Housing Rubble

Is it possible to "miss the boat" or be "priced out forever"?

admin — Mon, 24 Dec 2007 15:01:00 +0000

Over the past few years there appears to have been a lot of concern amongst young people that if they do not get a foothold on the "housing ladder" sooner rather than later, that they will somehow be priced out of owning a home forever, or "miss the boat" - the boat in question being affordable owner-occupied housing. But is this a genuine risk, or are they worrying unduly?

Over the past century the housing market has both risen and fallen, in both nominal terms and real terms. When the level of initial monthly payments for a mortgage on the average first-time-buyer type house is measured against wages, the peaks and troughs in the housing market are clear to see. There have been times when housing has been more affordable, or more expensive, than other times, but in the past affordability has always corrected itself to move back to reasonable levels before too long.

The main reason for this is that the housing market is fundamentally supported by new buyers entering the market. These provide the cash to support each level of the housing market, from small flats up to large family houses. If this support is removed, or weakens, then demand at all levels of the housing market is affected and prices correct downwards. Alternatively if wages are rising faster than house prices, this also has a corrective effect on affordability.

In recent times the number of first-time-buyers entering the market has fallen to record lows. In 2007, just 300,000 first-time-buyers entered the market, the lowest since 1980, according to the Halifax. Halifax also found that houses are unaffordable to first-time-buyers in 96% of towns. This has only been made possible by the recent phenomena of "buy-to-let". This is essentially a new source of demand that has been made possible by the availability of credit in the form of buy-to-let mortgages, which were not available until the mid 1990s. In the past 10 years the number of buy-to-let mortgages outstanding has risen from a base of virtually zero up to nearly 1 million today.

Much of the concern amongst first-time-buyers is centred around the belief that these "investors" will fill the role of the first-time-buyer meaning that there is no need for them any longer. But this is impossible for many reasons. The first of which is that without first-time-buyers, there will be no buyers to buy the second level of housing, the small family home. When families wish to trade up from their small terraced house to a larger family house, there will be no demand in the marketplace to enable them to sell their existing house. The laws of supply and demand then kick in, and prices move downwards to a new equilibrium point where it becomes affordable for first time buyers to enter the market directly at the small family home level.

The second reason that buy-to-let cannot replace first-time-buyer demand is to do with rental incomes and financing costs. Already over the past 10 years the large increase in the number of buy-to-let flats and houses has kept rental prices very low, far below the level of purchase prices. This is of course due to the fact that in many areas the rental market is now saturated with buy-to-let flats which the owners are all trying to rent out to the same group of tenants. This drives rental prices down, which means weaker returns for buy-to-let investors. And since rental income needs to cover mortgage payments in order to make the investment profitable, the incentive for new investors to enter the market becomes far less. The amount new investors can borrow is also limited by rental prices, as buy-to-let mortgage providers base the total credit available on the expected rental income of the particular flat or house that is being bought. This suppression of demand from buy-to-let allows the traditional first-time-buyer to step in and continue to buy houses as before.

In summary, fears of being "priced out" are clearly misplaced. While it is true that there are better times to buy than others, and that market timing is very important when buying a first home, it is clearly impossible to permanently "miss the boat", as there will always be another boat coming along soon once prices or wages correct to bring affordability back in line with long run averages.

Should a House be a Home, or an Investment?

admin — Wed, 28 Nov 2007 17:29:00 +0000

It is often said that if you are buying a house to live in then you should think of it as a home, not an investment. In other words you should be more focused on finding a house that you like, than what is likely to happen to its value in the future. This is broadly a sensible approach - a house, after all, has to be a place that you are content to live in, and will have a considerable impact on your future happiness and well-being.

There is, however, a danger inherent in the statement. Buying a house is, for most people, the biggest financial decision of their lives, and the impact on their finances should be considered very carefully.

When choosing a house, the most common approach seems to be as follows:

Go to a few banks and/or building socieities and see how much they will allow you to borrow on your current salary.
Go to a few estate agents and ask to be shown houses at around that price.
Pick the nicest you can find and buy it.

The problem in the above approach is that the potential buyer has at no point considered what they can afford. They have simply asked the bank to work out how much they can borrow, and assumed that if the bank is happy to lend that amount, then they can obviously afford to repay it. And the ultimate justification for this approach is that "it's a home, not an investment" - or in other words - the money doesn't matter because the main focus is to find a nice place to live.

