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Wealth Not Income Driving Hpi


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HOLA441

Tomandlu - I've really considered this point, where is all the money coming from? Competing with people with inherited property wealth is a factor, but as a main driver, I'd agree with Alex that there's a lot of wealth sloshing around from generations that had cheaper housing costs, and more cash than they actually needed. None of my aquaintances receiving handouts are losing their parents as yet. What's just driven this point home to me was at work just now. Two Cleaning Ladies, well into their 60's, hanging out having a fag together. One says to the other "Yeh, so my daughter needed to buy a property but couldn't afford to get enough of a deposit together, so I've just given her 50k of me own money..." I've gone and sat back at my nice corporate desk, to do my well paid corporate job, while contemplating the fact that I could be outbid by Office Cleaning Ladies.

Heh - yes, I take your point, but this is still symptomatic IMHO. This 'wealth' is just a reflection of HPI. Put it another way, those cleaning ladies would always have had that option - it's just that it would have been 10K, not 50K. People essentially swapping bits of housing for other bits of housing are cost-neutral - they are trading in the thing they are buying. It's swapping hours of labour for bits of housing that's got expensive.

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HOLA442

Two Cleaning Ladies, well into their 60's, hanging out having a fag together. One says to the other "Yeh, so my daughter needed to buy a property but couldn't afford to get enough of a deposit together, so I've just given her 50k of me own money..."

When these ladies were saving money in ISA's etc, the interest rates were 6-10%. Saving over the last 25 years accounts for a lot of the handed down BOMD deposits we're seeing.

The changes in pension pot rules will also release even more money to be gifted to offspring for deposits. And lousy savings rates will make parents even more ready to pass it on, 'rather than make you wait for it'..

Edited by juvenal
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HOLA443

When these ladies were saving money in ISA's etc, the interest rates were 6-10%. Saving over the last 25 years accounts for a lot of the handed down BOMD deposits we're seeing.

Exactly. I found an old ISA statement and I was getting 6% interest.

Now my savings account pays 1.5%.

My wife's gran had £150k cash in her account (before she went into a home) which was simply the little extra of her pension saved into the account at the end of every month compounded over nearly 30 years of retirement.

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HOLA444
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HOLA445

Two Cleaning Ladies, well into their 60's, hanging out having a fag together. One says to the other "Yeh, so my daughter needed to buy a property but couldn't afford to get enough of a deposit together, so I've just given her 50k of me own money..."

When these ladies were saving money in ISA's etc, the interest rates were 6-10%. Saving over the last 25 years accounts for a lot of the handed down BOMD deposits we're seeing.

The changes in pension pot rules will also release even more money to be gifted to offspring for deposits. And lousy savings rates will make parents even more ready to pass it on, 'rather than make you wait for it'..

True - and yet another HPI-related shafting from both ends. Now we have lousy rates (due to 2008) and high prices that are pulling this money out into the daylight. And, when it's gone, what happens next?

https://www.youtube.com/watch?v=DOUC_D2DAn8#t=788

Edited by tomandlu
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HOLA446
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HOLA447
....Two Cleaning Ladies, well into their 60's, hanging out having a fag together. One says to the other "Yeh, so my daughter needed to buy a property but couldn't afford to get enough of a deposit together, so I've just given her 50k of me own money..." I've gone and sat back at my nice corporate desk, to do my well paid corporate job, while contemplating the fact that I could be outbid by Office Cleaning Ladies.

This doesn't surprise me at all. That generation were taught to save and save they did. Those of us born later will be more inclined to spend it and you youngsters are the "I must have it now" generation. You only have to look at all the grey tops with campervans and big caravans to see there is money swilling about.

I sold up (London) in 2004 to move away and have rented ever since (largely because we didn't know if we were staying put as much as anything) If I had stayed in London my BoE tracker mortgage would have been about 300 quid a month on a three bed house. (yeah I got that all wrong I know - I should have joined the landlords and rented it out.....) My rent now is £800pcm (two bed house, south coast). You can soon stack a bit away if you have the extra 500 quid a month. Imagine your cleaning ladies paying off their 5 grand mortgage and you can see the extra cash rolling in easily.

