Friday, 17 November 2017

Economic Myths: "those who have worked hard all their lives to buy a home"

Sayid Javid was doing a fine job of playing both ends against the middle, as reported in The Daily Mail:

Mr Javid, a frequent critic of so-called Nimbys, said it was time to deliver 'moral justice' for the young – and warned older people they would not be permitted to stand in the way of a massive house building drive.

"What we need now is a giant leap … I still hear from those who say that there isn't a problem with housing... that affordability is only a problem for millennials that spend too much on nights out and smashed avocados.

"It's nonsense. The people who tell me this – usually baby boomers who have long-since paid off their own mortgage – they are living in a different world. They're not facing up to the reality of modern daily life and have no understanding of the modern market."


He's trying to claw back a few of the under-30 votes for the Tories with a couple of well-aimed blows at the NIMBYs and Boomers while ensuring that his party's major donors find it even easier to get planning permission.

He must know that you can give the land bankers as much planning permission as you like; it will not change their profit maximising level of output one iota - why would it? Even if they did increase output, it would only have a very short term and marginal downwards effect on prices.

But hey, he's a politician.

Here's the Economic Myth:

Lib Dem housing spokesman Wera Hobhouse last night criticised Mr Javid for his attack on baby boomers. She said: "This kind of language is divisive and unnecessarily sets one generation against another. It is patronising to tell those who have worked hard all their lives to buy a home and raise their children that they don't understand the housing market."

This "worked hard all your life" to buy a house is complete and utter bollocks (except for the very few people who bought something that was far too expensive). From the 1950s to the late 1990s, you could (if you wanted) have paid off the mortgage in ten or fifteen years and still been paying less per month than you would have been paying in rent for the same home; after that you are living rent free. All these Homeys have paid considerably less than tenants have.

For sure, there were a couple of nasty years in the mid-1970s when interest rates were very high; but inflation was even higher, so in exchange for two or three years of pain you effectively had half your mortgage eroded by inflation. My mum admitted to me that they paid off the rest of the mortgage they took out in 1964 with petty cash sometime in the mid-1970s. I bought a nice house in 1998 with a 20% deposit and paid off the mortgage in ten years (because that was the longest fixed rate period on offer).

There were another couple of fairly nasty years in the early 1990s as well, but so what, it was still cheaper than renting for nine out of ten mortgage borrowers. We note that these two high interest rate periods followed a house price bust; they took a different approach after the last one and pushed interest rates to zero instead.

It is true that some people with mortgages lose their jobs and struggle, but that is irrelevant, they'd have struggled to pay the rent as well. It's your "Losing your job" bit that causes the pain, not the fact that you chose to save money by buying not renting.

And even if it were true, are the Boomers saying that this is a good thing? That they want the all future generations to suffer as well? If that is a good way of deciding policy, then we would have to start another world war every twenty or so years.



But hey, she's a politician as well.

31 comments:

DBC Reed said...

Sayid Javid (note spelling)is pretty useful.He has admitted that market forces don't work any longer for housing: that the market is broken. (Yes and who broke it? Thatcherite dimwits).
His attack on the recipients of Thatcherite bribes of thousands of pounds a year in house price capital gains helps soften them up for some nice Land Value Tax (they are already diminishing to an electoral minority)Much better that he says it than John McDonnell who would be buried in Tory bullshit if he said anything like it.

Mark Wadsworth said...

DBC, spelling now corrected.

It would be nice if he were a land value taxers, but I doubt it.

Shiney said...

@DBCR

Point of Order "Yes and who broke it? Thatcherite dimwits" - add Blairite dimwits and Brownite dimwits and you'd be spot on.

Bayard said...

I have come to the conclusion tha the whole "Housing Crisis" myth has been invented by politicians as a lead in to the holy grail of politics: to reduce houses in price without reducing them in value. The only way to do this is to allow people to buy houses at undervalue, hence Right To Buy. Now there are no more council houses left to sell, plus people are beginning to cotton on that it wasn't a good idea to sell them off in the first place. So that leaves two avenues left: the first is to sell off the rest of social housing, i.e housing association stock. This has proved to be considerably less popular than it was supposed to be and we've not heard much about it lately. The second is to arrange matters so that new houses can be sold for less than they are worth and I think that things like Help to Buy are just leading up to full scale subsidising of private housing. The Tories will do this by giving money to their land speculating, sorry, housebuilding friends and Labour will do it by having the government build houses directly. The net result will be the same: lucky deserving buyers will be able to buy houses at undervalue and, after a decent interval, say ten years, sell them for their full market value.