For most people who take the above approach, it does them no harm. If they encounter difficulties (redundancy, illness, etc) along the way, and cannot keep up repayments, they can simply refinance their way out of trouble, due to the equity they've built up thanks to the ongoing house price appreciation of the past 15 years. But in a tougher economic environment this is not so easy.

This is why it's important to consider both the financial side of home buying as well as the emotional. Treating a house as a home, not an investment, is a pleasing and refreshing attitude, but it is not an excuse to buy a home that you cannot really afford.

The flip side of this conversation is the proliferation over the past 10 years of the use of housing as a pure investment. The rise in the number of buy-to-let mortgages outstanding is an emphatic demonstration of this. In 2001 there were 185,000, during 2007 that figure rose to 900,000 and beyond (for more detail see Is Housing a Good Choice for a Pension?) Brits have gone crazy for housing as an investment.

Housing as an investment is morally questionable. It is often argued that these new landlords are taking homes away from others who would wish to own them, particularly in the first time buyer market. Buy-to-let investments are usually small flats, which is exactly the type of home a typical first time buyer tends to go for. Many of the 840,000+ empty homes in Britain are held as "investments", forcing would-be owner occupiers to pay a higher price to enter the market. This has a particularly stark effect on the market in popular tourist areas, such as the south west, where many houses have been bought up as holiday homes. There are also thousands of empty newbuild flats up and down the country which are being held empty. This practice of keeping an empty flat and collecting no rental income, but instead banking on continued capital appreciation, is not so much investment as speculation.

Given the problems that have arisen due to people thinking of houses as investments rather than homes, it is rather surprising that the government - which is keen to promote the view that there is a housing shortage - is doing very little to discourage the practice. In fact, second homes currently enjoy a tax break amounting to a 50% discount on council tax, which is a considerable advantage over owner-occupation. Also, any mortgage interest costs incurred in financing an investment property are treated as deductible for income tax purposes, whereas such relief has not been afforded to owner-occupiers since the abolition of MIRAS in the 1990s. Thirdly, the government is also proposing to lower the effective rate of capital gains tax payable on second homes, from the current rate of up to 40%, down to just 18% from April 2008. With all these tax breaks, it's clear the government is intent on avoiding tackling the problem caused by people treating housing as an investment.

In conclusion, there is no clear answer to the question of whether a house should be an investment or a home. It is dangerous when buyers use the argument to absolve themselves of financial responsibility when purchasing a house. On the flip side, the damage done by too many people wanting to "invest" in housing is growing and is not being tackled.

Is Renting a Waste of Money?

admin — Fri, 23 Nov 2007 14:30:00 +0000

It's often said in the media that "renting is money down the drain" or that "rent is dead money". This is true, to the extent that you never get the money back. But the same can be said of mortgage interest, which for most people makes up a significant proportion of their mortgage payments. In fact, on a 25 year repayment mortgage, nearly 80% of the mortgage payments in the first year will be interest - money down the drain.

On this basis, a fair comparison between the cost of renting and buying is to compare the monthly costs of renting versus the monthly costs of an interest-only mortgage. The graph below shows the average UK monthly rent and the average UK mortgage interest payment, based on an interest-only mortgage on the average house price, at average mortgage interest rates. The figures used are taken from the DCLG, CML and Nationwide.

As can be seen from the graph, the costs of renting versus buying have been pretty well matched over the last decade, up until a few years ago. Now, thanks to the rapid rise of house prices and a slight increase in mortgage rates, it is around 1/3rd more expensive to buy.

This comparison is a very simplistic approach and ignores many other factors which are covered below. Nonetheless it demonstrates that the current disparity between renting and buying is a big change from the recent past. In fact, compared to renting, buying is now at its most expensive for many many years. See this Monevator article for a real-life comparison based on the case of a west London flat.

There are, of course, several other advantages and disadvantages to both renting and buying that need to be considered. Firstly, rents include many things that would be extra when buying a house. For example, the cost of any maintenance will be taken care of by the landlord. There is also the associated costs of buying, such as mortgage set-up fees and stamp duty to consider. Then of course, there is the added flexibility that renting brings. If you need to move to take advantage of a new job opportunity, you do not have the delays, hassle or costs of selling your house and buying another one to worry about.

