Priced out - a new proletariat?

This morning, Radio 4 reported that the number of people who own their own homes fell last year for the first time since the 1950s. (It's the last item on the Today Programme.) At the same time, as you might expect, the number of people renting has been increasing for the last six years. There is already evidence that many people are finding it increasingly difficult to buy houses. The average age of first time buyers is now 34. 

Is this just a blip, a symptom of a short-term supply problem, as politicians would have us believe, or is it a sign of a deeper shift? Are people being priced out of the property market by the buy-to-let landlords?

This is not as far fetched as it sounds. In Ashford the power of local property magnates has forced many would-be home buyers into the rented sector. According to the Guardian:

In Ashford town centre, every estate agent knows the Wilsons. "They own great big chunks of the new-build estates around here, particularly Park Farm," said one. "They have single-handedly pushed up prices in the new developments, buying them off-plan and renting the lot out. It's tough for first-time buyers. As soon as a suitable property for a first-time buyer comes on to the market you get three or four buy-to-let investors putting in offers. You'd like to be able to sell it to a young couple but you just can't."

As in any commercial sector, a concentration of wealth gives you more control over the market. Although many buy-to-let landlords only own a few properties, there are signs that this is beginning to change. According to the Times, the buy-to-let market is consolidating with companies putting together portfolios of rented property that can then be sold on to larger investors.  Last year, 11% of mortgage lending was for buy-to-let property purchases but, if the experience of the lenders interviewed by the Times is indicative, much of this is to existing landlords. The high bonuses being paid to those in the City also means that there are a lot of people around with a lot of money to invest and property portfolios are attractive to them.

Commenting on Milton Friedman's death last November,  Niall Ferguson said that the great man's ideas can still help us to understand global economics. Just because consumer price inflation has remained low does not mean that the relationship between monetary growth and inflation has broken down, he argued.

On the contrary: it is the key to understanding the world economy today. For there is nothing in Friedman's work that states that monetary expansion is always and everywhere a consumer price phenomenon.

In our time, unlike in the 1970s, oil price pressures have been countered by the entry of low-cost Asian labour into the global workforce. Not only are the things Asians make cheap and getting cheaper, competition from Asia also means that Western labour has lost the bargaining power it had 30 years ago. Stuff is cheap. Wages are pretty flat.

As a result, monetary expansion in our time does not translate into significantly higher prices in shopping malls. We don't expect it to. Rather, it translates into significantly higher prices for capital assets, particularly real estate and equities. The people who find it easiest to borrow money these days are hedge funds and private equity firms. Through leveraged buy outs, the latter can easily acquire companies and, by improving their cashflow, boost their valuations. These guys then buy houses in Chelsea with the millions they make.

In other words, huge City bonuses have to go somewhere and, rather than pushing up prices in the hight street, they are being invested in property. Traditionally, this would have been, as Ferguson says, houses in Chelsea or second homes in the Cotswolds but now many are investing in buy-to-let property portfolios.

Last July Money Week reported on the impact of this concentration of wealth on some recent London housing developments:

[B]uy-to–let investors have arguably been the prime feeders of the house-price beast since 1996. Take the purchases made at recent property developments in London, reported in The Mail on Sunday recently. At Falcon Wharf development in Docklands, 70% of purchasers were investors; at Angelis in Islington, 69% were; and at Lanherne Gate in Wimbledon, investors made up 46% of buyers.

As larger companies grab more of the housing stock, their ability to bid up house prices out of the reach of individual buyers will increase. Those people priced out of the property market still need somewhere to live, which ensures a steady supply of tenants for the buy-to-let investors.

Will this concentration of property ownership lead to a new class of rentiers made up of corporate investors and rich individual landlords? Could this be the start of a change in the pattern of property ownership in Britain?

Before the second world war, even middle-class people, for the most part, lived in rented property. Home ownership was only for the wealthy. In many European countries, it is still unusual for people to buy houses until they are in their late thirties. Might the rise in home ownership since the 1950s be thrown into reverse? And what will be the social impact of wannabe house buyers being forced into the rental market?