Bayard said...

DBCR, the housing market isn't broken, the housing market is working only too well. What Sayid Javid is calling for is for it to be broken.

Mark Wadsworth said...

Sh, followed by Camerosborne and Maymond dimwits.

B, yes, that is clearly the plan, they have to strike a balance of how many FTBs they bribe with the undervalue stuff - or else there will be no victims to sell the second hand overpriced stuff to.

Striebs said...

MW ,

I bought for the first time in 1997 and am still in the same house .

Wages were pretty good back then too but the vocational pension had all but disappeared for the sort of work I was doing (software development) .

It is easy to get confused about the reason why I was having to work so hard .

It was not due to the mortgage (which I was overpaying) but because my work situation was becoming more and more precarious . The software development industry was closing down in the UK . Jobs were being offshored and HM Govt was fast tracking visas for Indian workers in an effort to obtain access for British banks to the Indian domestic market .


I don't think I had it anywhere near as easy as people who bought before me but one could get something worth having for a realistic price - not the insult of a shoe box for a Kings ransom like today's young .

When you say inflation out stripped interest rates (even when they spiked to 17%) , I presume you are talking about the artificial basket of goods - excluding accommodation and pensions contributions .

Isn't what matters whether wage inflation outstripped mortgage interest rates ? Did it ?

Mark Wadsworth said...

S, let's not get bogged down in what was highest, general inflation, wage inflation or interest.

Point is, if you took out a mortgage of twice your income in 1970, by 1980 the mortgage would have fallen to half your income, even if you had only paid the interest.

Prices and wages rose by a factor of about four in the 1970s, that's the way it was.

Steven_L said...

they have to strike a balance of how many FTBs they bribe with the undervalue stuff - or else there will be no victims to sell the second hand overpriced stuff to.

They can sell to institutional landlords and find simple ways of subsiding the transaction.

We need more houses for rent because there is a 'crisis' therefore Mr 'help to buy' neg-eq second stepper in his £200k Barratt rabbit hutch gets a 'helping hand' from HMT to sell to insurance / pensions conglomerate so they can have more houses for 'affordable rent' (i.e. HMT pay some of the rent).

DBC Reed said...

Point of order:
I was merely saying that Sayid Javid's rhetoric echoes some of YPP's . A letter to ,say, the Guardian,( which today is carrying a full-on plea for a Land Value Tax from Patrick Collinson), from the YPP might point out the similarities and conclude with an even stronger demand for LVT, perhaps couched in terms of the economic apocalypse.

Bayard said...

SL, I like your thinking. Your second step will get us nicely to the next 18-year price collapse and everything will be back in the melting pot again.

Steven_L said...

I don't follow? What is my 2nd step and how will it lead to a house price crash?

I think any big grab by institutions will come after the next crash to be honest. I defo think small time BTL landlords will be hung out to dry in the next one and FTB's with their 'HTB' equity loans and negative equity on their new builds will be the ones that get targeted assistance.

18 years from 2007 is 2025 isn't it? Mid 2020's is def when the next crash is due, it'll be interesting to see whether is plays out under the tories or labour. It's feasible that 2022 will see an 'old men in a hurry' socialist government with a mandate to micromanage housing and pick winners and losers too.

Bayard said...

SL my first step is FTB's being given subsidies, your second step is the government helping those houses to be sold on at full market value to institutions. With any scheme like this, there is only so much time before the political will/public funding runs out and I predict that will be just before the next Harrison cycle crash after which the whole scheme can be safely junked.

Lola said...

DBCR etc. Trouble is they all see lVT as an EXTRA tax. When as we all know it has to be replacement tax - of pretty well every other tax.

Steven_L said...

With any scheme like this, there is only so much time before the political will/public funding runs out...

Some of them would print whatever it takes to keep nominal house prices 'above water'. For a start, cancelling HTB equity loans could be contingent on the sale of the property under some sort of government program to have more rental properties. This could be sales to finance companies or local authorities.

They look set to keep throwing subsidy behind first time buyers. This may become a permanent feature in the market. After all, in the last cycle we had 100% mortgages. Don't be so sure that some kind of scheme for '2nd steppers' (in other words it applies to anyone who only owns one house) won't make an appearance.

