Wednesday, 16 April 2014

"Your home probably earns more than you"

Nothing really new, but a good headline nonetheless in The Metro:

The average property in Britain now costs £253,000, rising to £458,000 in the capital, the Office for National Statistics said.

A would-be buyer would need to be on a salary of at least £96,308 – which would put them in the top ten per cent of earners in the country – to take home £63,000 after tax each year... [to be able to buy in London]

Oliver Atkinson, from online estate agents, said: "Forget talk of house bubbles. In London, the market is well beyond that – what we’re witnessing in the capital is a super-bubble."

Heck knows if the Lib-Cons will manage to keep this going long enough to get them through the next election.

I hesitate to use the over-used and hence nigh meaningless adjective "sustainable", but whatever that means, this isn't it.


Ralph Musgrave said...

Given that half the population of London are immigrants or children of post WWII immigrants, it’s pretty obvious what the main contributor to excess demand for housing in London is. However anyone mentioning this fact will be prosecuted for “hate speech”. You have been warned.

Issued by the Ministry of PC thought control.

The Stigler said...

Rule of thumb used to be that when housing got near 5 times earnings, the crash was forthcoming and when they hit 2 times earnings it was time to get out.

Out here in the sticks, my hairdresser owns a small house with her tyre fitting supervisor boyfriend. Lots of nice houses being built, computing industry growing rather nicely. Swindon's hitting the size where it's got the size of middle class where it can have a Waitrose and John Lewis.

Other than Chelsea and Sloane Square, I've never really understood the attraction of London.

Steven_L said...

Heck knows if the Lib-Cons will manage to keep this going long enough to get them through the next election.

I think things will continue along this path for a while now.

1) New homes are less than population growth and people need somewhere to live. Unless unemployment picks up rents will increase in areas with jobs. People renting in London will just cram more of themselves into smaller space. This behaviour in itself drives rents up.

2) Short term interest rates can be kept at whatever the BofE / government want. They will be kept at 0.5% until a couple of months after the US Fed has budged, and maybe even longer. Anyway, what is the 'natural' overnight price of money that the government / the banks just print?

3) The government can control longer term interest rates in the economy through open market operations and have shown a willingness to do so on a massive scale through QE and other interventions. They can guarantee mortgage debt to bring the rates more in line with government debt.

4) The only thing they can't control is a decline in the value of sterling, but the USA, the EU and Japan are all playing the same game. They all seem to want currencies to decline against assets. It's difficult to see a 'sterling crisis' forcing up interest rates.

5) As long as 'they' can create a situations where landlords can borrow 75% of the value of a property at 3% and rent it out at a 4% gross yield, that's a 4% return on capital assuming 0 growth in house prices. But land functions more like an inflation-linked government bond and more and more people are starting to realise that and will tolerate very low yields.

6) When this cycle comes to an end (around 2022-25) it will be characterised by a massively leveraged BTL sector operating (at the margins at least) on a knife-edge. Only this time the government will not be able to bail them out via even semi-conventional monetary policy, only by actual mortgage forgiveness, and this would require actaul confiscation of bank deposits, which is unlikely to happen.

7) Then again they might not want to bail them out, they might want institutional money to come in and mop the weak players up.

Steven_L said...

Or have you considered that the homey solution to a future crisis could be minimum rents legislation?

Why is it 'fair' that the tenant pays less than the mortgage to live there risk-free?

Bayard said...

RM, given that there were no nuclear weapons before women had the vote, I would have thought that it's equally clear who is to blame for the imminent nuclear holocaust. However anyone mentioning this "fact" will be prosecuted for “hate speech” and sexism.

Mark Wadsworth said...

RM, most people in London are immigrants, from elsewhere in the UK or from overseas. It's a world city.

TS, most people don't like London, but clearly, seven or eight million people do, and that's enough.

SL, that's a good list, albeit a bit depressing.

Minimum rents wouldn't work because people can still cram in to smaller homes, leaving some landlords with vac ants. But no doubt the government could just pay their mortgage for them.

B, agreed.

Steven_L said...

Housing benefit already sets a kind of minimum rent. You never know, they might decide to extend the concept.

Should the typical middle england swing voter have a BTL or two instead of a pension it might prove a vote winner.

Minimum rents could be quite easily be linked to new council tax bands or similar.

It would stop unfair competition from established landlords and big business, risking the stability of the banking system and the proper functioning of the housing market. It could help drive out rogue landlords and encourage investment in decent housing standards, blah, blah, etc.

I should stop giving them ideas shouldn't I?

Mark Wadsworth said...

SL, yes of course, Housing Benefit, that's what sets the minimum.

But the Tories still think that HB is a welfare payment for horrible poor people and haven't realised that actually it's a subsidy for lovely landowning people.

I wonder how long it will take them to work it out.

Bayard said...

"I wonder how long it will take them to work it out."

Mark, they must have already realised it. Why do you think HB hasn't been brutally slashed? (like it ought to be).

Mark Wadsworth said...

B, I might well be wrong on this one, but the Tories' "£25,000 cap" inadvertently does exactly that.

Excl. Housing Benefit, there are hardly any households who would get more than £250 a week in benefits (income support + Child Tax Credits), and the excess over this is HB.