Home ownership is in the news again. It is at its lowest since the last Conservative government. Can you afford your own house? I don’t mean can you afford any house. I mean can you, with your current income, afford the house in which you currently live?
The truth is that many people cannot, and this is the very definition of a bubble. Trade in an asset at a price or price range that strongly deviates from the corresponding asset’s intrinsic value. Remember that the intrinsic value of property involves cash flow. If people cannot afford to pay for your property, then the cash flow is low.
What is sustaining this bubble?
The Spectator gave an indication in 2013 of what was sustaining the bubble (republished in Money Week) and the short answer is policy. The Government has pursued a policy of making loans more affordable instead of allowing the price of housing to be determined by the market. This has kept prices high. The reason for this policy, not outlined in the Spectator article, is supporting the banks.
The result is yesterday’s announcement that, under a Conservative Government, home ownership is lower than at any time since the 1980s.
There are three factors going on here that we must take into account. The first isn’t to do with houses and home ownership at all – it’s to do with wages. The others are social housing and housing for investment.
Wages have been kept low for some considerable period. Some public sector workers have been on zero pay increases for several consecutive years. In fact, the average pay increase in the latest ONS figures is “up 1.8% from £518 in 2014. This follows an annual growth of 0.2% between 2013 and 2014”. The Government figures on the cost of property shows an annual increase of 8.1%.
The wages information shows that the gross average salary for a full-time employed person (April 2016) was £27,600. The average price of a property in the UK (May 2016) was £211,230 – seven-and-a-half times the average salary.
It doesn’t take an economic genius to spot that wages are simply not keeping up with the cost of housing.
Housing as Investment
Some folk will say that those buying housing for investment are self-serving landlords. But this is where many people are now finding their housing. Landlords are also having a dreadful time at the moment. The Government has doubled the stamp duty on houses for additional residential properties bizarrely because “Home ownership is also a key part of the government’s plan to provide economic security for working people at every stage of their life”.
Not only this, but Government has also prevented Landlords from claiming mortgage interest against the profit made from rental income. The reason given is “To make the tax system fairer, the government will restrict the amount of Income Tax relief landlords can get on residential property finance costs (such as mortgage interest) to the basic rate of tax”.
Costs passed to Tenants
These costs are not targeted on “poor” landlords, however that is determined, but on all landlords. These costs will, inevitably, be passed onto tenants and so simply cause an increase in housing costs. Essentially, they become a backdoor tax on those living in rented accommodation. Under the last Labour Government, George Osbourne, the author or this extraordinary regressive tax, would have called this a stealth tax.
Essentially, the Government has made investment in property harder. The profits are lower and the rents that need to be charged higher.
Neither of these issues would matter at all if there was an effective safety net, which is what social housing provides.
The Housing Act 1980 brought the ‘Right to Buy’ into UK law. The scheme allowed council house tenants to purchase the property in which they were living. However, although market prices were used to determine the price of a property, there was an in-built discount (of between 33% and 50%). The council receiving the money was prevented from using it. In essence the effect of the policy was to reduce social housing stock. It also reduced the participation of the public sector in providing that stock.
A report from the Commons communities and local government select committee says that 40% of former council houses are now are being rented out more expensively by private landlords. So ‘Right to Buy’, far from being a move to increase private home ownership, has in fact, been a large-scale privatisation of rented property.
But if all social housing does is to provide a safety net, then surely it doesn’t matter if that safety net is smaller, so long as it prevents homelessness. Aside from the fact that our social housing safety net isn’t sufficiently large to prevent homelessness (walk along almost any London street in 2016 to work that out), social housing does far more than that.
1. Social Housing influences the price of private sector rental
If private sector rental prices move significantly from social housing rental prices, and there is a sufficient stock of social housing, this will, inevitably, have an effect on the price charged for private sector rental. Private sector landlords rely on demand for their property to make a profit. An effective competitor on your doorstep provides competition and challenge to high prices. In a market unchallenged by social housing, or where that challenge is not of significant size, the economic law of supply and demand takes over.
