Think Tank Says Boe Should Have Ratio Of House Prices To Wages As A Target

[eek]

From a very badly written Guardian article there is the gem of an idea

http://www.theguardian.com/society/2016/jun/11/jeremy-corbyn-right-to-buy-plan-backed-by-thinktank

.....In a report to be published on Monday, the pro-market organisation Civitas also argues that the Bank of England should be placed under a statutory duty to keep the ratio of average house prices to average earnings within a defined range, in order to help control demand and limit price rises.[/size]

Support for such far-reaching policy shifts is evidence of deep concern among experts that the housing market is failing so called generation rent those people, mainly in their 20s and 30s, who are increasingly unable to get a foot on the ladder as prices soar.

The reports author, Peter Saunders, a research fellow at Civitas, says generational inequality has deepened over the last two decades as house prices have raced ahead of earnings. The result is that the younger generation is now expected to pay a much bigger multiple of its earnings to buy a home than its parents did, he says.

The baby boomers are now making capital gains at the expense of their children......

So the question is should banks be allowed to lend on affordability (which allows prices to rise as interest rates drop due to monthly costs being lower) or actual average price / wage ratios....

[Granit]

http://www.civitas.org.uk/publications/restoring-a-nation-of-home-owners/

Report is here, I haven't finished reading it yet (170 pages) but it's a good read so far.

[Frugal Git]

Thanks granit - just had a skim of the start. The premise seems to be from a good place - the basic send I get is that the author thinks houses are for living in, which is of course a novel idea these days in most media reporting.

The more things like this that are published the better.

[Frugal Git]

Though I'm not sure where I sit with any right to buy for private tenants. Right to buy ending altogether is a great idea - it's lunacy.

In this plan landlords are more or less made whole. Better to concentrate on making new lending more realistic (require a 20% deposit and 3 x primary + 1 x secondary max 25 year term mortgage - that's a finger in the air affordable at historical avg rates) and let the market do it's thing.

You can still lend at current rates (until a market event rectifies those) though - why not? Then things are very affordable and call it justice for a generation that's up to their eyeballs in student debt, are generally paid terrible wages and have no prospect of the pensions that previous gens have.

[eek]

Though I'm not sure where I sit with any right to buy for private tenants. Right to buy ending altogether is a great idea - it's lunacy.

In this plan landlords are more or less made whole. Better to concentrate on making new lending more realistic (require a 20% deposit and 3 x primary + 1 x secondary max 25 year term mortgage - that's a finger in the air affordable at historical avg rates) and let the market do it's thing.

You can still lend at current rates (until a market event rectifies those) though - why not? Then things are very affordable and call it justice for a generation that's up to their eyeballs in student debt, are generally paid terrible wages and have no prospect of the pensions that previous gens have.

Can't fault that. The only thing HMG would need to do would be to ensure Landlords cannot price out house buyers... (Extra stamp duty will beyond the 3% would be one solution)...

[zugzwang]

The author shows no real understanding of how successive UK govts have used hpi and (latterly) mass immigration to compensate for indigent economic growth. The historical ratio of affordability he quotes is not 4.5:1. And what's to stop aggrieved landlords from simply evicting their long-term tenants?

[Bland Unsight]

The author shows no real understanding of how successive UK govts have used hpi and (latterly) mass immigration to compensate for indigent economic growth. The historical ratio of affordability he quotes is not 4.5:1. And what's to stop aggrieved landlords from simply evicting their long-term tenants?

Holy Crap, I thought I could read quickly!

[999house]

State the obvious. I should run a think tank.

[Bland Unsight]

State the obvious. I should run a think tank.

Quite interesting to contrast the analysis in the introduction to the Civitas book with the analysis in the Kent Reliance Buy-to-let Britain. (I'll leave it as an exercise to the reader to work out which is which.)

The main causes of our problem have been on the demand side. The failure to control the explosion of credit from the late 1990s onwards grossly inflated house prices, and the historically low cost of credit since 2008 has kept them inflated and prevented the price correction which is necessary to restore the link with earnings (as occurred in the three previous house price booms). The growth of buy-to-let has further fuelled demand, and this has been reinforced by an influx of foreign money into the luxury London market, the strong growth in immigrant numbers, and an increase in the number of parents’ drawing down their own housing equity to help their children buy.