The growth in inequality is something that left-wing commentators have been talking about for years but, outside the chattering classes, few people seemed concerned. Inequality was seen as something that only affected people at the bottom of the social scale. The underclass might be falling behind but, provided there was no threat to their wealth or status, most middle-class people were not worried about the increasing gap between them and the super-rich people.

But there are signs that this disparity in wealth is taking its toll on the professional middle-classes. Many have found themselves unable to afford things that previous generations would have almost considered a right.  Public schools and private medical insurance have risen in price as the providers raise their prices to what the new super-rich will pay. Domestic help was going the same way until the Poles arrived to bring down the costs. Now, it appears, house prices may be moving beyond the affordable for some middle-class people too.

While not being able to get a nanny is annoying and being forced to send the kids to a comp is a bit scary, having to rent a house would seriously undermine many people's self-worth.

It is difficult to over-state the importance of home ownership to Britain's middle-classes and, indeed, to the post-Thatcher owner-occupier working-classes.  Over the past couple of generations, home-ownership has become the norm, not just for the obvious economic reasons but for cultural ones too. Thatchers "home owning democracy" rhetoric wrapped the idea of home-ownership with that of the independent English yeoman. Owning your little piece of land indicates that you have a stake in society, that you are your own person and that you can look anyone else in the eye, even if his house is bigger than yours. Correspondingly, to be a tenant is to somehow have failed, to be at the mercy of a landlord or, worse, the state. If a home-owner is an English yeoman, a tenant is a servile medieval peasant.

Am I exaggerating? Perhaps, but only a little.

What would happen if large numbers of people whose parents owned their own houses, and who have assumed from an early age that they would too, suddenly find that they are forced into rented accommodation? The economic hardship would be as nothing compared to the psychological impact. It would undermine their sense of who they are.

John Bone & Karen O’Reilly of Aberdeen University have launched a project to study the effects both of the global labour market and house-price inflation on 18-40 year olds in the UK. They say:

[R]elated to these developments in the workplace, the impact of the global house price bubble of the last few years is also of crucial interest, in recognition of the fact that home ownership currently requires younger people - at least those who can afford to do so - to commit increasing levels of their income if they are to have any prospect of ever buying a first home. It is our view that, when the implications of these developments are taken together, they hold the potential to produce profound and, as yet, largely unanticipated social consequences for this age cohort, as well as for UK society as a whole.

Through this research we wish to uncover the form and extent to which the experience of this group of young Britons departs from that of other ‘post-war’ generations and to try to identify any policy initiatives that might usefully be applied to addressing the range of social and personal problems which, we anticipate, are likely to arise from the current direction of socio-economic change.

The Chief Executive of PropertyFinder also believes that expectations are out of step with reality and gives this warning:

Compared to current housing tenure, people are clearly overestimating their chances of becoming homeowners. To a large extent, people's expectations are rooted in the past. In 2001, 59% of 25-34 year olds were homeowners according to the census. Since then, sharply higher house prices have rapidly eroded their ability to buy a home, but not their expectations of success.

So what will happen when something as critical to someone's identity as home-ownership  becomes unattainable?  Will it, as Bone & O’Reilly suggest, have profound social consequences? If it is perceived as being the result of rich rentiers pushing up property prices, might it cause people to begin to question income inequality in a way they they have not done for the last thirty years?

Thatcher wanted to extend property ownership to extend the attitudes that went with it.  If this process is reversed, the attitudes might change too. Could reduced levels of home-ownership lead to the re-proletarianisation of large sections of the working and middle classes? And what impact might these resentful manque freeholders have on British politics?

Comments

[Dave]

#1, Back when New Labour first came to power a lot of people of my dads generation changed from investing in pensions to property because of Gordon Browns tax raids. This is when the buy to let boom took off, Labour created the problem.

#2, Why do these high flying city investors think property is such a great investment? because they and their friends have convinced the government to open the borders allowing millions of new people to enter the country since Labour came to power causing demand to massively outstrip supply.
British people are being blocked from buying homes in their own country because out of control immigration, thats the reality, yet you avoided mentioning it.
Property investors wouldn't be in a position to make much money if the population was slightly declining as it would be without immigration.

