Winners and losersPosted: January 12, 2015
So buy to let landlords made £177 billion from rising house prices over the last five years – and that does not include rental income.
A series of linked stories in the Financial Times this morning make clear who the beneficiaries of booming property market have been since 2009, when interest rates fell to a record low. In addition to buy to letters, they are home owners in London (prices up by £563 billion in the last five years) and in Conservative constituencies outside the capital (prices up eight times faster than in Labour seats). Even social landlords get in on the act, with a 20 per cent increase in the value of their stock since 2009.
Yet all the research by Savills and impressive FT data visualisation beg some far bigger questions about what it calls the politics of British housing. Why has this happened? If those are the winners, who are the losers?
The obvious reason why is that the supply of new homes does not remotely match demand for housing. The obvious losers are frustrated first-time buyers, priced out of the market by rising prices and stuck as tenants paying the mortgages of all those buy-to-let landlords.
Lucian Cook of Savills says the rise in prices in London reflects the strength of its economy but could they soon be undermining it? The business lobby group London First says high prices are now a significant risk to the capital’s economy and a threat to labour mobility.
Buy to let also comes in for lots of criticism, sometimes from surprising sources. Conservative MP Charlie Elphicke says there is a strong case for a halt to tax reliefs on things like mortgage interest and wear and tear. With David Cameron making home ownership one of his six election themes in a speech earlier, Elphicke’s message that ‘most people would say that is money which could have gone to people owning their own homes rather than investors’ could hit home within the party.
However, there is another factor in the equation that is not mentioned in the articles. Cast your mind back to the start of the financial crisis and the big housing fear was that there would be a repeat of the housing market collapse of the 1990s: falling prices and negative equity and rising arrears and repossessions. Except that this time it would be far worse: households were far more indebted; over-extended buy-to-let empires were vulnerable to collapse; and mass defaults on payments would hit a banking sector that was already on the point of collapse.
Despite some scares, that scenario failed to materialise because the Bank of England did just about the only thing it could do in the circumstances. Where interest rates had been increased to 15 per cent in 1992, they were cut to a record low of just 0.5 per cent in March 2009 and have stayed there ever since.
As I blogged on the fifth anniversary of that decision last year, that benefitted borrowers at the expense of savers. The average mortgage interest rate was 5.9 per cent (which was seen as low) before the cut but it is now just 3.2 per cent. On a crude calculation based on £1.3 trillion of outstanding mortgage debt, that means mortgage interest payments are around £35 billion a year lower than they otherwise would have been.
Far from collapsing, property values were propped up and then inflated as lower payments were capitalised into prices. That effect was amplified by Funding for Lending and quantitative easing and prices were supported even more by schemes like Help to Buy that are ostensibly designed to benefit first-time buyers.
The decline in home ownership began much earlier than the 2000s as house prices reached unaffordable levels in more and more of the country. However, it has accelerated in the wake of policies that prevented a house price correction. Meanwhile new mortgage rules designed (rightly) to avoid a repeat of the lax lending before 2007 have also made it far harder for new borrowers to get a loan.
And the impact of the financial crisis has not just been about house prices and the housing market. Record low interest rates were followed by austerity and cuts in housing benefit justified in the name of keeping them low.