Source (Emphasis added.)

Driven by a political agenda that prioritises home ownership and a view that Buy to Let is harmful to the UK’s housing market, property investors are seen as the scapegoats for the nation’s housing issues, whilst regulators are turning their attention to the lenders that support the market. This constant focus on managing demand does nothing to address the real issue, which remains the lack of supply of new housing.

Source (h/t Freetrader, emphasis added)

[Dorkins]

Can't fault that. The only thing HMG would need to do would be to ensure Landlords cannot price out house buyers... (Extra stamp duty will beyond the 3% would be one solution)...

HMG could also eliminate mortgage interest relief for landlords at the basic rate of income tax instead of just the higher rate as is currently planned.

[Rigged]

HMG could also eliminate mortgage interest relief for landlords at the basic rate of income tax instead of just the higher rate as is currently planned.

Clearly the Tory party are looking out for the small landlords whose couple of BTL's are their pension.

Wouldn't want to rock the boat when you can tax someone who can't afford to buy a house or put money into a pension vast sums for manual labour.

Wonder if people on here will still vote Tory now they've shown they're out to protect landlords.

Edited June 12, 2016 by Rigged

[oracle]

Combined with a ban on buy-to-let lending on existing property, it could work....except for "getting credit into the economy".

So, need to change the monetary system to full reserve banking too I guess.

no need to ban buy to let. having a holiday home is nice, provided it does not adversely impact the local economy.

just tax multiple on domiciles other than primary residence....increasing with number of properties owned.(via land registry)

payable by owner, not occupier.

[renting til I die]

http://www.civitas.org.uk/publications/restoring-a-nation-of-home-owners/

Report is here, I haven't finished reading it yet (170 pages) but it's a good read so far.

Thanks for the link. Just finished reading it. Not a bad read but someone has already said that it was stating the obvious, I agree. Some good background there though and I think I will push anyone telling me to buy to read it!

The discounts they would have to offer to their tenants would merely share out some of the windfall gains they have been making over the last decade or two as a result of the exceptional circumstances surrounding the long fourth house price boom.

From the summary on RTB for private tenants. I think Peter is grossly underestimating the sheer greed of the people farmers!

[Granit]

Yeh I think the proposals are pretty interesting but the background is a good read independent of that. There were plenty of things I didn't know in there.

Maybe this is already well known by the forum but I didn't realise quite how dominant foreign ownership is in London. From pg89:

Only 40 per cent of buyers in prime central London in 2013 were from the UK (and 60 per cent of the sales were for cash).

In the year ending June 2013, half of all £1m+ sales of residential property in prime central London went to non-UK nationals, with 28 per cent going to non-residents….seven out of 10 London houses sold for £5 million or more go to foreigners.

Fewer than half of (foreign buyers) use their UK property as their main residence. One in six buy as an investment and never live in it.

If the anecdotes of foreign buyers fleeing London en masse are true (latest RICS report has a few of those anecdotes) then PCL is ******ed

from overseas: seven out of 10 London houses sold for

£5 m

[happyrichie]

what a terrible idea, every thing the government does is shit, if it targets 10x income per house we will be lucky if they plateau @ 20x income. if they did this the only people who would be buying houses would be criminal foreigners. stop asking government 2 do anything, remove them out of the way and watch prices crash

[Bland Unsight]

Maybe this is already well known by the forum but I didn't realise quite how dominant foreign ownership is in London. From pg89:

If it ain't earnings, it's credit. Except in London, in which case it's partly foreigners.

Edited June 12, 2016 by Ghost Bird

[thewig]

Mmmm.. thinky tanky... BABY!!

[Bland Unsight]

Finished the book which is the source for the article in the OP, Restoring a Nation of Home Owners. Interesting how it takes sides on a number of issues that come up on here time and time again.

With regard to the question of whether the key driver of prices is lack of supply of housing (relative to what I think of as 'demographic demand', i.e. the number of households that want a house) or credit he jumps with both feet onto the credit side of the argument.