Now imagine you are a bank and you can see all those not-so-bright working class people with a nest egg in the savings account. How do you get your grubby little mitts on it? Easy: get them to hand it over for the kid's deposit........

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HOLA448

It's swapping hours of labour for bits of housing that's got expensive.

In a sentence that's whats gone wrong. Your career or business is really a whole succession of service events which you hope to trade for a capital event buying a house. What's happening now is wrong and can only end badly.

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HOLA449

In a sentence that's whats gone wrong. Your career or business is really a whole succession of service events which you hope to trade for a capital event buying a house. What's happening now is wrong and can only end badly.

I have been thinking about this in terms of Piketty's findings and the consequences for housing costs for the young are truly terrifying.

In the 1950's and 60's, the UK's capital to income ratio was 2.5 : 1, meaning that it took 2.5 years of workers work to purchase all of the UK's capital stock. Note that the UK's housing makes up a significant part of that stock. Also note that this almost perfectly corresponds with the historic low for the cost of housing relative to income. Piketty's data shows that for a while thereafter the capital to income ratio remained constant, and we know from other sources that though the cost of housing did rise a bit it remained fairly low. The capital to income ratio was kept in check via high wage rises and high taxes on capital. Returns to capital are mostly reinvested into capital thus high taxes on those returns kept capital to income ratios, including housing, low. You might think that it was because we built so much housing but remember the capital part is the site value not the cost of building, and it was this that was kept in check.

But in the 1980's all that changed dramatically. Taxes on capital were substantially reduced, wage rises for average workers and below either dropped or almost completely stagnated, and incomes for the wealthiest who save significant fractions of their income rose dramatically. Thus capital to income ratio's rose from 2.5 : 1 in the 50's and 60's to 5 : 1 in 2010. Now this does not necessarily mean house prices will immediately rise since there are other forms of capital that that money can flow into. But if those other forms become less attractive relative to housing (as has happened), then house prices will inevitably rise as the asset rich buy into housing. Moreover, general economic theorem tells us that a rising capital to income ratio will always manifest as rising house to income ratios at some point, since money flowing into other assets will depress the relative return of those other assets making housing more attractive.

Now here is the terrifying bit : Piketty's data shows that for the 200 years prior to the first world war the capital to income ratio was 7 : 1 and we are going back to that. Meaning that eventually unless you are a scion of one of the wealthy, all youngsters will eventually be priced out.

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For some reason I cannot insert the graph showing the UK's capital : income ratio, but I can the one for Europe as a whole. The one for the UK has few differences so you can approximate the europe trend line as being the same for the UK.

So even if the mortgage based housing market crashes, there will still be a continually growing trend of the asset rich buying up more and more of the housing stock. So though housing might become cheap for a bit, if nothing changes as time goes on more and more of it will find its way into the hands of the asset rich to be rented back to the priced out masses. We will return to a rentier society. But this all begs the question of what will the young do if/when/as this happens, the 1800's were a time of severe social strife after all...

Edited by alexw
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HOLA4410

I think the only way incomes are going for quite some time is down.

TV/Internet and advertising of desirable goods/lifestyles may well backfire on the elite.

As the cost of living rises and desirable goods/lifestyles become more and more unaffordable for more people then I think social strife will increase.

Most people just want a decent place to live, a decent standard of life and something left over to have some fun. I wouldn't expect people to settle for anything less

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HOLA4411

Now here is the terrifying bit : Piketty's data shows that for the 200 years prior to the first world war the capital to income ratio was 7 : 1 and we are going back to that. Meaning that eventually unless you are a scion of one of the wealthy, all youngsters will eventually be priced out.

