The illusory housing recovery

Apparently there is life in the UK housing market. According to ONS, UK house prices increased by 3.1% in the 12 months to June 2013, up from a 2.9% increase in the 12 months to May 2013.

Predictably, vested interests like estate agents, surveyors and developers are crowing. The director of the Royal Institute of Chartered Surveyors, Peter Bolton King, claims the housing market is "on the road to recovery".

I wish I could be so positive. But this "recovery" is not quite what it seems.

Here's a lovely chart from the ONS report:

No, you aren't seeing things. That is indeed an 8.1% increase in house prices in London. Even the rest of the South East doesn't run it close - though more on the South East's supposed recovery shortly. So what on earth is going on in London?

This might have something to do with it:

The Mayor of London's property report (from which this graph is taken) says that "average private sector rents in London are around twice the national average". But mortgage interest rates have fallen, at least partly due to Government intervention. Consequently, buy-to-let purchases are increasing at a rate of knots as existing and would-be landlords jump on what looks like a gravy train. Across the country, the Council for Mortgage Lenders says that buy-to-let mortgages have increased by 19% in volume and 31% in value in the last year. Much of that increase has happened in London. Although....BBC Newsnight, in its special report on buy-to-let as an alternative investment for disgruntled savers getting rubbish returns on their deposits, focused on Southend. The South East's 2.9% increase is also partly due to increasing buy-to-let lending, it seeems.

But buy-to-let is not the only - or even the principal - cause of booming house prices in London. According to one estate agent surveyed by This is Money, 85% of prime property sales in London are to foreigners. And a report by the FT in July 2013 said that a record 82% of property sales were to overseas residents. Not immigrants - but people who live overseas and have no intention of moving to the UK. Many of these houses are bought simply as investments and remain empty once purchased.

So there is actually very little recovery in the London residential housing market. The 8.1% increase in house prices is due to inflows of hot money from overseas residents looking for safe investments (helped by the relative weakness of sterling), and a booming buy-to-let market due to high rents.

But what about the rest of the country? Well, there seems to be something of a North-South divide. Apart from London, house prices in the South East, West Midlands, Wales and the East are all growing at 2-3%. But elsewhere they are stagnant or falling.

As I noted above, it appears that buy-to-let has something to do with the rising prices in the South East. And it may also be influencing price rises in other regions too. However, it does appear that the Government's schemes to encourage first-time buyers are working. This chart shows the rate of increase of house prices by type of buyer. The evident spike at the beginning of April 2013 coincides with the extension of the Help to Buy mortgage deposit guarantee scheme to existing properties as well as new builds. There is little doubt that this enabled first-time buyers to borrow more and therefore buy more expensive property.

Would someone please explain to me why it is such a great idea for the Government to encourage first-time buyers to take on bigger mortgages at higher loan-to-value at a time when interest rates are at unprecedentedly low levels? The current low mortgage rates are by no means fixed in stone: Funding for Lending has reduced rates for borrowers, but there is no guarantee that they will remain low. Has no-one learned from the American housing crash of 2007, in which people with adjustable-rate mortgages suddenly found that the rate adjusted by far more than they could afford, and were forced into default? Where are the wage increases that support this increase in debt? This chart from the ONS shows that the rate of growth of wages is well below CPI, currently 2.8%, so real wages are actually falling:

I can't see how such expansion of lending, and the resulting rise in house prices, is remotely sustainable. The economy is not growing, real wages are falling and living costs are rising. I really don't buy the argument that rising house prices will somehow bootstrap the entire economy into sustainable growth. I'm in agreement with Moneyweek's editor-in-chief, Merryn Somerset Webb. Speaking to the BBC, she said:
"I tend to think rising house prices are terrible news. It's an entirely unproductive part of the economy," 
To my mind, unless economic activity increases and real wages start to rise, the housing market is bound to crash in due course, and the banks with it. Such rises in house prices are simply not sustainable in a flat economy with falling real wages. Encouraging house price rises under such circumstances is unbelievably stupid economic policy. But then this isn't about economics, really.

The supposed "housing recovery" is due to three things:
  • purchases of prime real estate in London by foreigners who have no intention of living in the UK but are attracted by the weakness of sterling 
  • expansion of the buy-to-let market by investors desperate to find some yield in a very low interest rate environment
  • Government schemes to encourage people to buy houses on the assumption that interest rates will remain low for a long time to come.
Really it is entirely illusory. It has been deliberately engineered by a Chancellor whose sole aim is to ensure outright victory for his party in the 2015 general election. By pushing up house prices, he ensures the support of his core vote: by encouraging people to buy and sell property, even at unsustainable prices, he hopes he can can claim to be the Chancellor who "got the economy moving". No wonder the loud complaints from savers (many of whom are Conservative voters) about low interest rates appear to be falling on deaf ears. No wonder Carney (with the tacit approval of the Chancellor) issued "forward guidance" that interest rates will remain on the floor until 2016. Markets were beginning to price in rate rises, but no way can rates be allowed to rise until after the 2015 election. The Conservative party's victory depends on it.