On the question of where we are in the credit cycle in housing, he takes the position that as house prices have not yet adjusted back down to their historical relationship with earnings we are effectively in a bubble that hasn't burst yet (i.e. 2008 was a temporary slump, and not a bubble bursting).

Also he's got no time for the abomination that is Help to Buy, in any of its incarnations.

What struck me as amusing is that this books shows that many of the views on here which property bulls elsewhere attribute to jealousy or bitterness are actually increasingly conventional and are to be found being voiced even by older, property rich right-of-centre think thank authors.

My main reaction to his idea of a private sector right-to-buy to winkle the BTL investors out of the market is that it would be a hell of a lot easier just to have massive property crash during the next recession and let LTV 'margin call' clauses and arrears take care of the rest, though I guess it would somewhat damage the credentials of Civitas as a sober think tank if they volunteered "HOUSE PRICE CRASH!!!!!" as a policy.

Saunder's previous book A Nation of Home Owners (Unwin Hyman, 1990) focuses a great deal on the role of capital gains and the expectation of capitals gain in how housing behaves as part of the economic machine and how prices actually get set.

In the (much shorter) 2016 Civitas book Saunder's argues that in the past house prices rose reflecting the growth of GDP, but workers wages rose too and thus for each new cohort housing was as affordable as it was for their predecessors and in due time they too enjoyed healthy gains. He contends that this relationship has broken down. By his argument, property, ultimately land, enjoys gains reflecting the economy's growth, but now an ever greater share of younger cohorts are priced out of getting a seat at the table and using their share of the land to capture a corresponding share of the gains. If I understand matters correctly, an excellent and (from my point of view) much missed HPC poster, northshore, made this point forcefully and repeatedly in his posting.

If I might add my own mad BTL obsessed take on things pre-1996 we'd basically settled for a system where everyone apart from the lowest socio-economic strata could get on the mystical ladder and then enjoy how land captured the fruits of growth. Post the financialisation of housing and the growth of BTL that ecosystem has been disturbed and an increasing number of better off members of younger cohorts (who feel that they are entitled to their share of the winnings) find that a BTL investors has priced them out, is collecting their winnings and using their wages to service the debt financing the BTLers position.

I guess there is an issue about trying to remove the mote in your brothers eye whilst passing over in silence the matter of the log in your own. Is BTL is merely an aspect a larger problem, which is allowing the fruits of growth to flow to land and not to labour?

Of course, I still f**king hate BTL because they are going mad for the f**ked up system and their labour consists largely of taking on debt to prop it up.

Edited June 23, 2016 by Ghost Bird

[Parkwell]

Is BTL is merely an aspect a larger problem, which is allowing the fruits of growth to flow to land and not to labour?

BTL, specifically leveraged landlords, is the unsightly cancerous wart on the face of a larger problem IMO. Removing it will help significantly but the battle for a better housing market and improving it’s relation to the economy doesn’t stop there.

Mortgage credit is still too readily handed out to buyers. The planning system is woeful. Another subject that used to come up here more often is land tax. I would like to see us experiment with moving away from consumption/transaction/income taxes and introduce a land tax. Start by picking off low hanging fruit like the ridiculous council tax.

For now though, BTL is the lowest hanging fruit and there is thankfully signs of it being culled. Unfortunately nowhere near fast enough. We already have a lost generation of home owners.

[Bland Unsight]

BTL, specifically leveraged landlords, is the unsightly cancerous wart on the face of a larger problem IMO. Removing it will help significantly but the battle for a better housing market and improving it’s relation to the economy doesn’t stop there.

Spot on! (No pun intended.)

[lastlaugh]

Is BTL is merely an aspect a larger problem, which is allowing the fruits of growth to flow to land and not to labour?

This.

Luckily the landowners only get one vote. We'll get a taste of just how much the fruits of growth can flow to land when the results come in later.

[Frugal Git]

Spot on! (No pun intended.)

I met a girl this week from Scandinavia. First date as it were.

Within the first 15 minutes, she brought up how ridiculous Cambridge housing was - and then whispered the words ....

'Someone told me something unbelievable the other day .... it it true people here buy to let?! With mortgages! F*cking scum! How can this happen??'

I'm in love.

[Bland Unsight]

I'm in love.

She's a keeper!