We will return to a rentier society. But this all begs the question of what will the young do if/when/as this happens, the 1800's were a time of severe social strife after all...

I'd like to hope they/we could vote for a radical change. It was after the first world war in 1918, that the first general election was held, allowing all men over 21 and all women to vote. Prior to that most poor were excluded (conveniently). If I've read your chart correctly, the income to capita ratio drastically improves at that point, although it shows European rather than UK data.

Edited by Starla
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HOLA4412

I'd like to hope they/we could vote for a radical change. It was after the first world war in 1918, that the first general election was held, allowing all men over 21 and all women to vote. Prior to that most poor were excluded (conveniently). If I've read your chart correctly, the income to capita ratio drastically improves at that point, although it shows European rather than UK data.

The UK chart is almost exactly the same as the European one, for some reason I could insert the European chart but not the one depicting the UK capital to income ratio. I just went back and edited my previous post to show that.

Edited by alexw
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HOLA4413

It's not real wealth so cannot keep the market going in perpetuity. It's working for certain people at the moment but when the music stops their paper 'wealth' will disappear. They can only make it real by cashing out now.

Quite. The people I know who have bought bigger homes have been ploughing unearned equity in to make it fly. Their incomes don't come close to cutting it.

A lot of people have houses which they have little hope of finding a buyer for.

Edited by The Knimbies who say no
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HOLA4414
......

Now here is the terrifying bit : Piketty's data shows that for the 200 years prior to the first world war the capital to income ratio was 7 : 1 and we are going back to that. Meaning that eventually unless you are a scion of one of the wealthy, all youngsters will eventually be priced out.

...

Alex, your analysis and understanding is impressive. The simple truth is that the post war period was a time of great confidence and improvement for the working class. It represented a shift away from the heavily class oriented society that had grown out of feudalism.

We are now witnessing the swing of the pendulum back to the élite and the so-called 1% (fewer in truth). Living standards are falling for the majority and remain heavily under pressure whilst the wealthy continue to enjoy a rising income and a rising standrad of living. Piketty simply explains why - capital generates real money whilst work produces ever diminishing reward. This is not exactly new or rocket science. If you invest 2 million you can live off it and do nothing. If you work as a cleaner part time you will need help from the state.

The greater the capital value of housing the greater the advantage to owning it. As it's capital value grows so too does the barrier to entry of new owners. By devaluing labour you further increase the inability of the person selling their labour to buy the capital asset. Labour can be devalued both by widening the competition (globalisation) or by mechanisation.

The issue is what will change this trend? So far I can see nothing.

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HOLA4415

Quite. The people I know who have bought bigger homes have been ploughing unearned equity in to make it fly. Their incomes don't come close to cutting it.

A lot of people have houses which they have little hope of finding a buyer for.

I've been thinking some more on this in the context of Piketty's work, which has got me thinking on now vs the past and its relation to housing costs vs wealth.

Like the vast majority here I've been (until reading Piketty) looking at the graph of house prices vs incomes thinking this, the last 50 years or so, is the norm. So housing should be ~3x incomes, and it will always and inevitably go back to this. But the historical norm has been housing, and by this I really mean land prices, being many multiples of what the average person can afford.

So when you and i and everyone else say what you are saying above, in reality we are just looking at a small window of time, and then taking part in a group thinking exercise.

Now it's true that the cost of housing will most likely fall for for now because so much of it is currently based on mortgages. But going into the future as housing ownership becomes more concentrated, the owners will not be selling to downsize or pay for old age, they will be holding on to it as a form of capital accumulation, and an income stream. So in the future house prices won't be 3x income they will be the based upon the return vs other asset classes, and as more money chases fewer assets (this happens naturally as the income streams of capital become concentrated - fewer assets come onto the market instead they are held), the price of housing will as with all other asset types, rise to their historical average of 7x average income. As an example of this in action simply look at the duke of westminster, who has just offloaded some of his extreme bubble priced central london property in order to increase his overall holdings, by buying less-bubble priced properties (housing) to rent out elsewhere.

