How owning a home in Britain became a luxury

This week I’m taking a look at how low interest rates have distorted the UK economy.

Today I want to take a look at the one financial topic that pretty much everyone in the UK has an opinion on.

House prices.

The housing crisis is all about supply and demand – of credit

Our current housing crisis is fundamentally down to low interest rates. That’s not to say that there aren’t other issues – physical supply and demand, the favourable tax treatment of land and property, constant counter-productive government interference – but at the heart of the housing crisis is a simple fact: if you pump more money into a market, then prices will go up.

The economics are not hard to understand. Let’s take a really simple example (and it is simple – the point is not to be realistic, just to demonstrate the colossal impact of falling interest rates, because lots of people still can’t seem to get their heads around the fact that solving this isn’t simply about throwing up a load more houses).

Let’s say you can afford to pay £1,000 a month on accommodation. At 10% interest rates, that amounts to a mortgage of just under £110,000 (on a 25-year repayment basis). At 2% interest rates, it’s roughly £235,000.

At first you think: “Wow! I can afford to buy TWICE as much house!” But you can’t. Because everyone else has access to the same mortgage range as you. So all you can do is pay twice as much – for the same house.

Now, say the person you are buying from bought their house for £110,000, back when rates were at 10%. They’ve paid a fair bit off the mortgage, and built up maybe £50,000 of equity, say. You pay £235,000 for the house. They pay £60,000 to the bank. That leaves them trousering £175,000.

They go to buy their next house. They can’t afford a bigger mortgage payment – just the same £1,000. But they can stick a £175,000 deposit down. And they can now borrow £235,000 as well. So they can buy a house for £410,000.

Throw in ever-increasing levels of leverage (as interest rates fall) and eventually you get to a point where prices are so high that saving enough for a deposit – even a starter home – becomes almost impossible.

And over time, as long as prices continue to rise, then what really begins to matter – far more than your income – is your ability to access equity stored on a prior rung of the great property Ponzi. This can be equity in your previous house, or equity you’ve borrowed from someone else’s house (hence the bank of Mum and Dad).

This is why home ownership in the UK has fallen sharply (it’s at a 30-year low). Potential new owner-occupiers have been locked out of the market, leaving only buy-to-let investors (who can leverage up existing equity).

The distance between “rungs” also increases, meaning that more recent homeowners cannot afford to upgrade, which impinges on labour mobility.

How can we get out of this mess?

Now, this might not matter so much if renting in the UK were on a par with ownership – in other words, if renting were a viable long-term option both financially and in terms of security. But it’s not.

I realise that lots of landlords are good landlords and I realise that a lot of landlords out there have suffered from nightmare tenants. So I’m not interested in getting into an evil landlord versus lovely tenants mudslinging match here.

The point is that in the UK, renting is an insecure form of tenure, where the balance of risk is on the tenant. If you want a semi-permanent base – ie you want to have kids and send them to local schools and settle down and all the rest of it – then you have a lot more security owning your home.

So most people aspire to own one before they have families. This is having the additional unfortunate effect of delaying household formation – ie people getting married and having children.

How can we change this? Increasing the tax payable by buy-to-let investors will help, in as much as it reduces the competition for first-time buyer properties, but it’s not going to increase affordability in a massive way.

Imposing capital gains tax on primary residences (as is being kicked about in various policy circles, though it’s still a politically toxic idea) would help, in that it would reduce the quantity of fresh equity being rolled over into new properties. It would also help British people to stop seeing their homes as a savings vehicle as well as a place to live in.

There are also good arguments for imposing taxes designed to discourage sitting on unproductive land or property – ie higher council tax for empty properties, and disincentives to hoard land.

The wishful thinking option

But the only answer right now that doesn’t involve a major slide in house prices (which would probably batter the economy and the financial system all over again) is rapid wage inflation combined with static or gently falling house prices.

Is that likely? I certainly think that a gentle rise in interest rates at this point could help, by drawing a line under ever-falling mortgage rates. Just enough to help house price expectations adjust to the idea that the days of “real” (after-inflation) gains are gone.

And then if the economy continues to chug along and investment picks up and competition for employees improves – maybe, just maybe, we’ll get an improvement in wages that’s significant enough to both supply a soft landing for the housing market and fuel rising home ownership again.