#3, We already know one of the social results, the BNP victory at Barking was because some immigrants were getting a better deal on 'social' housing, or at least thats what people thought..

[Celtic Infidel]

Not thought,a fact.
We also have British people priced out of employment due to mass immigration.
Thats why they are being driven into the arms of the Bnp and we welcome them.

[pommygranate]

Steve

You touch on many interesting points here but i'm not sure of your conclusions. Some observations -

i) The governemnt's stated inflation figures, or CPI, of 2.5%, is wildly out of line with the rise in prices people are actually experiencing. Housing costs and fuel are excluded, which partially explains this fact. You can now work out your actual rate of inflation on the govt's tax website. When i tried it, mine came out at 8%.

ii) The rise in property prices is not just a UK phenomenon. Here in Australia, we have the highest prices (relative to earnings) anywhere in the world. Net immigration is clearly a factor but other factors are at work too.

The main difference between the UK and Australia is the limited release of land in the UK, restricting supply and forcing up prices.

iii) There is no global conspiracy from rich City workers to push up house prices. Eventually prices will reach levels where the rental yield will be so low that homeowners will choose to rent and speculators will move back into equities. This is already happening in Australia where prices have declined since 2004.
Oh, and if you think 11% buy-to-let levels are high, here we have levels as high as 40%.

iv) A further factor to explain the inexorable rise in prices is that banks are willing to lend on increasingly crazy terms. Last week a pensioner was granted a 200 year interest only mortgage. In the US, house prices are finally collapsing because the banks are tightening their lending standards following a wave of defaults in the sub-prime sector (highest risk owners).

v) The reason asset prices (shares, commodities and property) are appreciating so greatly is that central banks have artifically kept interest rates low because of the insatiable demand for bonds from Asia, in particular India, China, Japan and S Korea. This has kept long term interest rates low, reducing the need for central banks to raise short term rates.

Eventually asset prices will correct when the credit bubble bursts. Because the Fed and the BoJ are so unwilling to raise rates now (the Greenspan 'put'), this will lead to a 1930s style depression. Probably in about 5 years.

When this correction arrives, you won't be able to give away your house.

[Dave]

People say the UK has a lot of planning restrictions etc and thats true but where I live and infact all around the English Midlands there has been a massive scale of building work going on for the last 10 years.

[Steve]

Dave - I don't think large numbers of immigrants are coming into the UK and buying houses, apart from, perhaps, a few rich Russians. This is more about a concentration of wealth and an inflow of capital than an inflow of people. The impact of immigration is secondary, in that it does increase the demand for rented property which has helped to fund the growth of the buy-to-let market.

I agree with you about the release of land, though. Wherever you look there is new housing being built and I wonder just how much more would need to be released to increase the supply enough to allow more people to buy houses.

Pommygranate - I didn't suggest there was a conspiracy by rich City workers. It's just that when enough people (or companies) are attracted to housing as an investment, that consolidation of financial power will start to price individual buyers out of the market. If that reaches a critical point, it will change the nature of property ownership in the UK.

Pub ownership is an interesting precedent. Very few are now individually owned. Even if there is a recession in the pub trade, the big estate-holders just hang onto their assets. They don't exit from the market and offload the pubs onto individual publicans.

If large buy-to-let landlords get a grip on a critical mass of housing, which in some areas of Britain they are already doing, it could change the nature of the distribution of property in the UK. And that would stick, regardless of market conditions.

[Wolfie]

Excellent analysis Steve, I'm impressed.

Only missed a couple of important factors (well this is a big subject).

1) The global economy is "cash rich". Both oil producers and China's manufacturing base are not spending enough, which is pumping cash into the global investment portfolios. Generally this leaves too many investors chasing too few investment opportunities. Equity inflation is getting "silly" to say the least.

2) Both in America and in the UK deregulation of the mortgage market is allowing lenders to pump this cash out into the market. With low interest rates and high demand this generates a market where it can seem like you can't loose as equity growth outstrips cost as much as 6:1.