Of course all this is with the added caveat the masses allow this to happen, and don't revolt, etc, which is why I am still hopeful.

Edited by alexw
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HOLA4416

Problem with the accumulation/income slant is that property is already a pisspoor investment on that front for many. eg I've mentioned an anecdote recently about neighbours of people I know who rather than selling their home for the circa £300k it might be expected to get in the current market, they are going to let it out and buy another one regardless to move into, probably get around £850/month looking at what is available nearby. £300k of extra borrowing to chase 3% gross yield.

They are just doubling down on expected HPI to help them out of a hole on the new place, at the expense of monetising their unearned equity to date.

Unfortunately they don't seem to have considered that a 4 bed detached on a main road, a growing list of maintenance issues and an asking price of over 8* national average household incomes has very little headroom, price wise.

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HOLA4417

I think the only way incomes are going for quite some time is down.

TV/Internet and advertising of desirable goods/lifestyles may well backfire on the elite.

As the cost of living rises and desirable goods/lifestyles become more and more unaffordable for more people then I think social strife will increase.

Most people just want a decent place to live, a decent standard of life and something left over to have some fun. I wouldn't expect people to settle for anything less

The whole consumer lifestyle has been pimped as being the 'ultimate answer' to happiness .. which kind of worked when the economy was roaring and people were willing and able to take on massive amounts of debt to 'live the dream'. Indeed, during the boom years just about everyone could enjoy the celebrity lifestyle - for as long as the cheap credit was flowing.

Now that the population in general is so saturated with debt that they can't take on any more to keep up their lifestyles and many people are seeing a reduction in their standard of living, it's not playing so well and is helping to foment discontent.

For all that though, just try going to a second or third world country and seeing how much the consumer culture has permeated even there, where people realistically are never going to be able to afford it. People really believe that the road to happiness is through expensive brand name goods. The propaganda is strongly established.

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HOLA4418
.... So in the future house prices won't be 3x income they will be the based upon the return vs other asset classes,....

That makes current house prices 30% or more over what they should be. A correction is still inevitable. Prices tend to overshoot and once falling prices becomre reailty then sentiment will turn as well. However, the current lunacy can continue for longer than many would-be buyers can afford to wait.

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HOLA4419

Problem with the accumulation/income slant is that property is already a pisspoor investment on that front for many. eg I've mentioned an anecdote recently about neighbours of people I know who rather than selling their home for the circa £300k it might be expected to get in the current market, they are going to let it out and buy another one regardless to move into, probably get around £850/month looking at what is available nearby. £300k of extra borrowing to chase 3% gross yield.

They are just doubling down on expected HPI to help them out of a hole on the new place, at the expense of monetising their unearned equity to date.

Unfortunately they don't seem to have considered that a 4 bed detached on a main road, a growing list of maintenance issues and an asking price of over 8* national average household incomes has very little headroom, price wise.

You are looking at it from a short term perspective. Lets say the market crashes. At that point both capital and potential first time buyers will enter the market. Some of those houses will go the first time buyers, and some to capital to be held more or less in perpetuity via family holdings. Repeat this cycle again and again and eventually all is held in the hands of capital.

So in the short term I agree with you, but not in the long term, not with the direction society is currently traveling.

Edited by alexw
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HOLA4420

I suppose for every Duke of Westminster or Rothschild, there are countless forgotten others who took a sudden bath or is/was in the process of slowly losing it all. Plenty of formerly powerful family seats are now reduced to flogging their art and other assets and allowing the great unwashed through the door for tours in order to repair holes in the roof etc.

I guess what we're getting at is Buffet's mantra about holding stocks 'for infinity' being the best strategy. I happen to think he's dead wrong about that.

That said, the direction of travel in my lifetime has been firmly in favour of unearned equity and inheritances, not good imo. It'll change at some point.