However, it’s also possible that we get a political shift, resulting in heavy-handed moves that could derail the housing market without improving things very much for the “have-nots”. Jeremy Corbyn could get into power and undermine property rights, for example.

But we could also see more short-term mistakes made by a government keen to get young people onside, but also scared of being seen to drive prices lower. That’s how we got the Help-to-Buy scheme, and I wouldn’t be surprised to see more variations on that theme in the future.

One thing I can say is that this is going to be one of the most intensely political sectors of the market over the next few years. So if you own housebuilders, just beware – as Shore Capital recently warned, keep an eye out for legislation that could affect the sector negatively.

  • DemiSapien

    Prime London peaked in late 2015 taking GBP/USD into account. It is a shame you are suggesting further taxes! Government is a dull tool and while it may damp the price it won’t go to a noble cause it will get sucked into the bottomless pit. It will cause an exodus of cash as further loss of confidence in government takes hold. Rather unfortunately, I think this path is in full swing right now; just put higher interest rates in the mix and the house of cards will look even more shaky.

  • John

    But it’s not a UK wide problem. We purchased our house in 2009 for £320K and according to Nationwide’s Property Value calculator it is only worth about 2% more now. However if I put the same purchase date and price in for a property in London, it has increased by c£400K over the same period.
    The issue is largely a London and SE problem which has put a massive amount of “wealth” in people’s pockets for no effort or reason other than supply and demand. However it has also created more of a “them and us” scenario where some become significantly wealthier and others don’t purely based on where they live.
    For the good of the whole of the UK, jobs, people and wealth need to be spread more evenly otherwise solutions will have to be applied to specific areas of the country and these will either exacerbate the problem or create unrest or unease because it will be considered unfair on those effected.
    I would be in favour of allowing the reins on inflation to be loosened a bit and for interest rates to increase and dampen the property market but that alone will only postpone the inevitable need to tackle the London/SE v Rest of the UK wealth issues.

    • DemiSapien

      It becomes a UK problem as finance has everything is to do with world capital flows. But why should we try to make everyone have the same amount of wealth? I was not born the fastest runner, we will never be equal in any manner. Certainly, government is a useless tool to redistribute wealth – it has never been able to do so; even the sniff of it blows up the economy that gives the jobs.

  • Aaron Stack

    Liked this article until the discordant anti-Corbyn comments at the end. Please get a grip. The one and only way we could even possibly reach Stepek’s wishful thinking scenario would be a Labour government. There is no chance whatsoever of any sensible economic policy from the Conservatives. let’s face it, apart from Ken Clarke (perhaps), there never was.

    • FriarStuck

      Jeremy Corbyn and his Shadow Chancellor, John McDonnell, are both Marxists.

      Marxists do not believe in private property rights.

      Let me remind you of point number one, on the eleven point action plan contained within the Communist Party Manifest of 1848:

      1. Abolition of property in land and application of all rents of land to public purposes.

      It’s not unfair of this article to mention that Corbyn would weaken property rights (as a proposed solution the housing crisis), since that is what Marxists believe.

      • Ben Jamin’

        How can anyone have a property right over part of the Earth? I understand that it was as common for people in England to own slaves as we own houses now. And they had exactly the same view of property in slaves as people have in land.

        You should also understand that land taxes are viewed as about as hardcore as capitalism gets by many on the Right, which is why Blue-Socialist Tories don’t like them.

        • FriarStuck

          I understand the motivation for land taxes, but then I’ve also studied the regimes in history where there are no property rights at all.

          If you want to stop people accumulating wealth from idle speculation on land (or anything for that matter), I also think there’s a very good argument for getting rid of central banks artificially setting interest rates, and de-nationalising currencies (some might call this hard core capitalism).

          Finally, quick thought experiment, let’s say a land tax is introduced, and starts taking away the gains of land speculation created by loose monetary policy.

          So far so good, however, what’s to stop moneyed interests from lobbying the government to introduce some byzantine scheme to re-distribute those speculative profits straight back to them?

          Because that’s a pretty good description of how the tax system currently functions.

          • Ben Jamin’

            I guess it could all be collected and redistributed as a Citizens Income.

        • FriarStuck

          Also, the entire financial system was about to implode in 2008, taking all the land speculators (and every other speculator) to the cleaners with it (until the government and central banks stepped in), without the need for a land tax.

