The illogical pricing of property

In my latest post at Pieria I discuss the way in which treating houses as investments creates unsustainable rises in house prices, and outline two possible futures:

"The dream of property ownership has been fostered by Government in the UK for a very long time. Perhaps not as long as in the US, where FDR's New Deal in the 1930s promoted the goal of every American owning their own home: but certainly for over 50 years. Owning a house has become the principal icon of membership of the middle class. 
"Yet owning a house is becoming ever more difficult as house price rises outstrip wages. In the US, this tendency was interrupted by the 2007/8 crash, though house prices are now rising again. But in the UK, house prices have risen to the point where in much of the country only the very well-paid can afford property on a single income, and in parts of London and the South East even well-paid couples struggle to afford a family home...."

Read more here.

Comments

  1. Run do not walk to the nearest exit.

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  2. Had trouble registering for your main site but this quote:

    "Does anyone REALLY think interest rates will return to the levels of the past while house prices are so high?"

    Can the BoE really control mortgage rates? I think not. Who cares what the base rate is. They are not able to keep mortgage rates low, nor gilts. If the US raises rates (which has had a clearout) then the UK will lose control.

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    1. If you let me know what the problem is with registering for Pieria, I'll see if I can get it fixed.

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    2. I also have a problem. If I fill in everything and click JOIN, I just get an empty MESSAGE appear.

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  3. Ben,

    Two comments:

    1) In the UK, most mortgages are directly linked to the base rate, which is set by the Bank of England. If the base rate is increased, therefore, most UK mortgage rates will rise.

    2) The lenders themselves will not want to raise mortgage rates significantly if the result is likely to be a property crash. I agree that rising funding costs could force them to do so, but that simply leads me on to the additional point I made in the post - that Government support of the housing market is inevitable. Government would be forced to act to squash any general tendency of mortgage rates to rise. As indeed it already has: the Funding for Lending scheme was introduced to dampen rising funding costs in the Eurozone crisis, because lenders were starting to raise mortgage rates.

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    1. Is that correct? I thought many were linked to "trackers" which were tied to the base rate of the lending institution, which is basically whatever they feel like. For example I believe there is a Barclays Base Rate.

      On 2 we are in utter agreement. To usur is human, to forbear is divine!

      I agree the govt will fight this to the end - but it can go beyond their control were they either end up with the currency tanking (a soft default but still a default) or throw the towel in. Politically the former is easier but neither are comfortable.

      If US rates rise what can the little UK do?

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    2. Technically it is the "base rate" of the lending institution, but in practice it is the Bank of England's base rate or very close to it. It would be a brave lender that deviated much from the published Bank of England base rate.

      I honestly think the interest rate scare (and associated inflation scare) is wrongly founded. The only direction for interest rates over the longer term is downwards in my view. Deflation, not inflation, is the real risk. You know that core inflation turned negative in the US in the last quarter? Honestly, they aren't going to raise interest rates for the foreseeable future. They can't. The economic fundamentals don't add up.

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    3. Technically it is the "base rate" of the lending institution, but in practice it is the Bank of England's base rate or very close to it. It would be a brave lender that deviated much from the published Bank of England base rate.

      I honestly think the interest rate scare (and associated inflation scare) is wrongly founded. The only direction for interest rates over the longer term is downwards in my view. Deflation, not inflation, is the real risk. You know that core inflation turned negative in the US in the last quarter? Honestly, they aren't going to raise interest rates for the foreseeable future. They can't. The economic fundamentals don't add up.

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    4. I wouldn't be so sure about them not deviating from the base rate. Why would Barclays shy from this? They are already hated by everyone. The fact is they *can* do it as it's their base rate.

      Agreed it's dictated by the US. If they have deflation, which demographics point to, then rates stay low. It depends how they want to cook it I guess. Print more and try for inflation or Japan it. Either way the UK follows in the wake but does not choose the course.

      ps can I just say the "captures" on posting are absurdly hard to read. I've never known another site like it.

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  4. As someone who has spent lots of time going through Census returns it is remarkable how many people lived in houses, even at the highest levels of society, compared with today. In the decades since WW2 we have awarded ourselves a huge amount of personal living space. One article I saw about two dear ladies renting council houses. For thirty years they had lived as widows each in a three bedroom council house next door to each other. In the meantime in their community there is said to be a severe shortage of property. This is actually compounded by the fact that a lot of the existing ones are second homes and holiday lets. You can look around the whole of the UK and see vast amounts of either little used or limited use of existing property. Neither the "social" nor the private housing markets can manage to put people needing homes into any of the spare capacity that exists. Historically it is crazy and more to the point a dead weight on what should be the real economy.

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  5. "In the UK, most mortgages are directly linked to the base rate, which is set by the Bank of England. If the base rate is increased, therefore, most UK mortgage rates will rise".

    Look at what has happened to base rate in the last 15 years and you have your answer for why house prices have increased dramatically. Central banks introduced this shambles in attempting to reduce the cost of money to aid economic recoveries.

    I suggest you map the course of interest rates, gross property yields and property prices. It is very straightforward - central bank induced yield compression and credit accumulation into a vast credit bubble.

    If it was a supply issue, rents would have risen far more dramatically over the last 15 years - this is a grotesque cost of money and yield compression distortion.

    Yet all they do is induce bigger and bigger problems. And they do so again.

    The Bank of England has therefore determined vast income and wealth distribution in the UK and it is barely accountable to democracy.

    Disgrace.

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  6. So who loses?

    Why does it matter if we can just keep rates low and print money?

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  7. Ever considered the fact that low interest rates may be deflationary?

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  8. This comment has been removed by the author.

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  9. Land prices rising faster than wages can be explained. Land prices rise due to wages rising and,as increases in productivity reduce the cost of goods, the portion of the wages left available to be spent on land therfore increases in amount and also in its portion of wages.