There are also numerous advantages of buying over renting. First of all (provided you keep paying the mortgage) you have security of tenure, whereas a landlord can kick you out with two months notice. You also have the opportunity to make changes and improvements to your house - you can replace that old boiler and save on heating bills, or add some extra space with an extension or loft conversion.

Then there's the big one - house prices. If house prices rise, you are definitely worse off renting. Rising house prices aren't always a great thing for homeowners - it means your next house will be even more expensive, of course - but at least you are keeping pace with the market. On the other hand, if prices fall, you run the risk of all sorts of problems when it comes to moving, or remortgaging, plus the demoralising effect of paying the mortgage every month while your house drops in value. A dead market can also make it very difficult to move, even if you have plenty of spare equity.

Buying a house has one other advantage over the long term - it shields you from inflation. Rents will usually rise at the rate of inflation, whereas once you buy a house, the cost is fixed at that point in time. On a repayment mortgage, you should own the house outright after 25 years. But in the short term, very little of the loan is actually paid off in the first few years of a 25 year mortgage, and in the case of interest-only mortgages, none of it is paid off! When examining the long term benefits of buying over renting, it is also important to consider what the long term outlook for house prices might be. See Will House Prices Always Rise in the Long Term? for more thoughts on this.

From the above points, it seems clear that renting is not always a waste of money, as some in the media would like us to believe. Certainly it is no worse than buying with an interest-only mortgage, a choice that could be described as simply "renting from the bank". If you aim to own a house eventually, and are keen to get the best house for your money, then timing your entry into the market is important. For more discussion of this, see Is Housing The Best Investment?

Given that the cost of buying is now at a historic high point when compared to renting, and that many feel there is not much risk of house prices going higher in the next couple of years, it seems to make sense to wait and see what happens. After all, renting is not as big a waste of money as it might at first seem.

Is Housing a Good Choice for a Pension?

admin — Wed, 21 Nov 2007 12:23:00 +0000

In recent years there has been a significant rise in the number of people who are choosing to use property investment as a means of provisioning for their retirement. The growth of the "property is my pension" brigade has been marked by a massive increase in the number of buy-to-let mortgages, from 185,000 in 2001 to 850,000 in 2006 (a near five-fold increase in five years) according to the CML. The chart below shows the change in the total number of mortgages outstanding since 1998 - as can be seen, most of the new mortgages that have been added since then have been buy-to-let (there are now 900,000 more buy-to-let mortgages, but there are only around 100,000 more non buy-to-let mortgages).

To put these figures in context, there are around 11 million mortgages in Britain, so the proportion of buy-to-let mortgages has risen from 1.7% to 7.7% in five years. This has, broadly speaking, been put down to two factors:

The loss of confidence in traditional pension schemes, particularly since the 2000 dot-com bust and 50% fall in the value of the stock market.
The large rises in both nominal and real-terms house prices since that time, and the associated media coverage.

The increase in the number of people buying second homes to rent out, as demonstrated by the increase in the number of buy-to-let mortgages outstanding, is nothing short of phenomenal. Given these figures, it would not be an exaggeration to say that Britain (or a large number of its residents, at least) is now a property-obsessed nation. The number of house-buying programmes on television is testament to that, and there are now enough to fill entire channels dedicated to property related programming.

Provisioning for retirement is a vital part of financial planning for everybody, but given the above evidence it would appear that many are now relying on housing to provide their pension. A survey for the Motley Fool in mid-2007 revealed that 28% of homeowners are planning to use the equity in their homes to contribute to their retirement. Couple that with the fact that nearly 8% of outstanding mortgages are buy-to-let, and this view is further reinforced.

Unfortunately, there are several arguments to suggest that basing your pension arrangements around housing may not be a good idea. Chief among these is the need for diversification in a pension. Relying on housing (and the housing market) to provide for retirement is akin to "putting all your eggs in one basket". Traditional pensions use a variety of investments in order to spread any risk to the capital across a number of sectors. The funds are diversified across fixed income (i.e. bonds, both government and corporate), equities (a.k.a. the stock market), commodities (oil, gold, wheat, sugar etc.) and so on, and spread across many sectors of the economy. So if suddenly the price of wheat plummets, or a couple of companies on the stock market go bankrupt, the risk to the overall pension fund is minimised.

