone's guess, but they don't need to move out to sell.

If this is all triggered by a tightening of credit, the housing market won't just be affected directly through mortgages, but it will cool down the current City bonanza, and with it the last part of the country where prices are actually still rising (ie. the South East. Perhaps apart from NI, but that appears to have more to do with the Irish housing market)

'houses are worth more' they say. they cost more, so doesn't that mean they are worth-less since it takes more of our effort to buy a house. low interest rates have led to monthly repayments coming down, thereby encouraging more people to extend their lending further. but low inflation means that wages will rise more slowly, so instead of the old situation where extending yourself early on would soon be overtaken by inflation and wage increases wiping out the true cost of repayments. now you will be stuck with a massive proportion of your earnings being taken up with mortgage repayments for most of your working life - no respite here. nowadays one serious interuption to your earnings and you will be stuck. and we live in a world of fewer certainties, so let's hope no serious problems arise or the effects will be devastating. the elasticity of prices in a rising market is great - everyone wants more or feels compelled to pay more, but in a falling market, it becomes sticky as everyone resists seeing their house valued at less. we are now in a situation where the elastic band has been stretched further than ever before as everyone looks to property ownership as a safe and necessary investment. it's going to go horribly wrong, we just don't know on what day the whole thing will stop and what may be the implications for this house of cards.

Just listening to your program regarding the property market. If you look at the Land Registry over the last 4 quarters and for that matter, few years, barely a million houses are selling each year. This out of a total of 18 million owner occupied homes in England and Wales. Yesterday I spotted a statistic regarding 2006's total of buy to let mortgages - an astonishing figure of over 300,000. So only around 700,000 'normal' sales a year are happening. That is a real shortage!

Evan

I really appreciate your broadcasts, especially recently on the housing market.

Regarding the housing market, a learned colleague informed me some four years ago that the Chancellor (GB) considerably increased "dividend tax" on all shares around 1997 (10% to 20%?), and that consequently, a lot of money moved from the stock market to bricks and mortar, and that this was in large part, the lightning of the fuse of the housing market boom.

Is this true? Can anybody tell me?

Looking forward to your next programme.
Regards, Robin

In the debate about house prices, it鈥檚 surprising/frustrating that economics commentators seem to have forgotten about opportunity costs and aren鈥檛 pointing out that housing prices do not need to fall for people to lose money by buying a house. For most current buyers in the UK, growth rates actually need to go up (up!) for most people to be financially better off buying rather than if they just rented. Given the huge difference between rents and mortgage payments, any rationale for buying rests on the assumption that large future capital gains will make up for significantly higher near term mortgage payments. Potential buyers, rather than piling all of their income into a house, could put the money they鈥檙e saving by renting into other investments. The question comes down to what buyers are assuming future appreciation rates will be and do those assumptions make sense. At current house price growth rates, it doesn鈥檛 make sense for most UK buyers outside of London to invest in real estate rather than other investments, and even for London, you have to assume that appreciation rates will continue to outstrip inflation by at least 300%.

I took a house that was listed on the internet both for sale and for rent and put together a spreadsheet looking at just what rate of future price appreciation you would have to assume for it to make more sense to buy rather than rent. The house is a family home with 5 bedrooms and a big lot located just outside of London on the other side of the M25. List price is 795,000 pounds and the monthly rent is 2,750. At that price, the monthly mortgage payment on a 20 year mortgage with 20% down at current rates (6.1%) comes out at around 4,600 pounds a month. There are cheaper rates out there, but they involve points and starter rates that are just moving the costs around. The rate used is the lowest APR. Upkeep on the house would be around 0.5% of purchase price at a minimum (i.e. enough to cover maintenance, no kitchen/bath remodeling allowed) and stamp duty, paid up front by the buyer, would be 4%. Capital gains on the house are tax free.

In looking at a comparison to renting, to be safe, you would want to assume that rent would increase by 3% a year (CPI has been averaging just above 2% so this assumption is a little high). You could invest the difference between the monthly mortgage payment and monthly rent, as well as all up front costs, and conservatively assume a 5.5% return (which would be taxed at a 40% tax rate for someone who could afford this house).

With these assumptions, it turns out that for a 10 year holding period, the house would have to appreciate by 7.5% a year for the two options to be equivalent on a present value basis. If you had or wanted to sell after 5 years, you'd lose 50,000 pounds (on a present value basis) by buying, assuming the 7.5% annual appreciation rate. According to the Financial Times, houses in the southeast of England outside of London are now seeing annual gains of about 6% (more than double CPI). At that rate of appreciation, you're 115,000 pounds worse off by buying, assuming you hold the house for 10 years.

Granted, this house is more expensive than the average house, but it actually has a higher rental yield (i.e. rent - upkeep / purchase price) than most new buy-to-let properties. The rent yield is 3.7%, while the rental yield on most new buy-to-let properties is supposedly somewhere in the low 3% range, so the rent on this house is actually proportionally lower than many rentals. Additionally, for a cheaper property with a lower-income occupant, the tax advantages of buying would be even smaller.

It's interesting, that given these assumptions, financial advisers are still telling people that renting is a waste of money. Housing prices have gone up a lot in the past, but it seems hard to argue that they will continue to go up by more than 3 times the CPI given current levels of affordability and the outlook for interest rates.

I really enjoyed yesterday's installment of The Price of Property, being one of the ``young professionals" with no hope of buying a home in London until possibly my mid-80s and only then if there is an almighty crash. The thing I found totally amazing was the story of a family of Bulgarians owning a flat in Fulham - Mum, Dad and Granny all working to pay the mortgage. I have not recently seen a one-bedroom flat in that area for less than 拢200,000 so the adults must be earning about 拢70,000 each. Good for them - but that is considerably more than the average graduate and two of them said they worked as cleaners. Should we abandon our professions if we want to get a foot on the property ladder?

As always property and house prices is an emotive subject, with differing opinions on what will happen next but a general concensus as to why prices has risen historically.

As with all invstments, past performance cannot be considered a guarantee for the future. Supply and demand economics will hold the key to what the future holds, along with the cost of borrowing which (I think) suggests that the higher interest rates go, the bigger the leap of faith required by landlords to underwrite monthly deficits to benefit from future house price appreciation. At least until rental prices try to catch up, depending on affordability to let.

Inflation has a large part to play in what will happen to interest rates and no-one can say with complete certainty what the future holds.

Perhaps that is why there is no such thing as a "safe" investment. Risk and reward go hand in hand in property investing as with any other kind.

Great series though and certainly a debate worth having.

I hope that there will be a further edition of the property programme. If so, could Evan provide some research on the effect of the "two-tier" division of accommodation property in Guernsey (and I understand in Jersey too. Despite the restrictions house prices are very high for protected essential users, and astronomical for those who have to use the open market.

If you are considering a sister programme on motoring, again I believe that Guernsey is going to abandon its road-tax and increase the duty on petrol. Both of these are much lower than, and different from, those which apply on the mainland.