Property treadmill
A little birdie warned me that the Torygraph had a particularly
stupid article up about house prices. On reading the post it turns out to be a lot less stupid than most MSM writing about economics, but I promised Femme-de-R I'd fisk it, so I am going to have to go into detail on a few particularly egregious points.
guys and gals houses and people who want to buy them. Money, prices, mortgages etc. are just a way for nerdy guys to get laid a dez rez in the suburbs. At a "Sex and the City"-themed singles party the vast majority of the ladies are going to go home unsatisfied and nothing can change this. Even if all the women are gorgeous, rich, Oxbridge-educated professionals and the two guys who turned up by mistake are a failed computer programmer and Mr Fry Cook of the Month, only two couplings are possible. [I ignore second homes for the moment - most first-time buyers are not trying to buy in the rural areas popular with second home-owners].
At the moment this is the state of the housing market. There are very few entry-level homes (because the planning system makes them less profitable to build than McMansions, when it doesn't make building homes for the private sector completely impossible) and a lot of first-time buyers (because of immigration, people wanting to buy before they get married, an expanding middle class etc.) When Northern Crock would lend you enough money to buy a house you couldn't afford, house prices were crazy-stupid, so most first-time buyers couldn't buy houses. Now you can only buy houses you can afford, prices have dropped to merely unaffordable levels and first-time buyers are still out in the cold.
None of this has anything to do with the mortgage crisis. The only thing that can make housing affordable is if a new supply of houses comes onto the market (perhaps repossesed buy-to-lets) or if a bunch of buyers quit (perhaps young single people might realise that buying a house that you might have to sell in two years when you get married is a risky speculative investment, and thus unwise).
At the same time, the article completely ignores the main way the housing market downturn can help first-time buyers. First-time buyers have to compete for entry-level homes with investors (i.e. your friends with property portfolios) and speculators (your enemies with property portfolios, plus Will Hutton's wife) buying to let. They don't compete all that much, because investors prefer one-bedroom flats in prestigious city-centre locations that they can rent out to single yuppies whereas homebuyers prefer three-bedroom semis in the suburbs that they can raise a family in. But economic theory tells us that this kind of small effect can affect prices a lot.
People now know that buying to let isn't free money. Some buy-to-let landlords can't compete with first-time buyers any more because they are too busy struggling to avoid reposession. Others have simply pulled out of the market because they don't want to lose their shirts. If all the gold-diggers leave our party because they realise that there are no rich men, this improves the odds for the women actually looking for love.
Overall verdict: while this story avoids most of the standard errors of media house price reportage (possibly because it isn't written by Will Hutton talking his wife's book) it still kind of misses the point. And I haven't yet dealt with the one line that really made me cringe, from near the beginning of the article:
In the Elder Days when Men were Real Men, and your Friendly Local Building Society was really friendly, local, and a building society, large deposits (20% plus fees plus any difference between the purchase price and the building society's surveyor's valuation) were used as a device for rationing mortgages, which were at subsidised interest rates - often below inflation after accounting for the now-abolished tax relief. The limiting factor on how much house you could afford was normally the deposit you could put down, and the best source for a deposit was the sale of your previous house. With inflation at 5-10%, house prices could rise by 10% a year without anything untoward going on, so you built up equity easily as inflation wiped out your mortgage.
Nowadays mortgages are rationed using credit ratings and ability to afford the monthly payments. Even in a credit crunch you only need a 10% deposit, and 5% will do in normal market conditions. The limiting factor on how much house you can afford is whether you can afford the mortgage payments. And if you take on too large a mortgage, inflation means that it will be a financial millstone for 25 years. To cap it all, house prices could only go up 10% a year because of a speculative bubble that has now burst. Between getting into credit card debt to cover the mortgage when your cheap Northern Rock 2-year fix expires and the threat of negative equity, house 1 is as likely to take you further away from house 2 as towards it. Even if the price of your current house is going up, the price of the house you want to trade up to is probably going up faster. The "housing ladder" is actually a "housing treadmill" where just staying in place is hard work.
Nor is this a bad thing. The housing wealth that our parents acquired without working for it was a transfer - partly from people too poor to get on the "ladder" in the first place (someone had to pay for all that mortgage interest tax relief) and partly from all the gen-Xers who have to pay through the nose for shoeboxes. A society where the only way to live in a nice house is to pay for it is a fairer society. And a society where a house is a home and not an investment is a more honest society.
Read more!
stupid article up about house prices. On reading the post it turns out to be a lot less stupid than most MSM writing about economics, but I promised Femme-de-R I'd fisk it, so I am going to have to go into detail on a few particularly egregious points.
He also warned that the "severe rationing" of mortgages was preventing first time buyers from taking advantage of falling house prices, preventing affordability from improving.Not quite. Edmund Conway needs to remember that business is like dating. The key players in the housing market are
At the moment this is the state of the housing market. There are very few entry-level homes (because the planning system makes them less profitable to build than McMansions, when it doesn't make building homes for the private sector completely impossible) and a lot of first-time buyers (because of immigration, people wanting to buy before they get married, an expanding middle class etc.) When Northern Crock would lend you enough money to buy a house you couldn't afford, house prices were crazy-stupid, so most first-time buyers couldn't buy houses. Now you can only buy houses you can afford, prices have dropped to merely unaffordable levels and first-time buyers are still out in the cold.