This could simply be that they sell their house to an intermediary (the government) so they can buy a new build 3 bed place at a generous 'market' price. And the government sell it onto a first time buyer with either long term shared appreciation arrangements or a special loan that is written off as long as you don't sell within the first 5 or 10 years.

Hence the Land Registry record all the sales at the fake prices the electorate want to see and house prices keep going up as they always should. Everyone can either deny this truth or be thrown to the wolves in the PRS with limited consumers protections and index linked rent rises (once all the weak landlords are shaken out and a kind of cartel using standardised contracts steps in) or give in and use a government house price manipulation scheme to 'get on the ladder'.

I can't see a tory or a labour government intervening less in the housing market. Intervention will increase, and perhaps to the point of micromanagement, where it's not really a market at all, and the risk is transferred to the sovereign and any future house price collapse simply becomes a run on sterling.

Bayard said...

"This could simply be that they sell their house to an intermediary (the government) so they can buy a new build 3 bed place at a generous 'market' price."

A sort of land version of the motor trade-in deal, with the government or the banks or other institutions acting under orders selling the 2nd Stepper a new house and giving a generous trade-in price for the old one, so instead of subsidising the new house, they overpay for the old one? They then sell the old one at a discount to another FTB.

Steven_L said...

Not a discount, that would show up on land registry sale prices, which is the last thing they want. It will be a form of shared appreciation mortgage or shared ownership, but they'll swear it's nothing of the sort.

Steven_L said...

But yes, there'll end up a load of first time buyers in negative equity who bought overprices new builds using help to buy, or simply just took on high LTV mortgages. But the 'help to buy' angle will be used to argue the government need to step in and help them reach the next rung on the ladder.

So provided they by an even bigger, even more overpriced new build, once, again, the government will come in and structure a deal. A deal that allows the builder to get top dollar, the land registry prices and mortgage lender index prices to remain high, the negative equity to stay off both the consumer's and the finance companies' balance sheets and the voter to move to a bigger house.

The only way the can make sure house prices keep rising faster than wages and consumer price inflation forever will be to micromanage the market to the point it isn't actually a market. Labour won't have the balls to let the market deflate either because there will inevitable be losers within the demographics they don't think should lose out. They simply won't be able to cope with the idea that some poor working or lower middle class first time buyers would lose all their assets, so they will opt for micromanagement.

Labour will micromanage the housing market because it's the only 'fair' thing to do to ensure nobody loses out. The tories will do it because they'll be backed into a corner and it'll be the only thing they can do other than admit their ideology is fundamentally flawed. So they'll micromanage and pretend it's a 'free market' policy. Both parties will turn on weak, unincorporated small time landlords as scapegoats and encourage large institutional - both public and private sector - landlords instead. Within the sphere of incorporated landlords, consolidation will take place.

Mark Wadsworth said...

SL, that is all a splendid pyramid scheme you have constructed there, it will probably head in that direction - masking underlying price falls with ever large subsidies in a glorious circle; govt buys home at overvalue from 'second stepper' - govt sells home under RTB with massive soft loan that will never be paid off etc.

DBC, the two big parties have lately come to the realisation of what I/YPP have been saying all along - massive numbers of under-40s don't vote because they are disillusioned with the whole thing.

Corbyn tapped into this nicely, by changing the topic to the narrow one of 'student debts', the Tories are getting a bit closer to the real topic (land prices) but without offering the real solution (LVT).

Steven_L said...

masking underlying price falls

Price falls for much of, if not most of, the UK have been masked for the last decade now. Even in terms of nominal sterling prices, there are many parts of the UK where selling prices are less now than in 2007. The losers in the last bubble have been completely airbrushed from the national conscience.

Mark Wadsworth said...

SL, that isn't conscious airbrushing, that's because our media is so London-centric, they genuinely aren't aware.

DBC Reed said...

Spreadshit Phil was on the Andrew Marr programme today saying he would stop at nothing to make big house builders "build out" their many thousands of building plots with extant planning permissions ( now supporting crops of nettles and millions of pounds of inflationary capital gains one might add).He sounded so cross , I expected him to start quoting Winston Churchill from 1909 going on about the landowner who "sits still and does nothing" referenced in Patrick Collinson's cut-out-and-keep land price article in Saturday's Guardian.
I am afraid Tory dimwits like him will get hold of LVT and do their magic with it: totally fuck it up forever, the way they did with "property owning democracy".

