The Government Is Inflating A Disastrous Property Bubble

[The Masked Tulip]

Imagine, if you can bear it, that you are a first-time buyer in the UK. You go to look at a 500-square-foot box masquerading as a two-bedroom flat in an average sort of area masquerading as an up-and-coming part of London. It’s a new build — one you can just about imagine downgrading your lifestyle expectations enough to live in.

The problem is that you can’t quite afford it. The good news is that your chancellor is behind you on this one. With you all the way. George Osborne really wants you to be able to buy a house.

http://moneyweek.com/government-inflating-disastrous-property-bubble/

[interestrateripoff]

To be fair the Chancellor can't afford it either, but that isn't stopping him from "helping".

[GloomMonger]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

I’m not sure why MW puts these articles out every month or so, other than to justify the wrong stance it took on housing back in 2008.The fact is for most FTB’s the mortgage rate is not much lower now than it was in 2006 ,despite the very low base rate.

More importantly they keep trotting out this 3.5 times salary long term house price. Even Evan Davis on Radio 4 used this ratio as being the “norm”. But it never really existed other than as a lending multiple for the banks.

For houses to be at 3.5 times salary now they’d be only £102,000. For that to happen interest rates would need to breach 16%, something it has never done since 1692.

The fact is house prices do not reflect salary, but income. Only 65% of income is salaries, but all income is available to buy houses. The current price to income level is 6 times and it has averaged 4.8 times since 1970. However, since the massive downward shift in interest rates in 1992 they have averaged 5.5 times so are close to their average of the past 21 years.

I maintain however that it is not price but the cost of buying a house outright over 25 years using a typical mortgage that is the important indicator. That has averaged 7.3 times income since 1992 and is currently at 8. So I agree houses are above the long term trend but by only about 10%. That is not a bubble nor is it disastrous especially as the typical house buyer is much richer now than they were in 1970 or 1992.

[billybong]

More importantly they keep trotting out this 3.5 times salary long term house price. Even Evan Davis on Radio 4 used this ratio as being the “norm”. But it never really existed other than as a lending multiple for the banks.

So it did exist - and that was the multiple.

[winkie]

House prices reflect the amount of cash or credit available to buy them....the cost of that credit or the other alternatives growth/income to invest that cash....when nobody wants a house because the cost of keeping/maintaining that house is greater than the growth/income that house provides, prices will fall...in the meantime others are investing in low cost/fees/interest alternatives.....houses are good for keeping the rain out, good houses keep you warm for less......there are other alternatives, property is only part of the wider picture of opportunity out there....

[eric pebble]

And -- What got us here in the first place???

PREDATORY LIAR LOANS.

[billybong]

For houses to be at 3.5 times salary now they’d be only £102,000. For that to happen interest rates would need to breach 16%, something it has never done since 1692.

House prices could already be at or near the £102,000 level even at current interest rate levels if the government had not interfered with all their various interventions to date since 2008. They were headed towards that level before the massive interventions and manipulations.

It's not clear where the "interest rates ..need to breach16%" for it to happen comes from or what it is based on but for sure if interest rates did reach that level (and it's not entirely out of the question at some stage) then house prices would be far far lower than now.

Edited October 10, 2013 by billybong

[19 year mortgage 8itch]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

Awesome, interesting cherry picking of a period from 1992 when interests have fallen as prices rose. By his metric, prices should not rise from here ever as mortgage rates will not conceivably get any lower.

[cybernoid]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

We can measure it however we like, fact is, this kind of intervention is unprecedented and we are 5 short years from bank runs & the biggest financial shock since the 30s and nothing has improved. I read their comment as 'everything is as it has always been whats all the fuss about'. Plainly thats ridiculous, why have we got htb1, htb2, lowest interest rates in 300 years etc etc. Everything is not as it has been.

[@contradevian]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

That is not a bubble nor is it disastrous especially as the typical house buyer is much richer now than they were in 1970 or 1992.

Are they?