Traditionally the world's largest economies control global equity but those who should be leading the prudent way seem to have abdicated their responsibility to fiscal control. Most worrying. Then there is the credit derivatives market - its nuts out there!

[Steve]

Wolfie - you're right, I could have gone on forever on this one but I had to try and keep focused.

Incidentally - what 'fiscal control' would you suggest?

[anon]

Technically the government could extend the "right to buy" from council housing to private rented property. Depending upon the legislation this could make buy to rent less attractive.

[Steve]

Anon - I don't think any government wanting to keep party donations flowing in from the rich would even think about doing something like that.

[Dave]

But Steve I did not mean millions of immigrants were coming in and buying property. They don't have to buy to seriously affect the market.
They need somewhere to live you can't dispute that :) , and since most intend only to stay for a short time (at first) they rent, which creates huge buy to let opportunities for the investor. Not to mention all the government & building association work for 'asylum seekers' and families with special needs like needing 7 bedrooms and toilets facing away from Mecca!
You might say thats only a tiny proportion and probably thats true but when demand is massively outstripping supply any squeeze can make it worse.

I maintain my point if our population was static or falling as it would be without immigration there would be no serious money in either buy to let or property investment in general. Yes always a clever person can make some money but it would be nothing like whats happening now.

[Wolfie]

The proverbial horse has bolted unfortunately.

Traditional means of cooling a housing market are to tinker with interest rates but that will do little to cure the long-term problem and simply create new ones. This would be very unpopular but I'd recommend...

1) Re-introducing controls on the mortgage market, limiting how much can be lent to domestic borrowers (as a proportion of income). Particularly to those wishing to purchase second homes/rental properties in the UK.

2) Introducing tax regimes to penalize buy-to-let borrowers so that its no-longer financially attractive to hold non-residential property portfolios. This should be counter-balanced with mortgage relief for primary residential holdings.

3) Introduce tax regimes similar to item 2 to penalize foreign investors to prevent exploitation of the market from abroad.

4) Use the funds retained from items 2 and 3 to finance the re-purchase of former buy-to-let properties to be used as council tenant lets.

Naturally this would have to be introduced gradually so as not to give the market a cardiac arrest.

It wouldn't be popular but someone's got to pull the dummy out of the baby's mouth.

[Pablo]

City investors have begun to push up prices of houses in Birmingham and even as far as the North West, Cheshire, Greater Manchester, Merseyside, as they seek fresh places to invest their bonuses in property, given the saturated and bloated market in London and the South East. How can anyone get their foot on the ladder for the first time these days, competing against that kind of capital?

[Wolfie]

"Red-Top" tosh!

[Steve]

What's "Red-Top" tosh?

[Wolfie]

Come now Steve!

http://en.wikipedia.org/wiki/Red_top
(no.3)
http://en.wiktionary.org/wiki/tosh

Blaming City bonuses - do the maths.

[pommygranate]

Wolfie

This is a manifesto that even the hard-left would blanche at! More state controls? More regulations? Surely history has told us that the more the state interferes with the market, the more inefficient that market becomes.

The only type of regulation that is justified is for banks to be restricted in how much they can lend to borrowers. This is only because banks, unlike all other types of companies, are never allowed to fail because of systemic risks. Hence we taxpayers ultimately bear the risk for their reckless lending practices.

The invisible hand will eventually work its magic and prices will correct. The truly awful state of the US and Australian housing markets will soon be reflected in the UK.

In the meantime, people will decide it is (temporarily) more economic to rent than to buy.

[Rastaman]

Well, I'm relieved to know that you no longer have a muslim problem in England. You must not if all these tepid posts are an indication. What happened, Steve? Some Islamic type make you an offer you were afraid to refuse?

I smell something rotting. You do sweep out the dead rats from the corner of the Pub, don't you?

Rastaman
www.islamanazi.com

[Steve]

Pommygranate, I'm not convinced about the "invisible hand of the market" - I reckon it's all a bit of a fairy story.