Mark Wadsworth said...

DBC, I laugh every time at "Spreadshit Phil".

Shiney said...

@DBCR

I agree... my worry is that either

1. The Tories will implement some half-arsed LVT-lite with so many exemptions/nip & tucks/bungs-for-their-mates/caveats that it'll be an omnishambles of the first order and discredit the concept for a generation

OR

2. Corbyn and co will get in, implement full on LVT as an addition to all other taxes and discredit the concept for a generation

Sigh!

DBC Reed said...

@S
LVT has to be introduced properly: I agree with you .( Must be the first time but, to offset that, it is on a major point.)
Corbyn/McDonnell have made a tax threat about unbuilt out plots with planning permission which could be self-contained in its effects.Spreadshit Phil could pinch that idea but this will only deepen the feeling among dimwit Tories that he is entirely untrustworthy.
Situation normal all fucked up.

Steven_L said...

our media is so London-centric, they genuinely aren't aware.

I know that swanky new build flats in posh parts of Northumberland that sold for £250k+ new in 2006/7 are on the market for £195k and less now.

I wonder how many parts of the UK are like this then?

It doesn't bode well for those paying 50%+ premiums on new build flats now does it?

Shiney said...

@DBCR

;-D

As @Lola has reminded us before, we (i.e. MW, you, me, Bayard, BJ and even pc156) all agree on the big knobs and healthy disagreement/discussion around the details is why we come here.

Long may that continue.

Striebs said...

MW ,

Thanks for pointing out that the issue was the principle of the mortgage becoming a smaller multiple/proportion of wages .

It occurred to me some time after I posted that the principle was the important thing here .

Had no idea wage inflation was so pronounced between 1970 and 1980 .

As you say , inflation bought their houses for them - and if they hit really hard times downsizing would get them off the hook .

Mark Wadsworth said...

Striebs, the 1970s were mental. I was a schoolkid at the time and we learned to adjust. If we were discussing/showing off how much something had cost (a bike, skateboard, watch etc) we would say how much it cost AND WHEN.

We knew that a bike that cost £20 LAST WEEK week was a less expensive bike than one that cost £20 TWO YEARS AGO. That's how we'd talk "This watch cost £15 THREE YEARS AGO" was much more impressive/expensive than "This watch cost £20 LAST WEEK".

Of course, Heath only stoked the high inflation to mask real house price falls, but the Trade Unions got more than their fair share of the blame.

Mike W said...

As @Lola has reminded us before, we (i.e. MW, you, me, Bayard, BJ and even pc156) all agree on the big knobs and healthy disagreement/discussion around the details is why we come here.

Well said Shiney.Agree completely.

'Corbyn and co will get in, implement full on LVT as an addition to all other taxes and discredit the concept for a generation'

I disagree. I think its getting them to see that MW's 'LVT lite' is what Labour and Unite union are actually moving toward anyway.But how it works and why. And that we explain how you move that to starting LVT proper and why. History shows that getting LVT on the books and keeping it going year on year is the hard bit. IMHO too many Labour party members think that it was union activity pure and simple that made the social gains in the post war 'Golden Age'. Getting them to see that it is LVT lite, that allowed workers to keep the gains, runs, it seems to me, against Labour's version of history. So even the modest step is a big one.

In defence of Paul here, I think South korea and its ship building dominance from nothing is an interesting problem.But as MW suggested the state political elite is the business/corporation elite deciding the risks too. As in the Prussian example in warfare suggested. But it is nothing like a Smith 18th century agrian free market model which is his point.

This is our usual, 'is to ought' type debate in so may areas.Fine.

DBC Reed, My distance mind reading skills makes me think Spreadshit Phil did vey well on Marr show. He was about to trot out the Neo liberal nostrum; 'There are no unemployed people.... just workers choosing to enjoy liesure time' and stopped. Suddenly realised where he was, and chose to look a knob end and bluff it out, rather than say what he had trained himself to believe about the serfs.

DBC Reed said...

Mi W
Now that Spreadshit has made a complete fool of himself by abolishing Stamp Duty >instant reaction on telly from would-be buyer with pregnant wife: this will put up house prices! its just a matter of the dimwits clustering round each other to keep reality at bay.