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    1. The exponential rise in property prices since the mid-1990s is not explained by wage rises or increases in productivity. It is partly explained by low cost of goods due to offshoring of production. But I think the biggest single reason for the huge rise in house prices is the rising proportion of women in the workforce.

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  10. Frances,

    Was there 25% per annum increases in female workforce participation during 2001-2007?

    Do you deny the role of central banks?

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  11. I can assure you, if you put rates back to where they were in 2000, house prices would not be where they are - no matter how many women have started grafting....

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    1. Agreed. It's the availability of credit also. I think using joint salaries as more women worked did play it's part but often with liar loans your income wasn't even assessed so they didn't care if your wife worked at all.

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    2. Availability of credit is certainly a factor. But liar loans were a very small proportion of the total. High income multiples are a much bigger issue.

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  12. Did rents grow exponentially over this period or do women not rent but only buy property?

    Why do you think property pricing is illogical if you blame it on female workforce participation?

    This is DENIAL of the role of central banks and the cost of money.

    At some point you are going to have to intellectually reconcile your views that high house prices are bad for growth (quite right) yet you support low interest rates (to aid growth) which makes house prices high!!!

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  13. Would the three Anonymous commenters above please identify themselves? I will not respond to faceless and nameless people. It is discourteous of you not to sign your comments if you are posting "anonymously". The rules of my site are clearly stated on the About page. I do not post Anonymous comments that are not signed. Identify yourselves, or be deleted.

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  14. Hello, all three are from Richard

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    1. That's better.

      This post is not about central banks, or about interest rates. Nor is it solely about the period from 2000-2013. It is about property in general, and the principal drivers of high house prices. If very low interest rates always drove property inflation, as you suggest, the last five years would have seen the biggest rises in history. That is not the case. Indeed we are not really seeing large increases in house prices anywhere except London, which is an international marketplace. House prices are actually falling in some areas of the UK. So the drivers of house prices are far more complex than simply the cost of credit.

      Rents are related to house prices - not surprisingly, since landlords have to buy property in order to let it.

      The participation of women in the workforce is rather more complex than a simple percentage increase. More women now work full-time (hours have risen), and women are also more highly paid than they used to be. All of that adds up to an increase in household incomes. The greater number of two-income households, and the higher incomes of women, drive up house prices. Put bluntly, a two-income household can afford to buy at higher prices than a one-income household.

      I find your comments aggressive. Please moderate your tone.

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  15. Frances,

    Central banks and interest rates are relevant to property.

    If one maps mortgage rates to gross yields & property prices over the last 15 years, I think one would find a very strong correlation, particularly in relatively liquid markets like London that have also broadly maintained employment and earning power & banker willingness to lend.

    All else equal, I think this is by far the greatest driver.

    I equally think the same applies to equities and other assets - perhaps worth looking at rates vs gross dividend yields....

    All that is happened is that money has been made ever cheaper and asset prices have risen accordingly...

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    1. No, I'm afraid you won't see that correlation. The relationship of house prices and mortgage rates is rather more complex than that.

      The London housing market is international. Prices in London relate more to global financial trends.

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  16. By the way, with the FLS (and HtB) now sitting on top of ZIRP and QE, delivering the lowest mortgage rates in history, we will also see greater prices - and that is the reason for the current lift in housing prices and it will continue in line with these distortions.

    It is all very simple.

    Richard

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    1. No, Richard, it is NOT very simple, and you don't do yourself or anyone else any favours by suggesting that it is. The only place in the UK that has significantly rising house prices is London, and as I said in my comment above, London is an international marketplace and prices there are driven more by external factors. Across the rest of the UK house prices are rising by less than 3% yoy and in some places they are falling.

      We have actually had the lowest mortgage rates in history for over 5 years and we do not have significantly rising house prices anywhere except in London.

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  17. Frances,

    I suggest you look at mortgage rates for differing LTVs over this period.

    Are you suggesting that house prices in the rest of the UK would have performed the same as now (or better) if central banks had not reduced the cost of money to the extent they have?

    For a given level of employment, real earnings, availability of equity and banks willingness to extend loans (London pre and post crisis equivalent), the effect on house prices is enormous. And I do understand the international effect, given I live in central London.

    As you say yourself, housing has become an investment, particularly in London and what do investors look at - YIELDS! And it is this comparison to yields available elsewhere that drives London pricing and will increasingly do so elsewhere. And the yield comparison - for example against gilts is what has driven yield compression such that London housing is now sub 3% gross yields.

    Elsewhere, people will make the comparison to the cost of saving and renting and central bank action drives them (where a deposit is possible) to buy.

    It is ALL about central banks and the cost of money.

    Central banks biggest mistake of the last 25 years is to think that 1-2% falls in interest rates would get a greater amount of demand driven current spending...but the impact of 1-2% falls in yields in asset prices is tremendously greater, particularly the lower one goes. This is why the entire financial and economic system is stuffed.

    To deny the role of the cost of money in housing prices is extraordinary.

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    1. Richard,

      We had a housing bubble when mortgage rates were considerably higher than they are now, and no bubble now despite the lowest mortgage rates in history - apart from London, where as I have said before international factors are far more important.

      I notice you are now trying to discuss the same issue on my latest post too - which has nothing whatsoever to do with central banks. This site is not the place to grandstand your beliefs. If you feel that strongly about central banks and the cost of money, set up your own blog. Don't abuse mine.

      This conversation is now closed.

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  18. Frances,

    Fair enough re leaving your site.

    I am simply astonished at the extent of your denial and coherence on this subject.

    Goodbye

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  19. Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic.

    house to rent in sitges & barcelona accommodation sitges

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