There is no such thing as a perfect market. The state always interferes and it always has - apart from in 1990s Russia and look what happened there.

In any case, if prices correct, it doesn't necessarily mean that those who have grabbed large chunks of housing for buy-to-let will automoatically sell it off. They might just hang on until it goes up again.

This period of rapidly rising property prices - if it goes on for long enough - could change the pattern of prpoerty ownership in the UK.

Wolfie - are you not even prepared to concede that people looking to spend their City bonuses could have an impact on prices in certain areas? It might be very localised (Cotswolds, Dorset etc.) but if enough of them wnat to buy in the same area, that could price locals out of the market.

[Wolfie]

My point is Steve, that the contribution to housing inflation by the City bonuses is small compared to other factors. Added to that the bonus only covers the deposit for the most part, its easy/cheap loans that is the key.

Pommy, similar controls have existed for decades under left and right government for sensible economic reasons. Mrs. T removed these barriers with good intentions but destabilised the market, if we did what you suggest foreign investors would flood the market.

I'm a nationalist and the interests of the British people are my concern; there is nothing "hard left" about protecting the British taxpayer from unscrupulous lending practices. The spiralling cost of property is stifling the Anglo-Saxon fertility and hollowing-out the life-blood of the national driver of the economy - the middle classes.

[Rastaman]

Wooo, heavy stuff. The stink is getting worse.

"The spiralling cost of property is stifling the Anglo-Saxon fertility". Har har har har har! Oh? You mean that increasing real estate prices are reducing your sex drive? Are you sure it isn't your whiny, lay-down attitude that's doing it?

Silence is assent. When you ignore me I know it's because I'm hitting home. All those people taking over all that housing that you're sniveling about are probably muslims. Here in America where we still have balls, we are constantly building low-cost housing for young people. We have something as well called Habitat For Humanity, that builds houses and GIVES THEM AWAY to deserving low income families. Okay? So either do the same or shut up and move on to your real problems.

Actually I know why you quit dealing seriously with the major issues facing you. Let's not forget this is a drinkers blog and drunks really do not like talking about the 800 pound gorilla hiding in their closet. So much better to yell at the TV during a soccer game, or anything that takes you away from reality instead of standing up and confronting it like men. Drinkers would rather hide from their problems. That's why they drink.

As for your inability to get it up anymore, that's a common problem with frightened, neurotic drunks. Alcohol may make you think you're Superman while you're smashed but all it really does is make everything steadily worse, and nothing will get better until you quit and take control of and responsibility for your own lives.

Get your shit together. All your problems aren't because "they" are screwing up, they're because YOU are screwing up.

Rastaman
www.islamanazi.com

[Anon]

Pommygranate, I'm not convinced about the "invisible hand of the market" - I reckon it's all a bit of a fairy story.

There is no such thing as a perfect market. The state always interferes and it always has - apart from in 1990s Russia and look what happened there.

I think Adam Smith might differ with your suggest that Russia approximated to a perfect market. After all even he started from the proposition that there had to be first a rule of law and property rights.

[Steve]

Anon - I wasn't trying to say Russia was a perfect market, just an example of what happens when the state refuses to intervene.

[Rastaman]

To market, to market, to buy a fat hen. Or in Englands case, a muslim to market to buy a fat child sex slave.

Steve, maybe you should reconsider renaming this blog. I like Drunks in Denial. DiD. What do you think?

Yeah, I know. The more I point out how far you're drifting away from the dynamic freedom fighter you were when I found you, the more you'll just dig in deeper, but we both have to be what we are. You go ahead and run and hide while I stand and fight and keep tugging at your sleeve.

Rastaman the Persistent and Unrelenting

www.islamanazi.com

[pommygranate]

Wolfie

if we did what you suggest foreign investors would flood the market

Only if they thought UK housing was a good investment. With rental yields now under 3%, and house prices/earnings at an all time high, only a compete mug would buy-to-let right now.

[Rastaman]

Shhh. If we're really quiet maybe he'll go away.

Fat chance in Hell.

Rastaman the Eternal