          Bad monetary policy + bad social policy does not equate to good policy.

          • heddois

            as usual the poor bail out the rich…

        • FriarStuck

          N.B. Should read “…a pretty good description of the tax and regulatory system…”

        • marylyn ford

          Because it stops people killing each other.

          • Ben Jamin’

            So people haven’t fought and killed each other to control/own a piece of the Earth?

            Not sure what reality you inhabit.

            • marylyn ford

              It stops quite as many people killing each other, I should have said. Invasions of other territories is a different subject.

        • ZetrocUK

          How can anyone have a property right over part of the Earth? Easy. With property rights laws.

          Property rights are the basis of freedom. See “an Englishman’s home is his castle” – one of the simple ideas which led to modern democracy.

          Comparing rights over land with the right to own a human being is ridiculous and deserving of no further comment.

          • Ben Jamin’

            “Comparing rights over land with the right to own a human being is ridiculous and deserving of no further comment.”

            Yes, and we had property right laws to own other human beings. So legality doesn’t confer a moral property right else slavery would still be legal wouldn’t it?

            You say comparing land ownership and slavery is ridiculous, but offer no refutation. Because you know what I’m saying is valid and it proves your beliefs false and immoral.

            But I guess you won’t be adding a further comment. Oh well.

            • ZetrocUK

              Missing the point entirely. Comparing land with a human being is the height of hysterical stupidity. You’re not a university lecturer by any chance, are you?

              • Ben Jamin’

                Where did I compare land with a human being? I didn’t.

                I’m merely pointing out that people justifications for owning land as a property right are exactly the same as those used by slave owners. And therefore if property rights to slaves were found to be immoral then so they are with land.

                Again, I notice you cannot refute this and can only resort to personal insults. That should give you a big fat clue you’ve got things horribly wrong.

                Hope this helps you look at the World differently. It’s never too late 🙂

                • BritBit

                  You’re completely right. We should do away with property rights and simply resort to continuously fighting over use of land at any given time. The system would reward the strongest in the human species and punish the weak, which I personally approve of in terms of evolutionary benefit. I’ll start polishing my guns and keep my fingers crossed for a Corbyn win!

                  • Ben Jamin’

                    Who said do away with property rights? I recommended doing the opposite. Odd.

  • FriarStuck

    Good article!

    Finally after literally tearing my hair out listening to politicians and talking heads vaguely blathering about house/land prices, for well over a decade (never have so many words been spoken by the great and the good in relation to this question, but to never really say anything at all), a succinct summary of why the housing market in the UK is broken.

  • FriarStuck

    p.s. It’s a shame Moneyweek couldn’t have covered why the various government schemes like HTB, FLS, and housing benefit, have also inflated house prices, but I accept this article is mainly about the deleterious effects of low interest rates.

  • Ben Jamin’

    It’s only the capitalisation of land values into rental incomes/selling prices that cause affordability issues for parts of society and dysfunction in the housing market. That capitalisation can be put to an end and problems with housing solved by a 100% tax on the rental value of land. Easy.

    On the other hand we can increase the supply of housing, which will not stop land values being capitalised (although their value will be reduced by a fraction), so will not solve affordability issues. It would also add costs to our economy and add to existing inefficiencies in our housing market.

  • jaizan

    When people move jobs, they frequently have to sell the house and move to another one. Not so much if you work in a mundane job, but for anything professional, companies looking for similar skills can easily be 60 miles up the road.

    Capital gains tax on property would inhibit free movement of labour and therefore damage the economy.

    With stamp duty, there is already too much taxation on labour mobility.

    To cure the housing crises, I suggest:
    1 Increasing interest rates
    2 Regulate the rate of immigration & ensure house building is fast enough to match demand.
    3 Move a few government functions out to places like Middlesborough, to even out the housing demand.

    Also, they have already adjusted the taxation in buy to let. Largely making it uneconomic, but the forthcoming increases in interest rates may make more landlords see sense.

    • marylyn ford

      You would have to do land reclamation on the Dogger Bank.

      • crazydave789

        north sea not that deep, reclamation is a viable option if we followed the dutch model.