Investing solely in the housing market is the opposite of the diversification usually employed in pension schemes. Housing assets are "highly-correlated", meaning that if the value of one house underperforms, the value of other houses are likely to underperform as well. This risk is multiplied by investors who only buy housing of one particular type, or - even worse - in one particular building! There are numerous examples of individuals who have bought new-build flats "off-plan" and in bulk, for example buying 10 flats in the same building, to obtain a discount. This approach is the riskiest of all approaches, because if anything at all was to happen to affect one flat, it's highly likely that all the other flats would be affected in the same way.

Leaving aside the fundamental principle that investments should be diversified, there are also several risks to the long term growth prospects for the housing market. These include the fact that housing is currently benefiting from a demographic "bulge" and that the UK population may not continue to sustain the demand for housing at its current levels. Another risk is that higher energy costs, due to the depletion of world oil supplies, are likely to mean that people have a smaller proportion of their income available to spend on housing in the future, and therefore that in real terms prices are likely to underperform. A third risk is that the government is planning to increase the supply of housing by building 3 million new homes over the next 12 years, which will certainly have an effect on the supply/demand balance and hence prices. These factors are discussed in more detail in Will house prices always rise in the long term?

As an asset class over the past 50 years, housing has performed comparably with the stock market, which is where a lot of investment in pensions often ends up. However, it's important to remember that investing in the stock market (and other areas) via a pension brings other significant advantages. Chief among these is the tax relief applied to pensions. Pension contributions are paid out of untaxed income, whereas any investment in housing will have to be made from funds that have already had income tax applied. Pensions also provide the opportunity to opt-out of paying national insurance contributions in many cases. Additionally, many employers contribute to pension payments, which is a valuable added-extra that should not be missed out on.

A final advantage of pensions is that they are built up over time - in many cases over 30 years or more. This ability to spread investment across such a long period of time reduces the overall risk greatly, as any peaks and troughs in the value of pension funds will be "smoothed out". With housing, this is often not the case, and investors need to pick their entry points carefully and attempt to time the market. History has shown that market timing has been very important when picking the best time to invest in housing, when compared to a benchmark investment such as the stock market. For more discussion on this, see Is Housing The Best Investment?

In conclusion, it seems that choosing housing alone to provide for retirement income is a very poor decision, and represents a very risky choice. The benefits of the diversification and tax breaks built into the pensions system far outweigh any perceived advantage that housing may have. And yet, public opinion is still strongly in favour of housing as an investment class over pensions, and confidence in traditional pension schemes is near all-time lows. A bizarre situation indeed, but given the media coverage over the last few years, not entirely surprising.

Will House Prices Always Rise in the Long Term?

admin — Mon, 19 Nov 2007 10:12:00 +0000

This is, again, a very complex question and one that is often oversimplified by the media. The average article on housing prices in the mainstream press will usually conclude that:

While short term price dips cannot be ruled out, housing is a good investment because prices always go up in the long run.

While is is true to say that, over the past century, house prices in the UK have risen at marginally above the rate of inflation, there is no guarantee that this will continue.

The first point to note is that any rise or fall in prices must always be considered alongside inflation. Many people tell anecdotal stories of how they bought their first house in 1965 for £1000 and now it's worth £5,000,000. But this does not consider the effects of inflation. If housing were to double in value over 10 years, but wages were to double over the same period, then the real value of the house remains unchanged. If it were to be sold, the money would still buy the same amount of food, energy, and everything else, as was the case 10 years before. So when considering changes in price, what really matters is the inflation-adjusted change.

Many people today plan to fund their retirement using the value stored in their home. But when inflation is considered, this plan appears ill conceived. To illustrate this, consider the average house price in relation to the average wage. This has fluctuated over the years, but has tended to stay in the range of around 3 to 4.5 - in other words, the proceeds from the sale of the average house will yield about 3 to 4.5 times the average annual salary. Retirement plans are usually to sell a larger-than-average house, and move to a smaller-than-average house, using the difference to fund living costs in retirement. But if the difference is only of the order of around 3 times the average salary, then it cannot hope to cover living costs for anywhere near long enough.

Hoping for nominal house prices to rise faster than wages for a sustained period of time is potentially risky. Although this has occured for the past few years, at some point there must come a limit where debt servicing costs are simply too great to be manageable. Low interest rates have helped to push the average house price skyward in relation to wages, but it is impossible for this to continue forever. At some point either wages will need to catch up, or prices will need to fall.

