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Property Ladder

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Many people misunderstand how the property ladder works (or should that be worked) including, I am sorry to say, quite a few on this board. There were two key ingredients:

- high inflation in wages

- a restriction on the initial multiple you could borrow, roughly based on the relatively high nominal interest rates of the time "initial affordability"

The former meant that the value of your loan would always go down, quickly. The latter meant that though your initial payments would be high, after inflation had eaten up sufficient of your loan you could use the additional wages available to borrow more and buy a bigger house.

What was not required was high (relative to wages) inflation in property prices. And although prices went up relative to earnings over the period this is mainly due to cyclicality, if we go from the 1970 "trough" to the 1982 "trough" they have moved barely anything. High inflation relative to wages hinders rather than helps the property ladder.

There were other factors, such as the demographic "baby boom" which

Meant that they key property buying 20-39 age group was the largest it would ever be for most of this period. The baby boomers themselves virtually stopped having children in the mid 70's - something that would have a consequence in decades to come.

During the whole period property prices never fell in nominal terms

(though they did, significantly, both in real terms and relative to wages). High inflation meant that when the market "crashed" you only had to hang on for a year or so until buyers wages caught up with your houses prices. In the two "crashes" (mid 70's and early 80's) transactions fell, but nominal prices didn't. The mantra became that you couldn't go wrong with property. This was wrong.

Key message: The property ladder was king. The first determinant of

What sort of house you could afford was how much equity you had built up? Within your cohort (position in income relative to others of a similar age with similar property "experience") then your relative income would be a determinant.

Now, 1990 - 1994 was a terrible period, because house prices fell in

Nominal terms for the longest sustained period since the Second World War. The reasons they did so are manifold, and explained with clarity by myself and others on many occasions.

After this period most "experts" thought that we had learned our lesson

And we would never see another property boom. One reason was that

Favorable demographics had now gone. Another was that the banks wouldn't make the same mistakes again. Growth in home ownership stalled. Renting became fashionable again (not always out of choice). Briefly even "right to buy" sales came to a halt.

However amongst this gloom and doom an economic shift was taking place.

Inflation, the demon of the last 20 years, was tamed. Interest rates

Became low and stable. Wage inflation was also low and stable.

Key message: By the mid 1990's one of the key pillars of the property ladder

- High wage inflation - was gone

In the period 1995-2004 house prices went up of course, just like they did before. And when they had gone up to much, and borrowers were unable to borrow enough to "get on the ladder", lenders reacted predictably by loosening the "holy grail" of lending constraints - the HPER ratio. They argued that they could so because we had the best of both worlds – the high house price inflation of the cretaceous and the low nominal interest rates of earlier periods. What they didn't realise was that they had just kicked away the other pillar supporting the housing ladder; leaving it hanging in mid air.

The housing ladder isn't just buying a house, seeing it go up, and

Selling it and buying another one. As I have shown before it is the underlying wage inflation, plus a low initial multiple, that creates the ladder. Otherwise all that happens is that the gaps in the rungs get bigger relative to your income. You cannot jump the gap because low wage inflation means your high initial payments are still high. Your equity is useless since you can't use it to buy a bigger house. And with stamp duty thresholds not increased the transaction costs of the property ladder are much higher.

Key message: There was no property ladder in the last boom - just an illusion of one

Most people have been unable to buy houses without large deposits. It

Seems unlikely these could have come out of past earned income given the average savings rate amongst people aged 20-39 (it’s roughly zero). Hence it could have come from unsecured borrowing (in which case, of course, it’s not really a deposit) or from parental housing wealth. In the case of the latter this is hardly altruistic. It is the only way their children (in aggregate) are going to be able to buy afford their houses (in aggregate). Its not going to the generation that follows the children of the baby boomers any good, because the children of the baby boomers won't have the same legacy to pass on; as they will not have anywhere near the equity their parents built up. This one off support to prices can only happen once.

Key message: With no property ladder the vast majority of people will

First buy their "last house". This probably implies a larger role for the rental sector.

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  • 302 Brexit, House prices and Summer 2020

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      • down 5% +
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