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Housing Affordability

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With the average UK Nationwide house price reaching a nominal all-time high £269,914 in May of 2022 there is plenty of debate going around in the media, politics and the economic spheres of how to make housing more affordable. What we will be looking at here is first, the popular reasons given for why it is getting for, not only young people to get on the housing ladder, but even those who are approaching middle age – and then we will give our contrarian or ignored reasons for why UK housing has become so unaffordable.

One of the most popular reasons given is that there are not enough houses being built and that there are too many immigrants arriving on our shores. Our view is that this reason is the easy way out and a politically expedient one, so let us look at the figures. In 2001 the average UK Nationwide house price ended the year at £92,533 and the population of the UK was 59.12 million. The UK has an average of 2.3 people living in each dwelling (Spain 3.0, Ireland 2.9) and back in 2001 there were 21.207 million dwellings. The population of the UK in 2020 had grown to 67.22 million and after calculations, we find that the new dwelling did not keep up with population growth (163,000 extra people), but if you adjust people per dwelling to 2.9 or 3 like in Ireland and Spain respectively, there would not really be a problem. Admittedly, there might have been a small shortage of dwellings, but not so much as to justify a rise in prices of almost 300%.

The other reason given is that the government is not doing enough to help those most in need the opportunity to buy their own homes and get on the property ladder. Here we would say that the more government has been doing, the less affordable housing becomes for the general population. Ever since the housing collapse of 2008 and 2009 when we saw major UK banks and building societies go under, each successive government has tried to keep the housing market going by providing schemes like ‘Help to Buy’ and so on. Our cynical view is that politicians love high house price values as it creates more tax revenues from stamp duty, inheritance tax and council tax – so the last thing they want to see is house prices dropping. If you have been reading my articles for a while you should know that the more governments try to fix things, in the real world the worse things will get.

Another culprit for the housing affordability crisis are the “greedy” buy-to-let investors driving up prices and also rents. In this case we agree that this kind of investing has driven up property prices and crowded out first-time buyers and others. But this is only a symptom of a much bigger problem that few ever mention. So what is this Big Problem? In my view it is the fact that the Bank of England has kept borrowing rates artificially low via its policy of QE or Quantitative Easing. In the aftermath of the 2008 Crisis, the Bank of England printed about £450 billion out of thin air in order to buy UK government bonds and Mortgage Backed Securities. What that did was bail out the government, the banks and the housing market. In 2020 the Bank again printed almost another £500 billion to do what it had again after 2008, but in a much shorter period of time. The Bank also kept its base rate below 1% from 2009 to May this year when they finally raised it to 1%. Just to give you an idea of how extremely low the base rate has been since 2009, according to Paul Lewis who presents the Money Box on BBC 4 radio, the average Bank rate since the 1694 when it was founded has been 4.83%.

The low interest rate environment or ZIRP (Zero Interest Rate Policy) conducted by our banking master at Threadneedle Street, has driven investors out of savings accounts into the property market – and specifically into buy-to-let as that has been able to provide a return on their savings above zero percent and the prospect of capital appreciation. The other thing ZIRP has encouraged is these investors to borrow cheaply too, so as a result giving them more wherewithal to buy more and more properties. The low mortgage rates and deals have also encouraged people that would otherwise wait a bit longer and save more, to buy properties that twenty or thirty years ago they would not have been able to afford. I would also add that average earnings or wages have not been able to keep up with house prices but would say that this would not have been as pronounced if ZIRP had not been in place from 2009 up until recently. So what do we think is the solution to housing affordability in the UK? As we said earlier, maybe we do need more land for development in order to increase the number of dwellings per population, but it is our belief that the Bank of England’s zero rate policy, money printing and the government’s schemes have been the major disruptors of affordability. Unfortunately, the solution is not pain free and will hurt those who have extended themselves with big mortgages and small down payments. The solution is for government to stop interfering and the Bank of England, to stop manipulating interest rates and allow the market to decide what the cost of borrowing should be. A 7% mortgage rate or even a double-digit rate like in the early 1990’s would lead to a collapse in the housing market, which sounds catastrophic, but would actually make housing affordable – and then maybe a home will become an Englishman’s castle once again

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