Don't blame the boomers

From Joe Sarling's blog comes this a lovely chart showing housing affordability by cohort since 1955:


As can be seen, the current generation of young people - Generation Y - faces paying a far higher proportion of their incomes in mortgages or rent than any previous cohort. This does not, of course, take into account the considerable price difference between London and everywhere else: if London were excluded, I suspect their position would not look quite so dire. Nonetheless, this chart is distinctly worrying. Such a high proportion of income spent on housing costs is not remotely sustainable.

But that is not what interested me about this chart. What is far more interesting is who really benefited from the increase in house prices since 1960. Contrary to popular opinion, it's not the baby boomers. It's the cohorts immediately before and immediately after them - Generation X, and (above all) the inter-war generation. Yes, those poor old people who grew up in the Depression and lived through World War II have benefited more from house price appreciation than anyone else. Considerably better, actually.

To be sure, many of the inter-war generation did not own property - at least to start with. The period from 1955-1970 was a period of enormous social housebuilding:



(chart from A Right To Build, Alastair Parvin)

The "cradle to grave" support that the post-war governments (of both colours) offered included a commitment to provide housing to whoever wanted it. So a whole generation grew up believing that they simply had to put down their name on a council waiting list and they would in due course get a house or a flat. To rent, of course. But they could rent it for life. And many of these houses and flats were substantial properties suitable for bringing up quite large families.

It's perhaps not widely known that - unlike the US - the UK did not have a baby boom in the 1950s. The UK's post-war baby boom was in two phases: those born immediately after the war (1946-50), and a second group born in Harold MacMillan's "you've never had it so good" period in the early 1960s. So Joe's chart is rather misleading, bringing together as it does two separate cohorts. I wonder exactly what he means by "baby boomers".

Anyway, the later cohort of "baby boomers" are the children of the inter-war generation. And I am one of them. The inter-war generation, encouraged by the easy availability of social housing and - for those who wanted to buy - low house prices, had large families. My father could afford the mortgage on a three-bedroom house with a garage, in the suburbs of London, on his modest salary as an insurance clerk. His wife, my mother, did not need to work. Which was just as well, as I am the eldest of four and my youngest brother is only five years younger than me. She had her work cut out.

Then came the inflation of the 1970s, and the first of several house price corrections, the Secondary Banking Crisis of 1973-5. The first group of baby boomers - those born after the war - were caught by this. House prices for the first cohort of baby boomers were significantly less affordable than they were for the inter-war generation. But for older people with higher incomes, smaller mortgages and significant equity, they were comfortable. My parents sold their three-bedroom semi for £14,500 in 1976, replacing it with a dilapidated six-bedroom Victorian house for the princely sum of £16,000. It needed work, of course, but the total expenditure on it was probably of the order of £20,000. It was still manageable on my father's salary alone.

But the 1980s destroyed all that.

There was another house price correction in the recession of the early 1980s. But this was followed by an enormous house price bubble. Fuelled by an overheating economy (the "Lawson boom") caused by over-easy monetary policy, and fiscal changes such as the ending of double mortgage interest rate tax relief for couples (signalled a year before it was implemented), house prices shot up. The inter-war generation who had rented social housing were allowed to buy their council properties through the Right to Buy programme. This also pushed up house prices, as the council properties were sold to their occupants at below market prices and then sold on by those occupants in order to turn a quick profit. Easy lending, too, helped feed the frenzy: 100% mortgages made their first appearance at that time, while mis-sold endowment policies enabled people to take on interest-only mortgages in the mistaken belief that an attached life insurance policy would pay the principal at maturity. Twenty years later, this came back to haunt them, as thousands of these policies proved to be worth far less than the mortgages they were supposed to pay off.

For the second cohort of baby boomers, together with those born in the 1950s, this house price boom was a disaster. Not only had the price of houses risen considerably, interest rates were sky-high. The Bank of England's base rate - to which most UK mortgages were tied - was in double digits for much of the 1980s, and by 1990 it was at nearly 15%. Of course older people were paying these rates too, but their mortgages were significantly smaller. The hit to their disposable income was far less. And social housing was no longer an option. The council houses had mostly been sold, and only those who met "need" criteria would qualify for social housing.

By 1988 I was earning more than my father, and I was single with no children. I wanted to buy my own property. But I could not afford a house like the one I grew up in, let alone the 6-bedroom Victorian house into which we had moved in 1976. So I left the suburbs of London, and moved somewhere cheaper. I thought that as my income rose, I would be able to return after say five years. That was twenty-eight years ago.  Beckenham is still home, but - to misquote Robert Louis Stevenson - home is no more home to me. I know now that I will never return to the place where I was born.

I bought my first house in 1988, when I was 28 - the same age at which my father bought the house I grew up in. But buying in 1988 was disastrous. It was the peak of the boom. Lacking a deposit, I had bought my house with a 100% endowment mortgage. A year later, prices crashed. I spent the next seven years in negative equity, unable to move and paying huge amounts in interest on a mortgage whose principal did not reduce (because the tied endowment policy meant it was interest-only).