As my regular readers know, I am determinedly politically non-aligned, so what I am going to say now will probably shock a lot of people. Osborne's behaviour both angers and frightens me. He is playing brinkmanship with the UK economy to achieve political ends. Nothing he does makes much sense from an economic point of view - which is why the flagship Help to Buy scheme has been universally panned, even by his own department and by people from his own party. But if you view his actions as entirely determined by his desire to secure a Conservative victory in 2015, it all makes perfect sense. He is dangerous.

Related links:

House price inflation continues to rise, says ONS - BBC News
UK House Price Index, June 2013 - ONS (pdf)
UK Consumer Price Inflation, June 2013 - ONS
London Housing Market Report - Greater London Authority
Buy-to-let lending tops £5bn in second quarter - CML
London for Sale! - This Is Money
Foreign investors behind record 82% of London property activity - FT (paywall)
Funding for Lending Scheme - Bank of England
Help to Buy Scheme - HM Government
Help to Buy Scheme: how it works - Guardian
Funding for Lending scheme viewed as mixed success - FT (paywall)
BBC Newsnight Friday 09/08/13 (video)

And it seems Simon Wren-Lewis agrees with me. (h/t Tim Harford and Tim Coldwell)


  1. Excellent summary. My suspicion is that the continued downward pressure on real wages is going to end up suppressing rental yields, choking many of the greater fools now rushing into BTL. I don't imagine many tears will be shed for them.

    Politically, despite never having voted Conservative before, I would have seriously considered it this time last year. Now? Not a chance.

  2. Very good article and research on the neu-bubble in the housing market. Continued government interference has gone from being unwise to immoral. Perhaps Obborne is looking to get MEWing going again!

    High houses prices for the general population are not to be celebrated - they are disastrous adding to the cost of living and reducing money available to the real economy and savings. Pure lunacy. It's fairly clear that construction lobbying is a factor - they have overpaid for land; banks have over-lent on property. BTL disadvantages FTBs, so schemes are dreamt up to entice them to borrow more than they should or should need to - if such schemes are needed the market isn't functioning properly.

    The illusion goes on. Elsewhere 'imputed rent' which was was 7.8% of GDP in 2009, in 2012 it had increased to 10.2% of GDP,a 30% rise. Desperate stuff to get the 'economy moving.'

  3. After the massive global debt-fuelled boom, there's little source of growth for the real economy, so the only way to make the situation not quite so f***ing awful is 1) Olympics (damn, we just had one), 2) royal babies (damn, we just had one) and 3) keep pumping house prices.
    We've been painted into a corner by politicians, central bankers and bankers and NO politician is going solve this mess. 'Telling it like it is' is a sure vote loser, so they will all promise recovery just around the corner based on more debt and hope that the crippled, lop-sided system will somehow right itself. It won't!
    Does anyone believe Labour would do any better?

  4. "Excellent summary".
    "Osborne's behaviour both angers and frightens me. He is playing brinkmanship with the UK economy to achieve political ends. Nothing he does makes much sense from an economic point of view ... He is dangerous."
    -Hear! Hear!

    That's exactly what many of us sense and fear, thank you.

    "if such schemes are needed the market isn't functioning properly."
    - Exactly.

    [Inflating - a former poster on a house prices discussion website, banned from that site without warning nor any explanation]

  5. That market can stay irrational longer than you can stay solvent. Period.

    Maybe London is moving to a long term situation like Switzerland or Hong Kong's where housing of any kind is a huge multiple of income. Note "London", not the UK as a whole.

    We shouldn't forget the effects on inflation on debt.... even at a historically low inflation rate of 3% it only takes a few years to reduce the real cost of mortgage\debt burden by 10-15% which is why the government "doesn't mind" if first time buyers take on large debt, gambling that int rates wont rise until after inflation has gnawed away at the principal.

    1. "We shouldn't forget the effects on inflation on debt.... "you mean wage inflation which is either non existent or in fact deflationary.We have inflation(from a variety of sources)eroding disposable income and unlikely to change in the medium term-in fact,more likely to exacerbate if the £ declines with mortgage debt taken out now being hit with a double whammy of increasing interest rates(when not if)and static/declining disposable real incomes-it will not be pretty and theer will be nothing the "Government" can do about it except watch the train crash unfolding.As far as the current bunch of idiots are concerned,their perspective doesn't extend beyond the current electoral cycle.