All I see is more uncertainty and casualisation in the work force, and no wage inflation. I'm sure some have "never had it so good" though

[winkie]

And -- What got us here in the first place???

PREDATORY LIAR LOANS.

But historic liar loans will help get us out......to gain you have to service and repay.....all holders of liar loans still hold that loan, and will still have to service that loan, and will still have to repay that loan.....if their income does not eventually reach the amount they lied about earning they will not be moving they will be stuck until they have created room to move.....have they gained anything?

[Dorkins]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

The fact is house prices do not reflect salary, but income.

Bzzzt. House prices reflect access to credit.

[StainlessSteelCat]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

MSW, smart and lovely though she is, is correct about the logic but like the rest of us completely wrong about the timing of a crash (in London and SE at least). She now has the appearance of a stopped clock. She also bought a few years ago too (not that I hold against her - I did last year).

I suspect Moneyweek has worked out it's niche to be something like the readers of this forum (their ads always talk about a forthcoming disaster to the financial system). It's content is worth reading, but we should be wary of confirmation bias.

[Eddie_George]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

Why did they fall in the USA then? (I won't include Ireland, because they we constrained by being in the Euro.)

[mongle]

I maintain however that it is not price but the cost of buying a house outright over 25 years using a typical mortgage that is the important indicator. That has averaged 7.3 times income since 1992 and is currently at 8

The cost of buying outright might be 8 using current interest rates. But surely interest rates are not going to stay at 4% for 25 years. Or will they?!!

[The Knimbies who say No]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

I’m not sure why MW puts these articles out every month or so, other than to justify the wrong stance it took on housing back in 2008.The fact is for most FTB’s the mortgage rate is not much lower now than it was in 2006 ,despite the very low base rate.

More importantly they keep trotting out this 3.5 times salary long term house price. Even Evan Davis on Radio 4 used this ratio as being the “norm”. But it never really existed other than as a lending multiple for the banks.

For houses to be at 3.5 times salary now they’d be only £102,000.

That is consistent with historic price multiples. Why 'only'? It's a six figure sum for a pile of bricks. How long would it take you to save up £100k, nevermind repay it with interest. We've become normalised to silly numbers that far outweigh our aggregate ability to save or repay them.

For that to happen interest rates would need to breach 16%, something it has never done since 1692.

Why so high? We know full well a rise of a few percentage points would be devastating for property prices, that's why they are at 0.5%. If 16%+ was the danger point, why would base rates at 5% be an issue? The fact that this is inconceivable to policymakers suggests 16% is way above the level when the problems start for overindebted households/banks.

The fact is house prices do not reflect salary, but income. Only 65% of income is salaries, but all income is available to buy houses. The current price to income level is 6 times and it has averaged 4.8 times since 1970. However, since the massive downward shift in interest rates in 1992 they have averaged 5.5 times so are close to their average of the past 21 years.

Savings rates have been devastated and I don't suppose an average person is generating £12.5k of income aside their average salary of £25k, I'd like to see the evidence of that. Plus, if pensions are this other income source it's not really fair to say that a FTB can use it to help them buy, as they will likely have little income, if any from a pension. It's FTBs who are squarely being targetted with HTB and it is they who are key to keeping this whole charade alive. edit [by hosing them down with cheap credit. Did incomes triplebetween '96-'07? No.]

I maintain however that it is not price but the cost of buying a house outright over 25 years using a typical mortgage that is the important indicator. That has averaged 7.3 times income since 1992 and is currently at 8. So I agree houses are above the long term trend but by only about 10%. That is not a bubble nor is it disastrous especially as the typical house buyer is much richer now than they were in 1970 or 1992.

I also maintain the 25 year cost is the most important factor. Show me some 25 year fixes and we'll do the sums. Otherwise it's nonsense to talk about the overall cost of a mortgage based on a 2 or 5 year deal, with the implicit remortgage at similar costs, when you cannot know what the rate environment will be outside the term of the fix deal. 25 year fix at 4% on a house overpriced by 50%? People might do the sums. 5 year fix at 3% on a 25 year mortgage on a house overpriced by 50% at centuries low rates? Fancy repeating the trick a further 4 times to get to the end unscathed? Not for me.