There are several reasons why prices may not keep up with inflation over the next 50 years. The first of these is population. Currently the population of the UK is rising, which is putting pressure on the limited housing stock. While there are not currently "too many people", as is borne out by the enormous number of empty homes in the UK, it is likely that if there were "too few people" then prices would need to fall in real terms. A shrinking population would reduce demand for both rented and owner-occupied accomodation causing a readjustment in both rental prices and purchase prices. Falling rental prices would in turn affect purchase prices as a smaller rental income can only cover the interest on a smaller mortgage.

Demographics suggest that the UK population will shrink over the next 30 years. There is currently a demographic "bulge" in the 50-54 age group, and a demographic "slump" in the 15-24 range. The 50-54 age group are mainly owner-occupiers, and the 15-24 group mostly live at home. In the next 20 years, the situation will reverse as these age groups move up the age ranges, and the "excess" of those in owner-occupation will turn into a shortage. A graph (from the ONS) showing the distribution of the UK population between different age groups is shown below.

Notice the bump in the 50-54 age group and the slimmer chart around the 15-24 range. The diagram below shows what the demographics of a country like the UK would look like in a normal situation, to show the difference:

Another factor to consider is rising energy costs. In the last week, unleaded petrol has just broken the £1/litre barrier. Crude oil has come close to reaching $100/barrel. And in recent years we have had concerns over gas supplies from Russia which has pushed the price of household gas higher. In fact, energy costs are now so high that it looks like the UK may return to large scale coal mining in spite of the implications for greenhouse gas emissions.

Higher energy costs are not an accident or a temporary phenomenon. The theory of , which is far too involved to discuss in detail here, states that world oil production will at some point reach an all-time-high and then enter irreversible decline. There is much disagreement as to when this will be (maybe now, maybe in 20 years time), but oil production has been flat for around two years now, whilst world demand has been rising rapidly. If the disparity between supply and demand continues to grow, people are likely to be spending a lot more of their incomes on energy, and therefore will have considerably less left to spend on housing.

The third and final threat to long-term house price appreciation is the government's house building plans. The plans are for 3 million new homes to be built between now and 2020. Currently around 200,000 houses are built each year, so these plans represent a 25% increase to the current rate of house building. This will increase supply, and therefore hold down real-terms prices. More importantly, the government has belatedly recognised that housing affordability is a problem in the UK, and are now at least making the right noises in attempting to bring down the real-terms average cost of housing in the long term.

Is Housing The Best Investment?

admin — Sun, 18 Nov 2007 23:00:00 +0000

In order to answer this question, first of all it is necessary to define what is meant by "investment". There are many definitions, but to illustrate what investment means in this context it is useful to contrast it with a few other things. Broadly speaking, there are three things you can do with your spare money (aside from spending it of course!):

Saving. This means putting your money in a risk-free pot such as a savings account or government bond. Usually this is a long-term strategy, where money is put away for 10+ years. Of course you can withdraw money from savings accounts earlier than that, but usually you will aim to keep the bulk of your money in there for a long time.
Investing. This means using your money to buy (hopefully) low-risk assets for the medium to long term, i.e. at least 5 years. You might expect some short term fluctuations in the value of your investment, but broadly speaking over a period of 5 years or more you would plan for little risk of losing money.
Speculation. This is the high-risk option with potential for high short-term returns. You might double or triple your money over a few months or even days, but on the other hand you stand a not-inconsiderable chance of losing it all.

The important distinction with regards to housing is between investment and speculation. Investment means you must plan to hold onto the asset for at least 5 years, and seek to minimise risk. With housing, you can of course obtain mortgage borrowing to "leverage" the investment, but this multiplies the risk. For example, with only a 10% deposit and 90% mortgage borrowing, the risk of losing money is 10 times that of the risk in buying a house with no debt. This approach is speculative in nature, as the risk is arguably too high to qualify as investment.

Unfortunately some amount of leverage is almost always required to invest in housing (unless you have a spare £200,000, which most people do not). Comparable leverage, of course, is also available for investing in the stock market without too much difficulty, either via margin, or derivatives such as options, contracts for difference, etc.