    2. I actually don't agree with you that inflation is good for borrowers. We keep hearing that, but it's not true for most. Most people pay the interest on their mortgages out of earned income. Unless earned income keeps pace with inflation, inflation actually makes mortgages harder to service. We really shouldn't be perpetuating the myth that inflation is good for borrowers. For most, it isn't.

    3. Income will sooner or later pick up, whether it's now, three years hence or six years hence.

      My first mortgage was for £13k, my first London mortgage was £45k. Figures that inflation has rendered all but meaningless.... a longer term look from the ons 2012 survey:

      "The survey results show that since April 2000, average annual pay for full-time workers has risen by 40%, from £18,848 to £26,500.

      In that time, inflation, as measured by changes in the retail prices index, has gone up by 43%."

      So in ten years a £200,000 mortgage has the same bite as £117,000 thanks to inflation.

      I know the past is no predictor etc, but "this time its different..." applies to doomsters as well as hypesters.

    4. Frances,

      This depends on your assumptions.

      If greater inflation implies lower growth of earned income, then that is clearly a disadvantage for income earners, but arguably that has nothing to do with whether you're a debtor or not, as falling real wages hurts every wage earner - whether renter or mortgagor.

      If greater inflation implies lower real interest rates, that in itself is a good thing for borrowers, as all other things being equal, it leaves them with greater real disposable income in the long run.

      However, high inflation may imply higher nominal interest rates. This has some disadvantage to borrowers as it front loads the real value of debt service payments.

    5. Debt service is nominal. The fact that with rising inflation the "real" value of those payments is declining makes no difference to the nominal amount paid. If wages do not rise with inflation, then the debt service burden is higher. Furthermore, higher inflation may result in nominal interest rate rises, in which case there is a double whammy to borrowers. Saying that there may be a benefit to them "in the long run" is no help to people who are facing poverty and default because their wages are not keeping up with inflation and their mortgage interest rate is rising. Let's get rid of this notion that high inflation helps borrowers. It does not.

    6. Even with inflation, how can the nominal debt service be higher if nominal interest rates are the same? If the nominal interest rate stays the same, the $ payments stay the same. Rising nominal rates is a single whammy. But yes I agree - if your mortgage payments represent a large part of your cash outflow, the high up-front cost can often be little compensation for knowing that it'll cost less in the long term. I don't dispute that this is a problem.

    7. No, the nominal amount doesn't change unless the nominal interest rate rises (which it might), but debt service increases as a proportion of real income.

    8. If nominal debt service stays the same and nominal income stays the same (or rises but less than inflation), then nominal debt service cannot be rising as a proportion of nominal income. Therefore real debt service cannot be rising as a proportion of real income (assuming you're using the same price deflator, which seems reasonable). Are you saying that nominal debt service rises as a proportion of real income? That's not a very meaningful measure.

    9. Nominal debt service increases as a proportion of real income. And since it is the nominal amount that is paid every month, that is completely meaningful to the person who is finding their wages don't stretch far enough to pay it any more because food, energy, transport etc. have all increased in price. I can mess around with deflators too, but in the end it is money going out of the door that matters. If the householder is having to pay more overall just to live, then unless his/her income rises to match that increase in general price level, the nominal amount of mortgage interest becomes an increasing burden even if the nominal interest rate does not rise.

    10. Well I don't disagree that rising prices are a problem if your income doesn't rise at the same rate and this is definitely a big issue in the UK at the moment. But that has nothing to do with being a borrower. The same applies to people paying rent. And people living in rented property face the prospect that rents will increase with inflation. Over the standard term of a mortgage, the chances are that a normal rental cost will rise in line with the general price level, whereas mortgage costs will not.

    11. I never said it wasn't also a problem for people paying rent. But this post is about borrowing to buy, not about renting.

  6. Frances, thank you for this welcome blast of sanity. How much economic disaster does it take to wean the UK middle classes off the heroin fix of high house prices? Do these people have children and grandchildren? Who do they think is going to pay the "right" (i.e. overinflated) price for their second-hand houses when they want to downsize, given rising taxes, stagnant wages, inflation, ZIRP and student debt?

    You are quite right that Osborne is behaving in an utterly irresponsible manner and I will certainly not vote Tory at the next election. There is plenty of evidence that the builders handed over a lot of money to the Tories in return for this policy.

    It is long past time that the UK revisited the extraordinary tax privileges conferred on housing, especially the housing of the uber-rich investing in Central London (many of whom pay no or, because they are non-doms, limited UK tax). In what other area do we allow people to make unlimited tax-free gains from what is pure leveraged speculation? Of course many Tory (Cameron, Osborne, Hammond, Maude) and Lib Dem (Clegg, Huhne) politians have first class seats on this gravy train so they will not be rushing to change the rules.