None of this has anything to do with the mortgage crisis. The only thing that can make housing affordable is if a new supply of houses comes onto the market (perhaps repossesed buy-to-lets) or if a bunch of buyers quit (perhaps young single people might realise that buying a house that you might have to sell in two years when you get married is a risky speculative investment, and thus unwise).
Planning wonk and adviser to the PM Stephen Nickell said "The consequence is that house prices fall. But despite the fall in house prices they still find it hard to get into the market because of the difficulty in getting hold of credit."No, Mr. very clever planning wonk. First-time buyers are finding it harder to get into the market because of the lack of houses.
The housing market - in terms of the price of houses - will not look much the same as it did before the credit crunch until after six or seven years.It is going to be a lot more than six or seven years before the crazy mortgage lending practices of the pre credit-crunch boom come back. The norm in financial markets is that you don't get another speculative bubble in the same thing until the people who remember the previous one are old enough that they can be dismissed as "old fogeys". That will be more like fifteen to twenty years. If housing prices to get back to 2006 levels before then it will only be because of inflation.
He also warned that the problems facing Britain's housebuilders threatened to put back the Prime Minister's promises to build 3m more homes by 2020.This is the real issue. The only sentence in the story that deals with the gender balance at the party. And it's buried half-way down. If the credit crunch does slow down housebuilding, then that is a long-term problem for potential homebuyers.
At the same time, the article completely ignores the main way the housing market downturn can help first-time buyers. First-time buyers have to compete for entry-level homes with investors (i.e. your friends with property portfolios) and speculators (your enemies with property portfolios, plus Will Hutton's wife) buying to let. They don't compete all that much, because investors prefer one-bedroom flats in prestigious city-centre locations that they can rent out to single yuppies whereas homebuyers prefer three-bedroom semis in the suburbs that they can raise a family in. But economic theory tells us that this kind of small effect can affect prices a lot.
People now know that buying to let isn't free money. Some buy-to-let landlords can't compete with first-time buyers any more because they are too busy struggling to avoid reposession. Others have simply pulled out of the market because they don't want to lose their shirts. If all the gold-diggers leave our party because they realise that there are no rich men, this improves the odds for the women actually looking for love.
In the capital sales of homes below £200,000 fell by more than 60 per cent, a further sign that first time buyers remain trapped outside the housing market.Given what you can get for 200 grand in London, I suspect that this is mostly flats bought for investment purposes. Which will start moving again when the forced sellers are banks (who are rational and just keep cutting the price until it sells) rather than amateur speculators (who desperately don't want to own up to taking a loss).
Overall verdict: while this story avoids most of the standard errors of media house price reportage (possibly because it isn't written by Will Hutton talking his wife's book) it still kind of misses the point. And I haven't yet dealt with the one line that really made me cringe, from near the beginning of the article:
Prof Nickell, the warden of Nuffield College, Oxford and the chairman of the National Housing and Planning Advice Unit, said he was extremely worried that the credit crunch would keep first time buyers from getting onto the property ladder.No speech marks, so at least I can hope that the words "property ladder" were chosen by the journalist (who can't be expected to know better) than the wonk (who should). The point of a ladder is that each rung helps you to get to the next rung up, something that is no longer true.
In the Elder Days when Men were Real Men, and your Friendly Local Building Society was really friendly, local, and a building society, large deposits (20% plus fees plus any difference between the purchase price and the building society's surveyor's valuation) were used as a device for rationing mortgages, which were at subsidised interest rates - often below inflation after accounting for the now-abolished tax relief. The limiting factor on how much house you could afford was normally the deposit you could put down, and the best source for a deposit was the sale of your previous house. With inflation at 5-10%, house prices could rise by 10% a year without anything untoward going on, so you built up equity easily as inflation wiped out your mortgage.
Nowadays mortgages are rationed using credit ratings and ability to afford the monthly payments. Even in a credit crunch you only need a 10% deposit, and 5% will do in normal market conditions. The limiting factor on how much house you can afford is whether you can afford the mortgage payments. And if you take on too large a mortgage, inflation means that it will be a financial millstone for 25 years. To cap it all, house prices could only go up 10% a year because of a speculative bubble that has now burst. Between getting into credit card debt to cover the mortgage when your cheap Northern Rock 2-year fix expires and the threat of negative equity, house 1 is as likely to take you further away from house 2 as towards it. Even if the price of your current house is going up, the price of the house you want to trade up to is probably going up faster. The "housing ladder" is actually a "housing treadmill" where just staying in place is hard work.
Nor is this a bad thing. The housing wealth that our parents acquired without working for it was a transfer - partly from people too poor to get on the "ladder" in the first place (someone had to pay for all that mortgage interest tax relief) and partly from all the gen-Xers who have to pay through the nose for shoeboxes. A society where the only way to live in a nice house is to pay for it is a fairer society. And a society where a house is a home and not an investment is a more honest society.
Read more!
posted by LibertyCat @ 9:53 am
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