A common question among many of my friends is regarding the house market. In the future are houses likely to continue going up? Or are prices finally about to hit the buffers?
I often see articles in the press, and on social media, where estate agents are reported as saying that the house market is expected to continue to rise. Is this true? Well the only sure answer is that we just don't know, however, it would be silly to assume that house prices will always increase faster than inflation.
Before we make our own guess about the price of houses, lets think about what really determines the price of houses and how has this changed over the last 70 years.
I remember once talking to an elderly gentleman who told me that the young people of today are all mad and pay far too much for houses. He assured me that it was not like this in his early days. He then went on to tell me that he bought his first house back in the 1950s for only £500. He paid cash and didn't borrow any money from anyone.
To buy a house for £500 seems quite incredible. We know that wages in the 1950s were substantially lower but £1 back in those days would go a lot further. In fact, the buying power of £1 back in 1950 would be equivalent to £33 in today's money. So if houses had gone up in this period, by the rate of inflation, a house which cost £500 in 1950 would now in 2019 cost approx £16,500.
I don't know for sure what date this elderly gentleman bought his house and I don't know where it was located or how large it was, but never the less, we all know that the price of houses over the last 70 years has gone up much faster than the general rate of inflation.
So why have house prices increased so much?
What were the things that changed over this time, resulting in such a large increase in the price of houses?
To answer this question, we need to look at the economics of the situation.
The price of houses is determined by the following:
- Supply of houses available in the market place.
- Demand from buyers wanting to buy a house.
- Availability of finance (how much can be borrowed).
It is very difficult to state with any accuracy how the supply of houses in the UK has increased over the years. We know that the total number of houses has been steadily increasing and we know that there are approx 25M houses in the UK today (2019).
In 1950 the population of the UK was approximately 50M and now in 2019 it is approximately 67M. All these people need somewhere to live.
What has changed a lot, over the last 70 years, is the amount of money that homebuyers have been able to borrow. In the 1950s it was not possible to borrow vast sums of money to buy a house and so buyers were not able to pay high prices. As a result prices were relatively low.
By the 1980s, it had become common place for house buyers to take out a mortgage and most Building Societies would allow homebuyers to borrow up to 3 times their basic salary.
After the 1980s interest rates (which had been around 10%) started to decrease and the banks and the building societies started increasing the amounts of money they would lend. In many cases the multiple increased to 4 or 5 times salary. The amount of money available to each homebuyer increased and so the prices of houses went up.
The other thing that changed was a culture among the financial people running the lenders. In 1980 most mortgages were provided by Building Societies (not by banks). Building Societies were 'mutual' organisations owned by their members and the society's objectives were to help their members. If you went to a Building Society and asked for advice, they generally gave you good advice. They did not attempt to sell you anything that you did not need.
In the late 1980s this gradually started to change. Commercial banks moved into the market and most of the Building Societies 'de-mutualised' and became banks. Employees in these banks were paid bonuses for selling financial products to customers. The quality of advice given by these people sometimes became very poor. The whole culture changed, as the individuals in the banks were told to focus on their bonuses and not necessarily on what was good for the customer.
Another change, which occurred towards the end of the 1990s, was the legislation regarding landlords. New legislation made it possible for landlords to start making serious money. As a result, lots of the older people started buying houses and renting them out to the younger people. This meant that the price of houses went up even more.
While a reform of legislation around landlords was well overdue, one very sorry outcome of the changes, was that it actually became more favourable for landlords to own houses rather than for young people. Landlords were able to claim tax against their costs but young home owners were not able to claim any tax back. The number of buy to let landlords started to increase and the number of young first time buyers purchasing a home reduced.
So we are now in 2019. Are house prices going to continue to increase?
I am often amazed when people tell me that the price of houses has increased continually during our life time and so will continue to increase into the future. While this may seem logical to them I think it is not a very sound basis to make such a judgement.
Instead we need to consider; supply of houses, demand for houses and availability of finance.
Supply of Houses
Where ever I go I see houses being built. Government figures indicate that new houses are being built at a rate of over 200,000 per year.
Demand for houses
The population of the UK is now approximately 67M and is growing at nearly 400,000 per year. Most of this increase in population is due to immigration into the country. This is quite alarming as we only grow food for half this number and for the other half we are totally reliant on being able to buy the extra food from overseas. If the price of food imported from overseas goes up, which it almost definitely will, we are going to be in a lot of trouble. Most UK politicians do not seem to have any worries about this increase in population but most voters are concerned. These concerns probably played a significant part in the 52% vote for BREXIT.
World population is now 7.7 billion and is increasing by a net 1 million every 4 days. Many countries in the world are now over populated. The amount of land in the world to grow food is not increasing. All 7.7 billion of us are using up resources and producing rubbish which is being dumped everywhere including in the sea and in the atmosphere. This is causing global warming and this in turn is resulting in drought and famine in many countries and this is leading to political instability and mass migration.