  7. "Nothing he does makes much sense from an economic point of view."

    Well, someone has had a pretty good crack at explaining his actions....

    1. That is SUCH a good post of Pawel's!

    2. Yes, maybe he should stop messing round in banks and do something useful. He has a role model...

  8. “Would someone please explain to me why it is such a great idea for the Government to encourage first-time buyers to take on bigger mortgages at higher loan-to-value at a time when interest rates are at unprecedentedly low levels?” The explanation is easy.

    If your political party (no names mentioned) is funded by banksters, it’s in your interests to bankroll banksters.

    Second, we’ve just had a credit crunch sparked off by excessive and irresponsible lending, so the obvious and best cure is to encourage excessive and irresponsible lending.

    The inane stupidity of Britain’s elite is a wonder to behold.

  9. I can't add much as it's all been said by you or your respondents. All I can say is that I have been writing to my local (Conservative) MP now for some months, since this lunacy was first mooted. He has been routing my complaints through the Treasury, and I have had the usual anodyne replies. The main thrust seems to be that we need to help people to buy houses and if anything looks like going a bit wrong, the policy is temporary and can be withdrawn! I mention this only to suggest that people should at least write/text etc to their MPs to protest. Yes I know it doesn't do any good really but we can't just sit by and do nothing at all. By the way, I am an OAP home owner, but I have a brain and children and grandchildren.

    1. Yes, join the club, we always get the same old same old template/macro-key phrase letters if we write.

  10. Excellent read.
    My conclusion: I really want my full communism now pls.

  11. We needed a property price correction US style in 2007/2008 but the govt never allowed that to happen.
    People would have defaulted on their mortgages, houses prices would have collapsed by 50-60% and in 2014 ( credit records expunged) the same dispossessed home owners would be able to join the property ladder at a 50% discount. Now they will have much more disposable income and be good for the economy as a whole. It's quite simple really.

  12. House prices are too high
    cause high costs, and damage the economy
    the bigger the boom the bigger the bust and we need to bust this but MPs of all shades

    My plan if I were dictator
    1. 5 yr plan to cut max mortgage to 50

    2. 50% negative equity to be written off by the banks – banks cannot just lend they have to take some responsibility

    3. Increased corporation tax on profits from mortgage loans in favour of reduced tax on the profits from loans to productive businesses

    4. Exception made to 3 for dedicated building societies to be run with strict regulation – safe and boring

    5. Increased protection for renters to mirror Germany

    6. Rent protection- (reduce the ROI on BTL)

    7. Gradually increase interest cover as a restriction of borrowing to 4 (ie cant borrow more than 25% of your after tax salary ---- plus take into account other borrowings when deciding the mortgage youre allowed)

    8. Reduce mortgage <3.5 times salary with immediate effect and stop the fraud of "gifted" deposits etc

    9. Increase tax on BTL incomes,

    10. Increase the capital gains on second properties over time i.e incentivise btl to sell now or be taxed more and more

  13. Am I the only one....

    I've been a buy to let investor since before buy to let began, in fact the 1986 bust forced me to rent my property and I began to feel the glow of other peoples money in my bank account.

    I assidously used every legal means to leverage my portfolio. Non-status, interest only, all pushed by the banks at the time. One day I extended my mortgage at the halifax by walking into a branch, filling out an A4 form and was credited that day (without any further survey, check etc) another £30k. Ahhh... the golden days.

    I doubled down and doubled down again, on wafer thin margins, until in 2007, I saw disaster coming (thanks of the US blog fame) and I sold half, kept half.

    There was a 20% fall in prices (more if you take into account inflation), I picked up property in 2010 (in London!) that was pennies on the pound.

    Now I'm buying tracts of what others call wasteland in northern cities, and stuffing them with LHA tenants at ludicrous ROI. In fact I'm thinking of selling down a bit of London to pay for Liverpool. (I'm getting on and 15% ROI is better than london 3.6% average)

    To all the bitter unhappy renters out there: hard luck, you backed the wrong horse, learn your lesson, don't spend hours constructing bonkers arguments about how you're right and the some vast conspiracy is stopping you making good. You have to risk something to get where you want to be. I had to work nights, put down big deposits to get a shed in some pungent part of London, but I took that gamble and it paid off. Along with inflation decimating my mortgages, and asset inflation boosting the properties. Is it that hard to see or understand? If you try and flip you'll fail, if you try and profit in 24 months you'll fail, but if you stick it out and ride out the inconsistencies, you'll be golden. Long term.