In a housing shortage such as we have now, prices inflate. If you don’t believe that demand has an effect on prices read the Index of private housing rental prices (IPHRP) in Great Britain, results: June 2016 the opening paragraph of which reads:
“Private rental prices paid by tenants in Great Britain rose by 2.4% in the 12 months to June 2016, down from 2.5% when compared with the year to May 2016. Private rental prices grew by 2.5% in England, 0.1% in Scotland and fell by 0.1% in Wales in the 12 months to June 2016. Rental prices increased in all the English regions over the year to June 2016, with rental prices increasing the most in the South East (3.4%)”.
Remember that this is against wage inflation of 1.8%. So in the South East of England, rented housing is increasing in price at almost twice the rate that wages are increasing. That is unsustainable for most families. Families are moving out, in London particularly, to be replaced by much wealthier people – the process of gentrification.
But London and the South East of England is where demand for housing is higher and so prices go up.
If councils had sufficient social housing to meet demand, then people with a housing need would be placed in this housing. Private sector landlords would have to reduce their prices to attract tenants. So private housing would be competing with social housing and this would stem the excesses of the private market.
2. Social Housing ensures that essential staff have homes
The public sector is the backbone of the country. Think about your average day, you get up in the morning and send your children to their local school – over 8.5m children attend a state run school. You then drive to work on roads provided by the state, or travel by state subsidised trains. If you’re unwell you will attend your state run GP, or attend your state run hospital. All the time you are under the protection of our state made laws. The state run police enforce the laws andour state run court service adjudicates them. Your local authority collects your rubbish once a week. You may go for a walk in a local authority park at the weekend. The state sponsored civil service maintains our government … you get my point.
The bizarre thing is that, with some notable exceptions, we assume that these jobs have little value. We begrudge paying the same salaries that we are happy to ascribe to our state-educated city bankers, for example. So nurses, teachers, bin men, road sweepers, police constables, fire and rescue personnel are paid far below the market rate.
Public outrage is shown when some civil servants are paid more than the Prime Minister but the salary of the Editor of the Daily Express, who published this particular story, has not been disclosed. This means that people with essential skills are unable to afford to live in some places. Recruitment is difficult and so agency staff are used instead. This increases the costs of our public services to more than if we simply paid these core workers properly and, importantly to this argument, made their housing more affordable.
Investment in social housing would allow core workers to afford to live where they are required, so hospitals, schools and local authorities could function.
3. A social housing net means that a family support network is available
In past times, if granny was ill, family would rally round. If mum needed a baby sister granny might be available. Basically, families formed a support network that pretty much everyone agrees is important. That can no longer happen. Children cannot afford to live near their parents, people move to get jobs and then can’t afford to move back home. Families are fragmented.
Now this sounds like an unrealistic conservative idyll – and to a certain extent, it is. But much of it worked. The amazing thing is that it has been destroyed by a conservative government.
But the truth is that communities are fragmenting. People don’t know their neighbours. Parents do not live close enough to help their children. So childcare is now essential and costly.
So is it a surprise that home ownership has plummeted? Not really. A government policy designed to create more Tory voters bolstered home ownership. The likelihood that this was a sustainable move was always low. Housing has returned to the rental sector, but now in expensive private rather than affordable public hands. We have a housing crisis – the right wing is already shouting “immigrant”, but this is nonsense.
However many immigrants there are, the the cost of the average house is more than seven times the average salary. Affordable homes are not being built. Luxury homes are. The pay for essential workers is derisory. These are the basics of the crisis. The fall in home ownership is not a problem resulting from too many people. The private rented sector owns former council houses. Immigrants did not cause that.
We have a housing crisis, and actually, the falling number of homeowners isn’t the most serious statistic. There are more than 1m people on council house waiting lists. The number of homeless people is more than 180,000 and has increased every year for the last three years. The main reason for homelessness in England according to Shelter is “now the loss of an assured short-hold tenancy – the type of tenancy most commonly held by private renters”.
We have a housing crisis, and we need serious people to solve it. They must not blame scapegoats and must not try to sustain a bubble to please the banks and the Daily Mail – the prosperity of our country depends on it.