The stock market can also be invested in tax-free via spread betting, or with tax breaks via a pension scheme. In the housing market, gains are subject to capital gains tax. Until recently this tax ebbed away over time due to taper relief, but from April 2008 the government plans to change it to a flat rate of 18%.

The stock market also has a distinct advantage over the housing market in that it is very liquid. This means that it is very easy to sell your investment for cash very quickly. In the housing market it can take weeks or months to sell depending on the time of year, and selling incurs considerable costs. The liquidity of the stock market also means that it is possible to rotate to different types of stocks very easily, if for example you believed that a particular sector was going to perform very well in the next few years. In housing, you can also rotate (from say flats to houses, or one geographical area to another) but again it takes time and costs money.

Another factor to consider is the cost of holding the investment. Housing requires maintenance, which can cost 1% of the investment per year. As for the stock market, simple index-trackers usually carry no fees, although actively managed funds will have a management fee of up to 2% per year.

Leaving aside the various practical pros and cons of each market listed above, the remaining obvious question is to ask which market has performed best over the long term? In all investments it is important to realise that past performance is not necessarily an indicator of future gains. However, looking at the past performance of the stock market and housing market, as shown by the graphs below, the answer is not obvious.

The graph above shows an index of stocks (the FTSE all-share, in blue) vs. housing (average national price according to Nationwide, in red) over the last 50 years, both starting at 100, adjusted for inflation. The graph shows stocks ahead for the first 15 years, then housing for 20 years, followed by stocks again which took off during the dot-com bubble. Since the bubble burst in 2000, housing has rocketed, and looks to be clearly ahead. However, consider the graph below, showing the relative performance of stocks and housing over the last 25 years.

The above shows that over the last 25 years, even when taking into account the dot-com bubble bursting, stocks are still ahead by a small amount, although they have been somewhat more volatile!

The final conclusions are that the two markets have comparable performance, with no clear winner, and entry and exit timing are very important. But history has shown that in tricky economic times, when cash is most likely to be needed, houses can be tricky to sell for their fair value, whereas stocks can always be sold for their quoted value in seconds. This is not, of course, a show-stopper for housing - it just means that a little extra care is needed when planning an exit strategy.

Is There A Housing Shortage?

admin — Tue, 13 Nov 2007 20:50:00 +0000

The short answer is yes, but not in the way that most people think, and certainly not in the way that the media describe.

The assertation that high house prices are due to "supply and demand", or "too many people" is, in and of itself, incorrect. At a very basic level, if there were "too many people" for too few houses, we would expect people to be living 10 to a room, or on the street, and this simply has not happened.

To understand this, you have to look more deeply into the issue of what "supply and demand" actually means. It is not the case that simply because there is more people who wish to buy a house than there are houses available to buy, that there is a housing shortage. To illustrate the absurdity of this argument, you can look to the example of a Ferrari and a ten year old boy. There are hundreds of thousands of ten year old boys across the world who dream of owning a Ferrari, but they do not represent "demand" for one. There is not a "shortage" of Ferraris. Similarly there are thousands of recent immigrants in Britain who would probably like to buy a house, but that does not prove there is a shortage of housing.

An imbalance of supply and demand will tend to move prices either up or down until supply and demand is once again in balance. An increase in the population does not automatically mean that there is more demand for housing. To deal with the example of immigrants, many of them simply move into shared houses, or rent rooms from others. Given that they initially rent when they arrive, any "shortage of housing" of this type should lead to increased rental prices, but in fact rental prices have been static or falling in real terms for 10 years.

The next thing to consider is whether the current high housing prices are a symptom of a shortage of supply, or an excess of demand. To determine this, we can look to previous price movements to provide an explanation. The number of houses in Britain remains relatively static, increasing steadily each year, without any wild variations. But housing prices do move both up and down quite considerably over relatively short periods. For example, prices fell around 10-20% nationally between 1989 and 1993. If this was due to supply, you would expect it to be accompanied by a large rise in the number of houses being built at around that time, but this simply was not the case, in fact in those years the number of houses built was slightly below average. Similarly from 2002 to 2007 prices rose at well above the average rate. But we did not suddenly begin knocking down significant numbers of houses in those years!