    Very long term the dam will break and the green belt will be gobbled up by new properties, but I doubt I'll be around to see it, and as ever I listen to Keynes regarding the long term.

    Ah well, different strokes, different folks. Don't bother trying to scare me with tall tales of imminent, almost certain, vastly likely, crashes, threats, meltdowns, benefit changes, blah blah blah, I've heard them all before.... how many years has been going? That tells you all you need to know.


    1. I realise that you are really wanting responses to feed your ego etc. But I will make one anyway as I'm sure you deserve to be praised for your foresight. You have done well, and no doubt taken chances and made good judgements. Nothing wrong with that. Well done. However, it's clear even from your own statements that (1) you started in the 1980's and (2) lavish amounts of credit were available most of the time in order to boost asset appreciation and the associated incomes to help rental values. All people who have posted about this blog topic are saying is that the credit allocated to residential housing (and the tax policies followed in that area) is escessive and harmful to the overall economy. And they are also saying that some people have been born since 1986.

  14. Here’s the explanation for the government’s irrational behaviour.

    The UK government (along with the IMF, OECD, Rogoff, Reinhart and most self-styled professional economists) have an irrational fear of deficits. That is, they don’t understand Keynes’s dictum, “Look after unemployment and the budget looks after itself”. Advocates of Modern Monetary Theory understand that phrase, but few others do.

    If government borrows and spends more, or simply prints money and spends more, that counts as deficit (shock horror). In contrast, if government cuts interest rates, or does QE or encourages lending by some other means, that DOESN’T count as deficit. Ergo government goes to extreme lengths to effect stimulus via monetary means or via other ways of encouraging borrowing, even if the forms of borrowing are clearly nonsensical.

    “Help to buy” subsidises the purchase of houses up to £600,000 in value: clearly a case of the poor subsidising the rich. Plain bonkers. But for those suffering from deficit phobia and other mental impairments, it makes sense.

  15. This excellent piece appeals to my innate prejudices about property markets, developed since the 1950's. Also I have linked to it in my blog today, Happy Days Are Not Here Again arising from my trip to London yesterday.

  16. Apparently these low interest rates are indeed fixed in stone. There's a school of thought suggests if they go up then a chain of derivatives implodes bringing about the collapse of the global financial system. That's why we're hearing this nonsense from Carney about not putting rates up till unemployment hits X%. Let's not forget the Tories are past masters at fiddling the figures so unemployment can be reported as anything they want it to be. They have a permanent excuse now for not raising the rates.

    1. I do actually think we are going to see low interest rates for quite some time to come, but not for the reasons that you give.

  17. Excellent analysis Frances, once again confirming my own suspicions. Thank you

  18. I agree with everything you have written in the post, Frances, but don't you see that this post is completely at odds with the one a couple of posts ago to which I objected. Interest rates held below equilibrium in the loanable funds market by all manner of monetary interventions are the main driver of the incipient housing upturn, and it can be understood that rising house prices are the resulting inflation if you realise that inflation is the rise in the general price level of all items traded against money other than just new production. Even aspects like rich foreigners buying London property are to some extent driven by our loose monetary policy - eg oil producer wealth from rising oil prices that we choose to accommodate rather than recognise as inflation under our control (ie we could make it a relative price change only if we would accept the initial slowdown in economic activity).

    1. Nope. It is not at odds. I have not in this post addressed the question of generally low interest rates. I have attacked the ADDITIONAL measures that the Government is using to ramp up the housing market - namely Funding for Lending and Help to Buy.

      The effect of low base rates on mortgage rates is negated to a considerable extent by wide credit spreads: margins on new mortgages are considerably higher than margins on existing mortgages (pre-2008). Funding for Lending depresses mortgage rates on new mortgages, and Help to Buy in effect makes part of a high-LTV mortgage interest-free for 5 years, as well as depressing the interest rate further because of the government guarantee. Without these schemes, mortgage rates for first-time buyers in particular would be far higher. These schemes are a major distortion of the housing market for political ends, and they are likely to inflate house prices further, leading in due course to a traumatic price correction unless real incomes start increasing too. THAT is what I am objecting to.

      Government policy is also to blame for the continuing fall in real incomes. But raising interest rates is not the solution. Raising interest rates would raise business finance costs, increasing unemployment and putting downwards pressure on wages. It's a terrible idea.

    2. Then I find your position ludicrous. FLS and HTB are just extensions of "unconventional" easing, which the authorities have resorted to because the policy interest rate hit practically zero. In the earlier post, you seemed to express support for lowering the interest paid on reserves. Do you not think that such a policy would also drive up lending and boost the housing market?

