Our dysfunctional housing marketPosted: August 27, 2012
Anyone wondering why the housing market is so dysfunctional can find plenty of explanations in figures released over the last few days.
Exhibit one: the Bank of England’s account of the effect its £375 billion (so far) quantitative easing programme. Most of the publicity has gone to the revelation that the richest 5 per cent of the population have gained 40 per cent of the benefits as the result of the way it has inflated the prices of assets like shares. However, it also includes an estimate of the way that borrowers have benefitted at the expense of savers because of record low interest rates. The total impact of lower rates on secured lending (mostly mortgages) is estimated at £94.4 billion since September 2008.
Exhibit two: figures out today from the Halifax showing that mortgage payments for a new borrower are at their lowest for 15 years. This reflects the total benefits in exhibit one for individual borrowers. Payments for a new borrower (first-time buyers and home movers) accounted for 26 per cent of average disposable earnings in the second quarter of 2012. That compares with 28 per cent this time last year, an average of 36 per cent over the last 27 years and a peak of 48 per cent in the third quarter of 2007.
Exhibit three: a survey by Lloyds TSB on Saturday showing the situation faced by “second steppers” – people looking to trade up to a second home. The value of a typical second home is currently 4.7 times gross average earnings. That’s an improvement on 5.2 a year ago but still well ahead of the long-run average of 3.3. The bank says that typical first-time buyers stay in their first home for around four years. The average second stepper today will therefore have bought in 2008 close to the peak of the market and the average price paid by a first-time buyer has dropped by 16 per cent or £25,000 since then. That leaves second steppers with an average of just £9,008 in equity, which is only enough for a 5.4 per cent deposit on a typical second home (£165,565). In 2005 they could put down a deposit of 44 per cent.
Exhibit four: A survey by the website MoneySupermarket.com found that the number of mortgage deals available for people with small deposits has shrunk rapidly in the last six to 12 months. Deals at 90 per cent value are down by a quarter in the last six months, while deals at 95 per cent have almost halved and the number of products aimed at first-time buyers is down by a third in the last 12 months. Things do not look great for existing borrowers stuck on standard variable rates and unable to remortgage either: Santander is increasing its SVR by 0.5 per cent to add £44 a month to the cost of a £150,000 mortgage from October. As I blogged earlier this month, the best deals inspired by the Bank of England’s Funding for Lending scheme are all going to borrowers with lots of equity.
So what can we conclude from all this? There are so many housing statistics out there saying so many contradictory things that it’s not easy, and things are different in different areas, but the combination of these highlights the following points for me:
1) House prices are too high. While mortgage payments remain at their most affordable in relation to earnings, and the average Halifax house price is down 19 per cent since their August 2007 peak, the average home still costs 4.3 times earnings. That is down from a peak of 5.8 in 2007. However, the ratio peaked at 5.0 times earnings in the last boom and had fallen back to just 3.3 within five years.
2) Prices are being supported by a shortage of supply – both of properties coming on to the market and of new-build homes. Repossessions are running at about half the levels seen in the last housing market boom and bust because borrowers under pressure do not have to sell. Important parts of the market, such as the transition between first and second homes, have already ground to a halt. New supply is running at around 100,000 homes a year in England compared to a demand of 250,000. The effect of this shortage is exacerbated in some markets, especially London, where extra demand is coming from overseas investors for whom the devaluation that accompanied low interest rates made UK homes much cheaper.
3) Prices are unsustainably high in the long term. Banks and building societies know that rates will not stay this low for as long as the term of a mortgage and that affordability problems are inevitable when rates rise. That is why they are understandably reluctant to lend at 90 or 95 per cent loan to value now and partly explains why they see buy to let landlords as a better bet than first-time buyers. It is also why builders are concentrating on making more money from limited production rather than increasing their volumes.
4) The longer the post-credit crunch emergency support measures continue, the more profound the dislocation in the housing market and beyond will become. Buy to let will continue to expand. Would-be first-time buyers will continue to be frustrated and stuck paying exorbitant rents. If they have an impact at all, government schemes to help them risk setting them up for negative equity in the longer term. Thanks to profoundly unequal distribution of the benefits of asset purchase and low interest rates, plus the public spending cuts that have followed, the housing haves will continue to accumulate wealth while the have-nots continue to be priced out.
No action to tackle this dislocation will be easy since what helps one part of the market risks disturbing another. To take one example, the consultancy Fathom is warning that boosting the supply of new homes through state-backed guarantees for housebuilding risks triggering a house price crash back to fair value (about 30 per cent below current levels). Yet its alternative of forcing the banks to repossess struggling borrowers and reveal their bad debts and then receive yet another bail-out seems even less palatable.
It seems we can stay stuck where we are, with a market that is barely functioning as a market, with a steady decline in home ownership gradually undermining the welfare system (since the shift to asset-based welfare relies on expanding home ownership and increased renting potentially means an increased benefit bill) and damaging the the political system (as private renters are disenfranchised). Or we can experience the sharp shock of house prices falling back to a sustainable level with potentially damaging consequences for the rest of the economy. Or perhaps we could start to think about what we really want from our housing system.