Edited October 10, 2013 by The B.L.T.

[richc]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

There is a very, very, very big difference between buying now or buying 20 years ago, and that's the growth rate in wages.

20 years ago, nominal wages were growing rapidly, such that the total cost of a buying a house over a 25 year period would be minimized through inflation. It would be tough for the first couple of years, and then a cake walk to pay off the mortgage. With nominal wages now static, there's no such effect, meaning that the total cost of the house over the life of the mortgage is now astronomically higher (and that even assumes that rates stay at rock bottom for the next two decades, which is not going to happen) .

[Bloo Loo]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

because the entire case is based on affordability criteria, rather then income v the commitment..its about monthly payments.

It is the ENTIRE reason the banks are between a rock and a hard place...cant lower rates and cant sell their equity to get out.

The end of a credit boom results in a rising of rates and a lowering of leverage...this will mean a lowering of security values and a short term death spiral for the banks...until incomes and values become restored to a level where capital generation can start again.

[zugzwang]

Interest rates last hit 15% in 1992, oddly enough.

[@contradevian]

Interest rates last hit 15% in 1992, oddly enough.

Only for a few hours though. Next day on exiting ERM back at 10%

[kilroy]

Bzzzt. House prices reflect access to credit.

indeed, and the average person receiving income receives that as salary, plus I don't know of many banks that will lend based on other income (such as dividend etc)

[FreeTrader]

Savings rates have been devastated and I don't suppose an average person is generating £12.5k of income aside their average salary of £25k, I'd like to see the evidence of that. Plus, if pensions are this other income source it's not really fair to say that a FTB can use it to help them buy, as they will likely have little income, if any from a pension. It's FTBs who are squarely being targetted with HTB and it is they who are key to keeping this whole charade alive. edit [by hosing them down with cheap credit. Did incomes triplebetween '96-'07? No.]

He's presumably using National Accounts aggregates, where wages and salaries comprise 65% of gross household disposable income (GHDI).

If this is the case then it's simply not true to say that 'all income is available to buy houses'.

For example, take the case of our old friend 'imputed owner occupier rent'.

In the National Accounts the ONS conceptually treats every owner occupier as a sort of mini BTL business which commercially rents out its single property. After deducting some costs for R&M the OO is left with a 'profit' which is added to household income under the Gross Operating Surplus category. Later in the computations any mortgage interest is deducted before arriving at GHDI.

Now, it's pretty obvious that the OO doesn't end up with this 'income' as cash in the bank that can then be used to go and buy a house. It's a notional income that is simultaneously consumed when the OO pays his rent to himself.

[Bloo Loo]

He's presumably using National Accounts aggregates, where wages and salaries comprise 65% of gross household disposable income (GHDI).

If this is the case then it's simply not true to say that 'all income is available to buy houses'.

For example, take the case of our old friend 'imputed owner occupier rent'.

In the National Accounts the ONS conceptually treats every owner occupier as a sort of mini BTL business which commercially rents out its single property. After deducting some costs for R&M the OO is left with a 'profit' which is added to household income under the Gross Operating Surplus category. Later in the computations any mortgage interest is deducted before arriving at GHDI.

Now, it's pretty obvious that the OO doesn't end up with this 'income' as cash in the bank that can then be used to go and buy a house. It's a notional income that is simultaneously consumed when the OO pays his rent to himself.

bit like paying, declaring and submitting a return for VAT at Zero rate....its all there in the paperwork, just doesnt actually exist.

[zugzwang]

Why did they fall in the USA then? (I won't include Ireland, because they we constrained by being in the Euro.)

Depends on how you measure income, I guess.

[Damik]

Good article, forwarding to my mother who thinks I should buy.

However, can anyone argue with one of the comments below?

Check Belfast - 50% down and still falling a bit