      And, by the way, it is always the case at the margin that "raising interest rates would raise business finance costs, increasing unemployment and putting downwards pressure on wages". Do you not see that, with such sympathies, well-meaning people like you have contributed to the present distortion of the housing market?

    3. No they aren't. They are political shenanigans, not "unconventional easing". Quite apart from anything else, as both target a particular sector and involve direct Government support (FLS short-term debt issuance, H2B government guarantees) they are fiscal policy, not monetary. You don't seem to understand the difference.

      I do not think that lowering the interest rate on reserves further would increase lending. Frankly I think it would make very little difference. I don't think low base rates have much impact on lending volumes: it is EXISTING borrowers (and bank balance sheets) that are protected by low rates. Indeed if you had read my earlier work you would realise that I do not support cutting interest rates further. Negative nominal rates have all sorts of perverse effects. Unfortunately you misinterpreted my remark that the BoE is actually propping up the short end of the Treasury yield curve with interest on reserves, and that without that support interest rates would be lower, as support for a lower interest rate policy. I suggest you have another look at what I actually said.

      Really the "distortion of the housing market" from low interest rates is a secondary consideration. As is the pressure on people who are living on the returns from their savings (sorry, I refuse to call them "savers", since they are not saving - they are spending). Business finance, earnings and employment are more important than either.

    4. Fiscal / monetary; I thought you might make a naïve distinction like that! It's all fiscal to some degree. Conventional easing involves paying over the market value for assets, but provided that any resulting reduction in income can be absorbed by seigniorage the fiscal aspect is not readily apparent. It gets more obvious when the intervention is large - note that the BoE does QE under an indemnity from HMT. I described how FLS is linked with money creation before. HTB is not done by the BoE, but it is a subsidy for borrowing for house purchase rather than house purchase per se, and the government has given the BoE the responsibility for ending it (though not for three years, thank you!).

    5. Hardly naive and I rather object to your use of that term. There is a considerable divide between monetary easing designed to improve economic performance by cutting finance costs for businesses and households, and pumping up a housing market to create a feel-good factor for political ends. I'm amazed you can't see the difference.

    6. The trouble is that there has not been enough of a divide. FLS was supposed to make borrowing for SME's easier, but was more successful at boosting mortgage lending:

      Overall though, I agree with you. We need policies to promote business, but since that does not look like working in time for the next election, our desperate career politicians are falling back on the old trick of boosting the housing market. But sadly that is to be expected; the people I really condemn in this are the MPC (with the exception of Andrew Sentence), who have been given the independence to confound such opportunism, but seem loath to use it.

    7. I would like to see Help to Buy scrapped and FLS restricted to SME lending only.

      I don't agree with Andrew Sentance.

  19. Excellent article...however. What is the message that the BBC/Labour/Dems are trying to put across at every opportunity? "A critical shortage of housing". Demand. Population growth is booming mostly through immigration. Even illegals have to live somewhere, that's why there is a burgeoning rentals market all over the UK. London is certainly an oddball in some respects but other price rises (SE) are driven by a shortage of property to rent = higher rents = more BTL merchants, helped by the wonderful Govt. handouts. There won't be any housing crash any time soon, unless immigration is stopped or reversed, its that simple.

    1. Rubbish. What is needed is more houses, not an end to immigration.

  20. Frances

    Excellent post.

    Remarkable policy, especially in the light of Rajan's thesis that inequality (in part) has led Government's to rely on credit creation to create the illusion of equality (of consumption).

    In the UK our own version is the obsession with house prices, despite the fact it's as clear as daylight that in aggregate rising house prices do not raise net wealth. I'm sure Willem Buiter covered these points many years ago when he still wrote for the FT.

    What I find most remarkable is the reasonable people seem to have no qualms about trying to flip houses at large increases to sellers, but posit to them that the buyer could be their offspring...

    Relax building restrictions, increase supply and gently deflate this market and return housing to its core purpose. Not only will productive energy be directed more appropriately but it may even ease the labour market.

    1. I totally agree, Nooman. GENTLE deflation of the housing market through a gradual increase in supply - and an end to insane policies to prop up prices and increase the household debt burden.

    2. Frances,

      Extremely well articulated explanation of why stupid Economic Policies are pushed by Politicians. I think I might forward your article to my local MP (a Conservative MP currently in the Government) because you make a lot more sense than he does. Hopefully it will also enthasise the fact that we know what they are doing as Gordon "Goldfinger" Brown and his accomplices did exactly the same thing prior to the May 2010 General Election. A Housing Boom just before an Election, which mysteriously lost it's steam a few weeks after the Election when House Prices started to flatten out then fall.

      House Prices increasing is always portrayed as Good, so why are Price Increases in everything else regarded as bad ? Absolutely agree with your article.

