The Brutal Truths About UK Housing
“Never live more than 15 minutes away from a pizza shop.”
The UK housing market is red-hot, up 13.4% over the last year. But its fuelled on stamp-duty holidays and ultra-low rates. Will it hurt? If so… how much?
I was going to write about giga-factories, lithium mining and other dinosauric investment myths this morning, but the first thing that caught my ear this morning was a very earnest young economist from some bank in the City commenting on the 13.4 % annualised rise in UK Housing Prices. He was asked to explain why, during the worst economic shock in 300 years (the Pandemic, in case anyone has forgotten), house prices were on the up he went into behavioural analysis about couples reassessing work/life balance, deciding to upsize, moving out the conurbations, etc.
Utter Twaddle. Famously, economists will never agree on anything. Put three of them in a box and expect 4 different theories on box economics.
Suffice to say, I disagree with the young man. The reason UK house prices have risen is largely a matter of distortions; over the last 12 months its been the stamp duty holiday, but longer term the absurd level of interest rates – a distorted monetary phenomenon – has been a massive factor driving the asset inflation of the housing stock.
Sure, there will be an element of the self-satisfied middle classes and company directors deciding to monetise their rising pension pots, stock portfolios, and bonuses (which rose on the back of stock buybacks). All these gains are consequences of low interest rates creating financial asset inflation. It has encouraged these fortunate holders of financial assets to scale up – explaining why it takes about 7.3 microseconds for a second home in Rock to sell.
Upper-end homes are a good example of how financial asset inflation has migrated into the real economy.
But for everyone else… there is reality.
First up, it’s a ridiculous notion to think the UK population could collectively decide to all upscale their housing simultaneously. The UK is short of housing stock. Each band of stock is limited. Its famously a ladder: to find the right home requires that home to be on sale, and to be able to sell your current home. If the middle classes all collectively decided to move to a new house with 1 more bedroom and a nice view, it would just not be possible.
(She-who-is-Mrs-Blain have thought long about the home we really want – close to the sea, an airport and train station to London, fantastic views, easy maintenance small garden but plenty of outdoor entertainment space, lock-up-and-go…etc. After 12 years we gave up looking, concluded it did not exist anywhere, and built it for ourselves. It should be finished in the next few weeks.)
Which leads to the question of who steps into buy the houses for sale as people climb the ladder?
UK property has not been this unaffordable for over 140 years. The average UK house price is now £245,432. With a £12,500 5% deposit, that would require a £60k salary to afford an optimistic 4x multiple mortgage. The average UK salary is £38,600, but median earnings are only £30k, meaning… even the average UK house is at least double the price most people in the country can possibly afford. At 8 times earnings, the UK home market is apparently at its most unaffordable level since the 1880s! (There are a few times the number shows spikes above 8 times – but let’s not quibble.)
The sheer unaffordability sounds shocking, but home ownership is a comparatively recent thing – giving prominence by the Thatcherite privatisation of the public owned rental stock of council homes. I would argue the “blessed” Margaret Thatcher (“Milk Snatcher” as I recall Grandad branding her), is as responsible as anyone for the Global Financial Crisis of 2007-2031 after she encouraged everyone to load up on mortgage debt to buy their own home. Previously we were a nation of renters – making rentiers rich! Today, private-sector renters now outnumber social renters.
Of course, most people who own a house quickly build up significant “equity” embedded in their current home – especially when prices rise 13% per annum! The total value of the housing stock is around £7.6 trillion. Total outstanding UK residential mortgages are around £1.5 trillion – meaning there is a notional £6 trillion of housing equity.
Historical data shows any corrections in UK housing stock prices are usually quickly reversed – usually within 24 months. That £6 trillion of equity is, probably, literally safe as houses; supported by the massive demand for UK housing from those on the ladder, those trying to climb on, and by other buyers; overseas owners seeking to own assets in the politically stable UK, and buy financial asset buyers, owning housing to rent to generate returns.
It’s a pretty safe asset class – but despite the 13% gains this year, over the long-term, equity markets will typically outperform the housing market. Which is why I don’t own rental property – but do invest in property companies.
However, let me go back to my original comment – UK housing stock and prices are distorted by low interest rates, government distortions and other factors, rather than social nonsense like couples around the country deciding to go find nicer schools in the country.
The reality is when interest rates are artificially low, you’d be mad not to abuse them to acquire assets on leverage. That’s what driven stocks higher, ultra-low bond yields forcing investors to take more and more risks in other markets markets, including equities to generate returns.
Ultra-low mortgage rates (where available) encourage home-buyers to overleverage. This where the real behavioural science comes in. When an convenient excuse, like the pandemic, occurs, that has the effect of reinforcing what you want, then it suddenly becomes much easier for the home-buyer to justify to degree of overleverage they are taking on.
Think about it – what’s not to favour buying a bigger home when the devil is whispering in your ear: “You will be working from home for years”, “Interest rates will remain low for ever”, “The pandemic won’t kill your job”, “The kids will love the new school..” Etc, etc, etc..
It’s just another variation on the old theme: “The [housing] market has but one objective; to inflict the maximum amount of pain on the maximum number of participants…”
This time next year you will probably find yourself catching the least reliable 2 hour train service in the World to London each day, your partner hates you because they have to drive the kids to school each day because the local council cut bus subsidies, and your dream house is being eaten by woodworm and you can’t extend it because a newt was spotted in the dried up pond 12 years ago…
Welcome to reality…
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