Population growth in the UK over the next few years will mainly be determined by the increasing number of migrants who will want to come here. Restricting this flow will depend on the resolve (or lack of resolve) of our politicians to find ways to implement controls on immigration.
The other thing affecting demand is landlords buying houses. Recent changes in tax have started to make it slightly less favourable for landlords to own houses. This means that the number of first time buyers has started to show a small increase.
Borrowed money available to homebuyers
In 2008 it became apparent that the people managing the banks were not doing a very good job of it. In some cases, they were encouraging their staff to loan money to individuals who would never be able to pay it back. At the same time these bankers were claiming large bonuses for short term gain. They had no integrity and they had no concern about the long term viability of the organisations that paid their salaries. It seems incomprehensible that businesses could be run in this way but never the less this is what happened.
The magic circle of bank managers, who were at the top table, have now all retired with massive pensions and golden payoffs. New managers are now running the show but it is difficult to believe that these people will be any different. Some economists are predicting that a second melt down in the banking sector will occur in the near future.
Interest rates have been at incredibly low values for well over a decade. With base rate at 0.75% there is little room for rates to go down and even if they were to go down, this is not likely to make much difference. Rates could possibly go up but were rates to increase to 1980 levels of approx 10% the result would be a disaster for everyone.
Everybody wants the economy to be doing well. If we were living in Utopia we would all run our finances so that we spent slightly less than we earned rather than the other way around. Unfortunately this is not the case here in the real world. The government (on our behalf) has slowly been spending more money than we are earning. Total government debt is now running at approx £1.7 trillion (£1,700,000,000,000) and it is increasing (it is not going down). In very round numbers, this is approx £30,000 per person or £100,000 per tax payer. 4% of our GDP is now spent paying interest on this loan. To put this in perspective, we spend 7% of our GDP paying for the NHS. If we weren't paying out 4% of our GDP paying interest, just think of all the useful things that this money could be spent on.
As you can see, the UK economy is not in good shape but no one seems to realise it except for those good people at the Bank of England (who don't get paid golden bonuses). To help the economy along they can lower interest rates but interest rates are already incredibly low and so can't really be lowered much more.
Another item in the Bank of England's toolbox is the ability to print money. If the bank prints lots of extra money and spends it, the net effect is that money becomes more plentiful. So with more money floating round, activity goes up, prices go up and inflation goes up. These days of course the bank does not actually need to print money, as they can do it electronically (which is cheaper anyway). Because the process in these modern times is a bit different, we have a different name. Rather than calling it 'printing money' we call it 'Quantitative Easing'.
Quantitative Easing does have some advantages to the economy but the down side is that the buying power of £1 goes down and inflation goes up.
The really good thing for the government is that, in effect, they are taking money from all the people with the money and they are using this to pay part of their very big interest bill. Some people might think of this as stealing from the rich and giving to the poor but really its not quite that straight forward.
It is probably best not to over worry about any of the above but we should all be aware that Quantitative Easing is likely to increase the prices paid for houses. People who own houses might be pleased but in reality it is not the price of the house that has gone up, it is the buying power of each £1 which has actually gone down.
So what about the future?
UK population is increasing at approx 400,000 per year and the number of houses being built is running at about 200,000 per year. This means that the supply and demand are probably about in balance (if we assume that 2 people live in the average house).
Interest rates cannot go down significantly as they are already incredibly low. At the same time they cannot be allowed to go up. If the Bank of England were to allow the interest rates to return to 1980 levels (10%) there would be an astronomically large number of bankruptcies. There would be rioting in the streets and the economy would grind to a halt. I think we can assume that those good people at the Bank of England are not going to allow interest rates to rise too much in the future.
It is very difficult to know what will happen to the commercial banks, except to say that bankers will continue to pay themselves unjustifiably sky high salaries. It is quite possible that there will be further melt downs in the financial sector followed by Government bailouts Other than that, probably not much will change.
Legislation regarding landlords is not likely to change in a way that landlords will again be encouraged to go out and buy lots of houses. If anything it may be that we get more changes to make it better for young people to buy their own houses to live in. This would be much more sensible.
From the above, it looks like everything is a bit static and therefore we can possibly assume that there will not be much change in the price of houses.
However, no one seems to be thinking about the cost of food. With world population increasing by 1 million every 4 days, it is obvious that on the global market the price of food will go up. For the UK this will be very difficult, as we import half our food. The average family will need to spend a higher proportion of their income on food. This means less money to spend on other things. Less money to spend servicing a mortgage. The average family will borrow less money when they are buying a house.
So the conclusion that I have is that the price of food will go up and the price of houses will go down. But of course I could be wrong.
Article written by JJ Heath-Caldwell
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