So if it's not a shortage of supply, it must be an excess of demand. Immigration plays a small part in this, but the real driver is the availability of funds to buy houses. From 2003 onwards, the amount of money available to borrow to buy houses has rocketed. Similarly the perception of property as an investment amongst the general public has considerably improved in this time. People are now more keen to buy houses than ever before, and they are not satisfied with just one house. They want second homes, houses to rent out, and even houses simply to hold onto in the hope that they rise in value. The funding for these has never been as easy to obtain as is now the case. Thanks to this we now have 840,000 empty homes in Britain, many of them newbuild city centre flats that have been bought by speculators.

Now consider what happened during the period 1987 to 1993. In 1987-89, prices rose very rapidly as housing-mania took hold and people desperately queued up to buy, fearful that they would never be able to afford to do so again. From 1990 onwards, the bubble collapsed and prices fell rapidly back down again. This was not caused by a change in the number of houses, or the number of people who needed housing. It was simply a result of a rapid change in attitudes to the value of housing, and the availability of money with which to purchase housing. In other words, the excess of demand evaporated overnight and was replaced by a lack of demand, eventually leading to oversupply of people wishing to sell. These factors shifted rapidly and turned the market on its head.

The fundamental point of the above is that when the media or the government talk about a "shortage of housing", they are not telling the whole story. We do need more houses in Britain, partly because the population is currently increasing, and partly because parts of Britain are too crowded. But the "shortage of housing" is talked about as if it is a permanent predicament that is not going to change overnight. It is stated that there is a shortage of housing and this will support prices until more houses are built. But the experience of 1989-1993 tells us that this is simply not true, and that an excess of demand can very quickly turn into a lack of demand and send prices into reverse.

First, A Few Questions

admin — Mon, 12 Nov 2007 23:16:00 +0000

When thinking about the housing market, there are several common interesting questions that crop up. Some of these are given below:

Is there a housing shortage?
Is housing the best investment?
Will house prices always rise in the long term?
Is housing a good choice for a pension?
Is renting a waste of money?
Should a house be a home, or an investment?
Is it possible to "miss the boat" or be "priced out forever"?
Would a fall in prices only affect lower quality homes?
Would a fall in prices cause buyers to immediately jump in for bargains?
Can prices fall without the high unemployment or high interest rates of the early 1990's?
If prices were to fall, would the government "let it happen"?
Is it always cheaper to buy a house over the long term?
Are rising house prices a good thing?
Will the so-called "sub-prime crisis" affect the UK market?
Is sub-prime an insignificant portion of the UK market?
Are the UK and US housing markets related, or completely different?
Can interest rate cuts save the housing market?

The answers to the above questions are complicated and in many cases surprising. The answers to each will be visited, in turn, in the coming weeks.

Rubble Intro

admin — Sun, 11 Nov 2007 21:35:00 +0000

Welcome to housingrubble.co.uk, a new blog that seeks to cover the UK housing market and the various events and situations that are having an impact upon it. This site will attempt to bring some depth and clarity to a subject that is currently attracting much media attention, and about which there is much uncertainty and confusion amongst the general public. Over the coming weeks and months this blog will set out the situation we are all currently in, give a background to the current events in the market and related markets (hopefully with some useful detailed analysis), and set out the various possible future paths that the market may take, together with explanations of their likelihood or otherwise.

The housing market is currently a myriad of myths, grey areas and unknowns. Press coverage is often contradictory, of no practical use, or laced with vested interests and dubious sources of all persuasions. Many claim to know what is happening, but very often they disagree or provide little justification or depth to their assessments. Additionally there are a great many drivers of the market that remain almost entirely unreported, or are only covered in publications read by a particular niche audience.

Housing Rubble seeks to contribute to the addressing of those issues with "no nonsense" coverage, adding both factual information and opinions to the debate. The UK housing market is vital to the UK economy and hence to the well being and happiness of everyone in this country, renters and owners alike. Its course should not the subject of hope or faith. While very few individuals can influence the direction of the markets, and few groups can determine its course, the public collectively should be able to figure out what is going on and what is likely to happen, and assign a probability to each possible outcome. Only then can we make rational choices about our individual and collective futures. Hopefully this blog will help to inform those decisions in some small part.

This blog is also intended to be an interactive resource, with a comments section available on each post. There will always be other angles, opposing viewpoints, or simply points that have been missed or overlooked. Everything on this site is open to debate. Please add your input in the comments section, it really will help to improve the site immensely. If you are commenting anonymously, please use a consistent name so that the thread of discussion will be clear to readers and the theme of your posts comes across.