Saturday, September 01, 2012

An article on the UK housing market

Tim Morgan at Tullett Prebon has written an insightful piece (PDF) on the UK housing sector. Here are some salient and sometimes shocking points to consider:

-  young people ... have seen housing priced out of their reach just as homeowners amongst their parents’ generation have seemed to prosper. Moreover, young would-be buyers no  longer enjoy the perks that benefited their elders, perks such as (a) mortgage interest tax relief, and (b) deeply discounted right-to-buy prices on local authority home sales. This seems - indeed is - grossly unfair to a generation which is also poised to inherit the massive debts recklessly built up by their predecessors.

- According to official figures,  a rise of just 2.2% in mortgage rates could put as much as 52%  (by value)  of all variable-rate mortgages into distress.

- The third, less than obvious problem for existing homeowners is the widespread assumption that they can monetise the equity in their properties to fund a good quality of life in their retirement. But to whom, exactly, do retiring members of the baby boomer generation think they are going to be selling their houses when they seek to realise their equity by downsizing? Certainly not to the younger generation, who cannot afford to buy at anything remotely approaching current price levels.  In short,  demographic distortion is going to spring a very nasty shock on anyone who expects to retire in comfort on the basis of inflated housing equity. Whilst our assessment of price/income multiples suggests further downside  of about 25% in real average property prices, there are well-reasoned arguments which suggest that real-terms price declines could exceed 40%.

- The second set of myths about high property prices is that  they are good for the economy. In the short term, rising prices may be economically beneficial if they boost consumer spending, but this is a function of the rate of change, not of absolute property price levels.  As soon as real prices cease to escalate – which at some point, of course, they must – this beneficial effect is lost, and any benefits are likely to reverse, because homeowners are left further in debt than they were before the escalation began. Between the end of 1999 and the end of 2007, mortgage debt outstanding increased from £494bn to £1.1 trillion, a real-terms increase of 53%. 

- the privately-owned housing sector is a capital sink, absorbing funds which could otherwise have been invested productively. If the £690bn expansion in property debt between 1999 and 2007 had been deployed into industry instead, the economy would be very, very much more productive than it is today. 

- By paying housing benefits, government expands demand and drives prices (rents) upwards, which explains why the cost of housing benefit to the state has risen from £11.1bn in 1999-2000 to £22.7bn in 2011-12. Thus seen, housing benefit has been a subsidy to the private rented sector, since the number of socially-owned homes decreased by 464,000 between 2000 and 2010, whereas there was a 2.1 million increase in privately-rented properties over the same period.  So  the more funds government makes available  in benefits, the higher rents will be, for the simple reason that government has been increasing demand for rented properties.
...f government wants to drive rents (and, hence, benefit costs) downwards, it needs to invest in increasing supply, not in boosting demand. There is, then, a compelling  financial case for a state-funded house-building programme, because it will reduce the future cost of benefits.

 -  ... house-building is an essentially domestic  industry, which has very important economic implications. If government were to initiate a major house-building programme, a host of businesses (including builders, electrical contractors, plumbers, builders’ merchants and various sub-contractors) would benefit, as would their employees. Most of this business would be placed with British suppliers, so far less of this stimulus would ‘leak’ into imports as it would if, say, VAT was cut as an alternative stimulus technique.

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