Appearance and reality in the 2014 housing market

Combine one ex-PR man prime minister with one lucky homebuyer who’s also an estate agent, then add one ex-teacher turned buy-to-let mogul. Welcome to the New Year recipe for housing, where perceptions are everything.

David Cameron used Help to Buy as a metaphor for the Conservative message about economic recovery and opportunity for all when he took part in a photo op in Southampton with a young mum and her toddler and had tea in the new home she’s just bought through a government scheme.

It seemed standard, if rather awkward-looking fare, until this post appeared on the internet claiming that the young mum, Sharon Ray, was actually Sharon O’Donnell, a sales director with the estate agent that allegedly sold the home. That was followed by a typically sexist story about the ‘attractive blonde’ in the Mail and this corrective about some exaggerations and errors in the original post. Cue a Twitterstorm and debate between those seeing the whole thing as an example of Tory fakery and those outraged by the hounding of a young woman who’d done nothing wrong.

I find myself straddling the two camps. Sharon Ray/O’Donnell was not, as the Mail puts it, ‘revealed to be an estate agent’ at all. That was clearly stated in the original media reports, as here on Channel 4 News. Her role as a Treasury case study was reported as long ago as November. If Help to Buy really is for aspiring and hardworking families, then surely estate agents can be both. Besides which, on current (made up) trends, all of us will eventually become estate agents and it is hardly surprising that someone in her line of work would become one of the first to take advantage of Help to Buy.

Against that, David Cameron’s previous form with photos (with loutish student societies, huskies and cycling to work) makes me less inclined to give him the benefit of the doubt. So too does the symbolism of the housing backdrop used for George Osborne’s claim that the economy is ‘turning a corner’. And did Cameron’s PR team not even consider that an estate agent buying a home that may have been sold by her own firm might send rather mixed messages about a policy already nicknamed Help to Sell? (Or, for that matter, warn her that she might be a focus of media attention).

Buy-to-let empire

If Sharon Ray/O’Donnell found herself the poster girl for Help to Buy, there is no doubting her counterpart for Buy to Let. Fergus Wilson and his wife Judith traded in jobs as maths teachers for a buy-to-let empire of 700 homes worth £225 million by the peak of the housing boom. In a series of stories in The Guardian, he’s demonstrated not just an appetite for publicity but also turn of phrase that makes for very good copy.

This time around he’s popped up to say that he will no longer rent to tenants on housing benefit and that he has issued 200 eviction notices against the claimants he already houses. Along with the impossibility of getting rent guarantee insurance for them and the availability of alternative eastern European tenants, he explains:

‘Rents have gone north, and benefit levels south. The gap is such that I have taken the decision to withdraw from taking tenants on housing benefit. From what I can gather just about all other landlords have done the same. Our situation is that not one of our working tenants is in arrears – all those in arrears are on housing benefit.’

It’s a harsh logic that it seems is being applied by many other landlords too and it is one that should be very worrying for the government too. Since 2010 it has effectively gambled that landlords will respond to cuts that reduce the local housing allowance below actual rents by reducing those rents rather than by pulling out of the claimant market. Here is a high profile example of exactly that, increasing fears that swathes of the country will effectively become ‘benefit blackspots’. The Wilsons seem to perceive housing benefit as being all about single mothers who are not working and seem unaware of the surge in the numbers of claimants who are in work.

However, it’s also an illustration of how much things have changed in the housing market before, during and after the financial crisis. In 2008, according to their own later account to The Guardian, the Wilsons came close to going bust. ‘We were going to be, to put it bluntly, stuffed,’ he said in 2010. ‘The only reason we were saved was the drop in interest rates.’

At the time, they were planning to sell up, believing that buy to let was ‘absolutely dead, and will never return’. As I blogged two years later, that turned out to be hopelessly wrong: buy to let recovered strongly and increased its share of total lending as banks came to see landlords as a better bet than first-time buyers. A combination of record low interest rates, quantitative easing and Funding for Lending made for a surefire investment for landlords, who could effectively borrow against the future income of their tenants knowing that their rental yield would be higher than their mortgage rate.

Meanwhile, as Fergus Wilson has discovered, housing benefit was being cut. This was no accident: the stated aim of austerity and cuts in benefits was to keep interest rates low. Effectively renters are paying to hold down the cost of mortgages for owners and landlords in what amounts to what you might call Help to Buy to Let. In complete contrast to their own perception in 2010, the Wilsons’ property empire seems to have grown by another 300 homes.

Peaks and bubbles

Back with Help to Buy itself, the gap between perception and reality is about something much more important than a photo op. Cameron also had a message for the scheme’s many critics: it’s all about aspiration and helping people and it will not inflate a house price bubble. ‘Where we are today, house prices are still way below the peak they reached in 2007,’ he said this week. ‘Forecasters do not think they will get back to the level before the crash even in 2019. So there is no evidence of a problem.’

Inconveniently for the prime minister, the following day’s Nationwide house price index showed that UK house prices rose by 8.4 per cent in the year to December 2013. As this graph shows, most of that increase has come since the announcement of Help to Buy in the Budget in March and the rate of inflation has been accelerating:

Analysts at Knight Frank forecast that prices on the Nationwide’s measure will rise by another 7 per cent in 2014 and by a total of 24 per cent between 2014 and 2018. If that sounds like bubble territory, they point out that this is only 14 per cent in real terms.

That is also the basis of Cameron’s statement that prices are ‘way below the peak’. On the Nationwide’s figures, the current UK average house price of £174,444 down slightly in nominal terms on the peak of £184,131 recorded in 2007. However, once adjusted for retail price inflation, today’s average price is still 22 per cent lower in real terms than in 2007. On this basis, prices now are about the same as they were in 2003

However, there are three big problems with that argument. First, 2007 represented a historic peak of unaffordability and there was widespread concern about house prices even in 2003. Second, what happens if interest rates rise? A Bank of England study before Christmas estimated that an increase of 2.5 percentage points would put one in six borrowers at risk of losing their homes. Third, the financial crisis and austerity mean that the real terms comparison is much less useful than it used to be. Yes, house prices have undershot retail prices but so has the ability of people to pay for them. According to the ONS, wages stopped rising in real terms in 2009 and by 2012 had fallen back to 2003 levels. Data published by the general union GMB shows that average earnings fell by 13.8 per cent in real terms between April 2008 and November 2013.

Forecasts are only forecasts, of course, and Knight Frank identifies key risks including an earlier than expected increase in interest rates, a fresh Eurozone crisis and a stalling economic recovery. However, it also forecasts a 16 per cent increase in rents between 2014 and 2018, with rents rising 2 per cent in 2014, 2.5 per cent in 2015 and then 3.5 per cent in each of the next three years. Increases like that are guaranteed to cause more problems for people on the local housing allowance, which will increase by just 1 per cent in the next two years and be subject to a welfare cap after that.

In the gap between appearances and reality on housing, it’s figures like these that are far more important than Sharon Ray, Fergus Wilson or even David Cameron.