Edited by The Knimbies who say no
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HOLA4421

I've been thinking some more on this in the context of Piketty's work, which has got me thinking on now vs the past and its relation to housing costs vs wealth.

Like the vast majority here I've been (until reading Piketty) looking at the graph of house prices vs incomes thinking this, the last 50 years or so, is the norm. So housing should be ~3x incomes, and it will always and inevitably go back to this. But the historical norm has been housing, and by this I really mean land prices, being many multiples of what the average person can afford.

So when you and i and everyone else say what you are saying above, in reality we are just looking at a small window of time, and then taking part in a group thinking exercise.

Now it's true that the cost of housing will most likely fall for for now because so much of it is currently based on mortgages. But going into the future as housing ownership becomes more concentrated, the owners will not be selling to downsize or pay for old age, they will be holding on to it as a form of capital accumulation, and an income stream. So in the future house prices won't be 3x income they will be the based upon the return vs other asset classes, and as more money chases fewer assets (this happens naturally as the income streams of capital become concentrated - fewer assets come onto the market instead they are held), the price of housing will as with all other asset types, rise to their historical average of 7x average income. As an example of this in action simply look at the duke of westminster, who has just offloaded some of his extreme bubble priced central london property in order to increase his overall holdings, by buying less-bubble priced properties (housing) to rent out elsewhere.

Of course all this is with the added caveat the masses allow this to happen, and don't revolt, etc, which is why I am still hopeful.

I've nearly finished reading Pikety, but I don't recognise the quote, "the price of housing will as with all other asset types, rise to their historical average of 7x average income". Yes he talks about capital being x7 national income, but that's a very different thing from houses being x7 average earnings. Can you point to where in the book he says this, maybe I missed it?

Incidentally, I'm as dubious as you about the view that houses will eventually revert to x3 average earnings, but my scepticism doesn't stem from Pikety. Rising ratios of house prices to earnings are a function of low interest rates, joint mortgages, restrictive planning regulations etc, rather than some kind of historical norm. Incidentally, in Britain in 1900 the average rural home was about x1 average earnings and the average urban home was a little less than x1.5 average earnings. I'm not saying that house prices at x7 earnings won't become the "new normal", but that I don't see any historical/long run justification for it.

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HOLA4422
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HOLA4423

I haven't read Pikety but the notion of a return to Victorian levels of inequality and worse sounds credible. We simply have to broaden our idea of what constitutes an acceptable domicile.

It's not that much of stretch, really. In fact, most of the world is way ahead of us.

6a0120a85dcdae970b0120a86da353970b-pi.jp

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HOLA4424

How many families are single child ones? And how much of this inheritance will get swallowed by care-home fees?

This is an interesting point..

Imagine that private BTL companies/trusts will buy pretty much any property at 4-5x average incomes.

Every time an owner dies, there is a very good chance that the house will not be directly inherited - it will have to be sold for care home fees, possible IHT or just splitting the inheritance. And a lot of those houses will end up with big BTL 'trusts'. So single-house estates, or people with a house and 1-2 BTLs are unlikely to be passing them all on. Only those rich enough to have a large BTL company and creative accountants to avoid IHT will persist, and they are likely to grow as well.

This would mean you'd never see a HPC, since as long as supply is restricted, these big BTL companies will set a high clearing price.

And these companies are likely to pay lower interest rates on borrowing than normal people. Even if IRs are hiked, you can bet that there will be a 'restructuring deal', in which the set of properties stays off the market.

Such a situation may well come to pass over the next few decades unless there is specific government action to stop it.

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HOLA4425

Every time an owner dies, there is a very good chance that the house will not be directly inherited - it will have to be sold for care home fees, possible IHT or just splitting the inheritance.

This is why potential property inheritances are such a poisoned chalice. Even if you stand to inherit property, it's still in your interest to want lower prices.

As for the second part of your scenario, I guess it depends on whether we let it happen or not, and - I suppose - whether it's necessarily a bad thing or not.

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