    • ZetrocUK

      CGT on profits would inhibit free movement far less than the current regime of higher and higher prices. It would replace other property taxes, so the only significant cost remaining would be moving costs (i.e. furniture, personal effects, etc). And those moving costs would me more affordable because the average person would no longer be paying 60-80% of their take home pay on the mortgage.

      I agree fully that higher interest rates and reduced immigration must be top of the list.

  • 4caster

    In the old days when mortgage tax relief was available at one’s marginal rate of income tax, buying a house was a no-brainer. After the relief was reduced to the standard rate and then abolished altogether, owning one’s home became a close call. Those who stay put do quite well, but for those who frequently move around the country or the world chasing better jobs, owning a property is a millstone around their necks. Stamp duty is the craziest tax, because it is a tax on mobility.

  • sayajp

    FANTASTIC! Complete avoidance of the BIGGEST ISSUE OF ALL, endless, out of control, insane IMMIGRATION, running at 500,000 people a year, year after year after year. OK, that’s nets down to around 350,000 but it’s mostly wealthier people leaving the UK and taking their equity with them, replaced by potless, unskilled, low earners, which is why Labour are loving this chaos, the housing crisis will mostly fall on the taxpayer. This issue dwarfs fantasies about ‘needing to stay in the single market’ – that’s a smokescreen. If we don’t have absolute control of our borders, we just move closer to meltdown. But Britain’s big housebuilders are bunging the Tories big donations, of course they want more more more immigrants.

    • Peter Edwards

      Because a modern state like Britain can not handle a 0.3% a year increase in population from immigrants.

      • sayajp

        What dangerous, utter nonsense.

        • Peter Edwards

          Yes dangerous not to have immigration.

          The Japanese have showed us how not to handle an aging population.

      • marylyn ford

        Did you get your figures from Diane?

      • keveen2

        No we cant handle and dont want 1/2m new people every year even if it was our own national birth rate!

        • Peter Edwards

          We do need them, and we can easily handle them.

          It’s just that some people are so bigoted they would rather cut of their nose to spite their face.

          • keveen2

            Can we have a vote? Who wants the population to increase by yet another 5m in the next 10 years or earlier? That is yet another 5 cities or very large towns. Yet more housing required etc etc and goodbye countryside and wildlife.
            Plus large numbers of immigrants are designed to keep wages low and destroy people power. Immigration is in the interests of big business but not the indiginous population – us! But we dont count.

            • Peter Edwards

              London and other major cities increasing their population does not mean more building in the countryside, when you hear 5 new Cities in the media it’s just a metaphor. It’s possible to build higher.

              And lets face it London and the places with the biggest influx of immigrants (the big cities) pay for the region’s with lowest migration (I will not say they subside for the work shy Natives).

          • George Carty

            “Keveen2” looks like a Malthusian rather than a bigot to me.

  • marylyn ford

    Confine social housing to vulnerable people only, old, ill, young runaways whose home life is dreadful,etc. All renters with 5 years of no arrears and no disputes with neighbours should have an interest only mortgage on freehold or sof properties. Ban non residents and companies apart from expats from owning, do not allow builders etc. to retain the freehold when selling and bring back double rates on empty property. Too many alleged housing charities are competing with first time buyers and evict people faster than private landlords do, anyone who lives in social housing will pay at least five times more than someone with a mortgage over a lifetime. Still, I suppose the poor are expected to keep the rich in the manner to which they are accustomed , and housing quangos are the worst in every way.
    However, if you read the Guardian you will have been Informed that brexit has caused a mad stampede for the exit by all and sundry, which if true would have reduced our population to a more sustainable level.

  • Peter Edwards

    The housing boom was started by the right to buy scheme which started in the early eighty’s

    If the public sector sector was still building the amount of houses it was in the late sixties we would have a much lower ceiling for rents and this would mean that when you follow the money trail BTL would make much less sense, it would have left the market to those who flip house’s a much harder endeavor and far easier for governments to control.

    Right-wing free market fundamentalism is destroying economies….Just like Socialist totalitarianism destroys economies.

  • keveen2

    No mention of the old system of Mutualised Building Societies where you saved up a deposit and banks were not part of the equation for most people. The mess started when Building Societies became banks in the 80s and lending became a free for all resulting in the 2008 world financial crisis due to mislending by the said banks. The societies encouraged saving, probity and self worth for all. (There were other scandals on that road but no lessons learned.)