We have all read reams about the paucity of available mortgage financing and tight credit conditions pushing average age of first-time buyers to 35, from 24 in the sixties.
In the go-go years leading up to 2007, cheap money and loose credit allowed just about anyone to live the dream. Along came the crisis and prospective first-time buyers now find themselves locked out of the property market.
It is a major political issue: hardwired into the Anglo-Saxon psyche is the right to own one’s abode.
Every month, Nationwide publishes its House Price Index along with a press release including a chart going back to 1982 titled “UK house price to earnings ratio”.
At 5.11x earnings, the ratio is 25+% above the long-term trend which is slightly higher than 4x earnings.
To put this into perspective, the average house price would have to drop by 22 per cent to £129,000 – a level last seen in August 2003 – or annual earnings would have to increase 28 per cent from £32,000 to £41,000, relish the thought, for the ratio to return to 4x earnings.
Should house prices drop 5 per cent per annum and wages grow 2 per cent per annum it would take three years to revert to trend. In the absence of cheap money and loose credit conditions, it stands to reason that the lower the house price to earnings ratio the more people will have access to home ownership.
To be fair, thanks to rock bottom interest rates, other affordability measures have improved, notably monthly mortgage payments as a percentage of earnings. But that will only last as long as the Bank of England keeps interest rates low. Already mortgage rates are trending up as lenders recalibrate to ensure margins cover costs of funding and servicing, potential losses, and provide a reasonable return on capital.
For those unable to buy, there is the rental market but here again the environment is less than friendly. For starters, renting is still viewed as a failure though current harsh borrowing conditions are doing their share to change this perception. And why not?
Germans for example have always been a nation of renters with only 43 per cent owner-occupiers. Germany’s tenancy regime however is much more accommodating to the renter than is the UK’s, delivering greater security of tenure and fairly low rents. With little to no security of tenure in the UK, it is hard for a prospective tenant to view renting as a viable long term housing solution. If that weren’t enough, rents hit record highs in July averaging £725 a month in England and Wales. The rental market may be the only alternative for those unable to buy but it is not a welcoming one.
The government seems to have understood that dealing with these issues would be a vote getter. Hence FirstBuy, NewBuy, Funding for Lending, and the more recent package of measures aimed at boosting homebuilding. High leverage 95% LTV deals, like the FirstBuy and NewBuy schemes, are what led to the 2008 crisis in the first place.
The expectation that salaries and property prices will increase is a gamble and is certainly not a bet one should be taking today, much less promote. So what should the government do?
A framework promoting a substantial increase in housing targeted at low and middle income buyers needs to be put in place; what has been proposed is a timid start, more needs to be done. Increase the exemption stamp duty level from the current £125,000.
Eliminate council tax discounts for unoccupied properties – after all, empty houses are a drag on the local economy.
To some extent, the government ought to be providing sufficient incentives so that coupled with existing market pressure the housing price to earnings ratio eventually returns to a more “affordable” level.
At the same time, rental regulations providing more tenure protection as well as reasonable limits on rent increases are needed to de-stigmatise renting and make it a viable long term option for those who don’t want to deal with home ownership or for the growing number who simply cannot afford it.
Mark Prisk as new housing minister certainly has his hands full.