      One of the problems is that if House Prices do fall (which they should), there will be a collapse in the Banking System. Looking at the Consolidated Balance Sheet of the Major Banks seems to have a High percentage of "Derivatives" under the Assets Column.

      If House Prices drop, how will the calculated value of these Derivatives be affected ? Would the Bnaking System become insolvent?

      Terrific article - thank you.

  21. I am afraid that I really don't get the argument here. A "bubble" in an asset class is when prices outstrip any rational backing for price. A bubble is when people are buying on the "greater fool" basis, and bubbles collapse when they run out of greater fools and have to liquidate. The US house bubble, for example, involved people buying second and third homes with 100% mortgages, hoping to flip them, and when the market leveled off and it became clear that there were no more fools, they had to liquidate and the market collapsed.

    But this article says quite the reverse. It says that London prices are being driven by foreign buying. The World is becoming an unstable place, not least in the Middle East, so if you are an Arab or Indian investor with business interests from Mumbai to New York, where would be an attractive place to live, Bonn?

    And the argument about rents is also a bad one. If rents are high, that makes house ownership more attractive on a rational basis. Higher returns on rental housing makes housing a rational choice of investment, *not* a bubble.

    Oh, and "Help to Buy" should be scrapped? Really? Wouldn't that just tilt the market even more in the direction of foreign and/or cash-only buyers? I can see no good argument against young couples buying homes, even with Government backing. A house is a very good investment over a decades-long time-frame and people who end up owning their home before they retire then have much lower living costs after retirement than people who rent all their lives, and that translates into lower costs of social support after retirement, so for a Government, subsidising people to buy a home when they are young is actually a pretty good investment.

    And why all the worry in the comments about derivatives? A foreign investor who buys a house in London "just in case" is likely to be paying in cash.

    To put that another way, if the Banks are once more getting into highly leveraged loans, we have more problems than the house market, but I think we know that isn't happening.

  22. Interesting article, but a few points:

    People mean two different things when they say "housing recovery": prices are rising, or the pace of building is accelerating. They naturally go hand in hand, but not in lock step.

    Although we thinking of rising house prices, what we really mean is rising land prices. Structures are worth their replacement costs, which are vary with wages and material prices, but are generally much more stable than land prices.

    Rising land prices will generally drive building, but if you're interested in an economic recovery angle, you should be looking at building, not at prices.

    Homebuilding isn't a particularly good or particularly bad kind of economic activity. It can be productive investment where there is genuine need to house people near growing business. Usually it's just another kind of consumption.

    The reason why homebuilding and land price booms can be such a problem for the economy is all to do with them being driven by credit.

    A buy-to-let driven recovery is still a recovery, and actually a relatively sustainable type of recovery, because rents aren't as volatile as credit-fueled demand.

    Where I absolutely agree is that quickly rising land aka house prices are a bad sign for the economy, but for a slightly different reason: because of the credit issues involved. Stimulating by trying to engineer a "wealth effect" always seemed to me profoundly stupid.

  23. The mismatch between supply of and demand for housing since at least the Right to Buy of the early '80s is behind all the UK's economic woes in my opinion. It was fine for those already owning houses in the '80s but has squeezed everyone else out.

    Price pumping is not only irresponsible and dangerous, it is evil. I hope the electorate realises this in 2015 but given the silence from the opposition on the topic, they may just vote for the feel-good of a 'recovery'. Support for all property up to £600k verges on criminal stupidity or electoral corruption.

    The only rational but frightening explanation is that the banks are so afraid of house price collapse and the effect on their capitalisation of negative equity and mortgage default that they have supported this insane policy to put off the evil day - but of course it would then be much worse in the end.

    We need more housing to meet population growth and demographic changes. The only case I can see for mortgage guarantee or support of any kind from the government is for new starter homes to promote building - maybe on properties up to £150k limiting the support to 20% (perhaps a tad more within the M25). This would prop up prices at the bottom and have minimum distortion further up the market.

    People could be weaned off renting into owning which would cut the demand for rented property. This may hurt new entrants to property investment but I don't shed too many tears there.

    A sustained policy of some sort of support for building starter properties would also help cut the Housing Benefit bill, which could be a double whammy - HB is I believe only payable on the interest component of a mortgage.

    Maybe the construction industry is behind this - if so then the sooner the funding of political parties is taken out of the control of vested interests on all sides, the better.

    1. The construction industry is absolutely behind this. Support from the Home Builders Federation, which is a major lobbying force in Whitehall:

    2. The House Builders' Federation response is to be expected, hiding behind the assertion that it will enable more house building but this is likely to be of £599k houses when we really need starter homes, homes for singles and DINKYs etc.