Joe's chart shows how bad the 1990s housing crash was. It wiped out the net worth of the 1960s baby boomers who bought property in the late 1980s. Because so many of us were in negative equity, we ended up in a worse wealth position than those ten years younger than us - Generation X.

Generation X entered the market when housing affordability was at levels not seen since the 1950s. They bought at the bottom, and then benefited from the record-breaking rise in house prices that peaked in 2006. And though they lost some value in the 2007-8 crash, the house price collapse was nowhere near as deep as that in the 1990s. Generation X have fared well from rising house prices.

But the inter-war generation have fared the best of all. Yes, they lived through the inflation of the 1970s and the high interest rates of the 1980s. But their mortgages were largely paid off by the 1990s, so they were never in negative equity. And despite the crashes of the 1970s, 1990 and 2007-8, overall the period from 1955-2016 has seen a simply enormous rise in house prices. Those who owned property throughout that period have done very well indeed. In 1999, my parents sold the aforementioned six-bedroom Victorian house in Beckenham for £200,000, and bought a three-bedroom bungalow outside London for cash. That bungalow too is now worth considerably more than when they bought it. Even now, the inter-war generation continue to benefit from rising house prices.

So please don't blame the "baby boomers" for the house price appreciation that has made property unaffordable for large numbers of today's young people, They are neither the cause of it nor the principal beneficiaries.

UPDATE. Neal Hudson has produced an amended version of Joe's chart which adds a baseline affordability taking into account mortgage interest rates.  I've embedded it as a tweet so that Neal's comment is visible.
Makes my point even more strongly, I think. And answers some of the comments on this post.




Comments

  1. How is this affordability ratio defined? You're not saying and the source is unclear. If it is house price to average income, it's debatable to use as an affordability ratio because it doesn't include the effect of interest rates.

    (Your historical case may still stand, though going forward high nominal prices are not necessarily as unaffordable as they look if interest rates stay low.)

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    Replies
    1. Cig,

      Neal Hudson on Twitter has made the same point, and provided a rebaselined chart which I will add to this post as an update. It actually strengthens the historical case. Because of very low interest rates, housing is more affordable now than it was during most of the 1970s and 80s.

      Delete
    2. But as Neal points out, owning a house is affordable, buying a house far less so.
      Much easier to buy if you already have property or other assets, as opposed to relying on wages.

      Delete
    3. paying a higher proportion of incomes in mortgages or rent as income rises - that is a manifestation of Ricardo's law of rent.

      Delete
  2. Is the moral of the monochrome graph to build a house or boat to live in?

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  3. 'Generational blame' has always struck me as a bit silly. But that aside, I don't accept the claim that "housing is more affordable now than in much of the 70s and 80s."

    If you look carefully at the graphs that's not what they say: at no point in the last decade has the affordability ratio fallen below the highest point achieved in those early decades. It's the fall in the 90s that bucks a long-term trend towards unaffordability, driven by the collapse in public building programmes with private building failing to fill the gap. With population growing supply has been exceeded by demand, which has been further bolstered by easier credit.

    I also think you are missing a few points. First, low interest rates have not brought much relief to the rented sector. My daughter pays 40 times as much for a room in London as I did in Oxford in the late 70s. Second, deposits are more challenging today even when monthly payments might be just affordable. Third, buying when interest rates are very low is high risk. Not only would monthly repayments rise with rates but the value of the asset would probably fall. My generation could also feel confident that our income would rise faster than the mortgage.

    Housing is a critical issue for the UK and Jeremy Corbyn has been quite right to keep pressing the PM on it.

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  13. Dork, I have deleted all of your nine comments because not one of them was on topic. I've warned you repeatedly about grandstanding on my site, and my patience is now at an end. Get your own blog. You are no longer welcome here.

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  14. Surely the people who are ultimately to blame for Britain's unaffordable housing are those who wrote the Town and Country Planning Act 1947?

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  18. Dork,

    not only are you off topic but now you are offensive as well.

    GET OFF MY BLOG. You are not welcome here.

    All further comments from you will be summarily deleted.

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  19. To go along with Lyn, we all know some Gen Xers who made out like bandits, so any generational analysis is bound to be an over generalisation.
    Still, it is important to recognise that the crash in housing in the 90s coincided with a recession. As it happens, the people most able to take advantage of the low prices were not Gen Xers struggling with unemployment or frozen wages, but the Boomers who could use existing property as security to buy another.

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    1. This is not true. The late boomers suffered unemployment, frozen wages AND negative equity in the 1990s. They could not buy additional properties - many could not afford the ones they already had. Those who WERE able to take advantage of low house prices in the 1990s were - once again - the interwar generation. The early boomers might also have benefited, though they would have been hit by the recession too.

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