      But there is no smoking gun AFAIK. Would that there were.

      Landlords will also welcome it although they may well get badly burnt when the bubble bursts while builders will have sold at least some of their stock.

      It is very dangerous.

  24. Excellent piece Frances - thank you. However you should be aware that Help to Buy mortgage guarantees will not be limited to First Time Buyers. Which of course makes the scheme even more dangerous.

    The first bubble was tragedy, this one is a farce. Actually in London I guess it's both as the bubble is still with us, 10 years on. Eddie George admitted blowing it up & asked Mervyn King to fix it; Mervyn King admitted "short term measures" were needed which contradicted long-term sense, again leaving it to Mark Carney to clean up, and no doubt Carney will leave it to the next guy, just as he's done in Canada.

    Until the housing boil is lanced there is no future here for the average under-40 family.

    For any Tory party types reading this: I voted Tory in 2010, and am a prospective First Time Buyer in a marginal London constituency where housing affordability is a problem for young professional (read Tory) families. Many of whom work in finance like myself. So I am exactly the target market for a genuine fix to FTB affordability. Yet this policy alone will ensure the loss of two votes for my MP, and an active campaign against her. People like Lynton Crosby and George Osborne will be long gone while your party is still suffering the consequences of this disgraceful exercise. Good luck surviving on the rump of the baby boomer vote when the pensions crisis hits and gets blamed on Carney keeping rates too low for too long.

    1. I know the H2B scheme is being extended. I think this is crazy.

  25. A breath of fresh air, as always! Not just the post itself, but also in the comments it's great to see you pointing out to people that inflation is bad news for borrowers if their income doesn't keep pace with it, as is currently the case.

    Now, I don't want to get into an argument with you because we've been here before, but I just thought I'd point out that the causes of this 'recovery' laid out in your post (foreign money keeping property empty and BTL) would both be negated by a transfer of the tax burden from labour to economic rent.

    Since you mentioned her, here is Merryn Somerset Webb's article supporting it and here is Martin Wolf having his say.

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  28. Outstanding item Frances - thank you. However you should bear in mind that Help to Buy home loan assures will not be restricted to First Time Customers. Which of course creates the plan even more risky.

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  32. Hi Frances – thank you for your remarkable analyses
    I’d welcome your views on how to stop London house prices increasing. I’m not sure that this is a bubble, as the point of bubbles is that they can be pricked, and I don’t see how this one can be.
    London has become a global city, and its houses are seen as a safe haven for foreign money. The super rich are getting richer at an accelerating pace as they hoover up everyone else’s wealth, and need to protect and grow this rapidly expanding pot by some risk-free means. Investing in desirable properties, which are in short supply, is a one-way bet. There is nothing to stop London house increasing. Rents will increase in parallel, because so many foreign-owned houses are removed from the market entirely: they aren’t let out and remain empty. Londoners will gradually be forced out, or pushed out by government edict. Rental returns will eventually fall, and some of the pressure will move out to the rest of the country, but not before British landlords sell up to foreigners, thus reducing the supply of London rental property.
    Governments are encouraging trickle-up through lax tax regimes that favour the wealthy, and dare not do anything else because this group pay significant income tax. London councils are pulling down council estates for redevelopment for the wealthy, encouraged by a government that has abandoned even the joke that was ‘affordable housing’. As you say, governments won’t implement policies that cause house prices to fall, and I can’t see even a Labour government still in thrall to Tory policies and in the face of popular acceptance of Tory economics being able to build its way out of trouble fast enough.
    The only thing that will stop this is London losing its status as a safe and desirable haven. But that won’t happen until it has become a ghost town, full of empty property.
    Do you have any ideas?
    Best wishes

    1. I'm in favour of 100% taxation of notional rents on empty properties. That should ensure that overseas owners actually let their properties out instead of keeping them empty. Overseas owners don't pay income tax here.

  33. Good answer. Additional potential revenue of upwards of £100k pa per property in central London should be enough to encourage councils to invest in the amount of investigation that will be needed to prove houses are empty. There’ll still be loopholes and foreign owners paying a flying visit every year, though. Otherwise, problem solved, for those able to afford these rents. I was more concerned with the impact of accelerating prices lower down the scale, as I know you are.
    Best wishes

  34. Excellent analysis Frances, once again confirming my own suspicions. Thank you
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  40. Excellent summary. My suspicion is that the continued downward pressure on real wages is going to end up suppressing rental yields, choking many of the greater fools now rushing into BTL. I don't imagine many tears will be shed for them.Politically, despite never having voted Conservative before, I would have seriously considered it this time last year. Now? Not a chance.........

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