Sorry. This is a long one. Work in progress. Let me count the ways…
One. Its so expensive
By almost any measure you care to choose UK housing is expensive. Costs are so high that the ratio of house prices to disposable income has increased by a multiple of between 2 and 3 for all income and house price brackets over the last 20 years. The rental market is no better. That means people are spending a vastly higher proportion of their disposable income on housing.
Demand is driven by population growth, the national obsession, and a decade of historically extraordinarily low interest rates. Supply is constrained by development nimbyism, carpet bagging land banking, and ideological and fiscal straightjackets that obstruct investment in social housing. All asset prices have been pumped by years of credit crunch and covid money printing. It’s a viscious storm (not a perfect storm or a vicious circle, a Viscious Storm).
Over the last decades in the UK many people have earnt the equivalent of an annual salary by simply sitting in a house that they own but they haven’t even improved. In fact, for 10 out of the last 20 years, the owner of an average house in London has reaped more in annual price growth than the average full time UK worker can earn in a year. How does that make any kind of sense?
This expense is a drain on productivity and a waste of effort. It’s a barrier to social mobility. Everyone’s economically productive work is, in effect, taxed by what they have to pay for their housing in excess of the true cost of that housing. Rather than spending it on improving the quality of their life, or investing in the future, it goes into the bulging pockets of asset holders. It’s another kind of Platform Pravilege stealing the Goose’s Common.
Two. The average house is not affordable for the average couple
Many people who pay rent are unable to save a deposit (because rent is so expensive). Many people find getting a mortgage difficult (e.g., 1 million people on zero hours contracts). While historically lenders would give mortgages on three times multiples of salaries now five times multiples are common. Even then, the median household income is £30k, meaning they can borrow £150k. That leaves some shortfall before the median couple can buy the average house of £300k. How does that make sense?
Three. Renters and the government buy houses for the comparatively wealthy
Deliberate government action has decreased social housing stock because of right to buy (and the refusal to let proceeds be spent on new housing). Deliberate government action has encouraged buy-to-let landlords by allowing them to set their mortage interest against their income tax (although this was stopped a few years ago). The result has been a rental sector dominated by an army of amateur landlords, meaning:
- On the whole, quality of accommodation and service is poor, because cost-conscious landlords do not have the economy of scale, capacity, or experience to work professionally — even when they themselves are subject to a grifting system of works and certifications.
- Renters who have not been able to save a deposit or get a mortgage end up buying houses for those who have. In other words, the less well off enrich the more well off.
- If those renters are eligble for housing benefit, it is in fact the government (i.e., us) paying for those houses in a massive transfer of public money directly into the current accounts of the comparatively wealthy. Five years ago this transfer was over £9bn and it’s unlikely to have got any better since.
Four. Land ownerships is concentrated in the hands of the few
Perhaps half the land in this country is owned by people descended from William the Bastard and his inner circle. Let that sink in. Many of the families that most benefit from the British housing system have been doing so for nearly a thousand years. Not through any efforts of their own, but because of who their parents are. Revolutions cause misery and don’t deliver on their promises, but they can remove entrenched interests that block social improvements. Great Britain has not had a post-enlightenment revolution, and this enduring concentration of land wealth is one of the results.
Five. The government does everything it can to keep house prices going up
The great con is that most people think it is a good thing if property prices go up, even though it makes most families worse off. It’s only if you’re downsizing that it helps. If you’re going up the ladder, rising prices mean what you make on your current house will not cover the extra you have to spend on your next house. If you’re not on the ladder, rising prices can accelerate beyond your ability to save a deposit.
Governments don’t want to change the system because misguided belief in the benefit of house price increases makes change too unpopular and radical. They have an entrenched attachment to the fetish of property speculation. And they are and represent the vested interests. In fact they do everything they can to avoid fixing the broken market, and to prop up price increases. Schemes like stamp duty holidays and Help to Buy look great to desperate buyers but in fact only have an inflationary effect.
Six. Across parties, MPs profit from house price inflation at public expense
Many MPs, including Michael Gove, became quite wealthy from remortgaging their London residences, extracting equity for themselves, and letting the tax payer pick up the increased mortgage payments. This continued in a different form after rules were changed following the expenses scandal. Many MPs rented our the properties they owned in London, then claimed expenses to pay rent or hotel fees for additional accommodation. Tory MPs claimed £3m in housing rent on expenses between April and November 2020.
Seven. The tax code encourages rent-seeking and punishes productive work
A worker with a job pays income tax, national insurance, and, when they buy a house, stamp duty. Someone who doesn’t work but owns assets, pays capital gains tax only when gains are realised, income tax only on dividends, and doesn’t need to pay stamp duty on the house they already own. Effective tax rates for the former are higher than the latter. We tax people doing productive work more than we tax people making a living sitting on their ASSets. If you value people working productively then the tax code should reflect that. At the moment it does the opposite. It encourages people to seek rents.
Eight. It doesn’t cost that much to build a house
For the sake of argument, using inaccurate and simplified but broadly indicative back-of-the-envelope estimates… it costs £250k to build an average 3-bed house (labour, materials etc.), and if this can be amortised over 50 years, the cost of paying for building is c.£5k per year. That’s <£100 per week. After 50 years there’s nothing left to pay. Most housing in the UK was built 50–150 years ago so the cost of building it should already be fully amortised.
Compare the average purchase price of a house at £300k with the cost of building it after amortisation being £0-£250k. The difference between the two figures (£50–300k) is a ‘tax’ on people who have typically worked for the money, to the benefit of people who haven’t: the speculators, the landlords, the rentiers.
After first posting this, I was pointed to evidence that Barret-type new houses can be built for about £100k, not the £250k I estimated. This makes the price of an amortised house even more egregiously inflated to the advantage of the rentiers and speculators.
Moreover, the increase in the proportion of gross profit in the chart below clearly shows one of the parties benefiting from this situation, and goes some way to explaining Jeff Fairburn’s £100m bonus.
Nine. Build rates are artificially slow
British builders do not want to build too many houses. They want to maintain high prices, so don’t want to swamp the market. They don’t want to sit on stock they can’t sell. But also they are a carefully leveraged machine that works on minimum working capital. If they operate at the right scale, they can keep building with minimal equity. Any ramp up requires more capital.
In my understanding, it’s only broad swathes of public money that could release the logjam. Pay the house builders to build houses at a good rate (of speed for us, and profit for them), rather than let them manipulate the housing market. I would expect this to being a much better return for society than HS2 or extra tridents.
Ten. Buyers of new builds pay double bubble interest
This blew my mind. If a builder is highly leveraged with minimal equity, part of the cost of their build is interest payments on the money they’ve borrowed to finance it. This cost is passed on to the purchaser when they buy the house.
If the purchaser takes a mortgage, they will pay interest on the money they’ve borrowed which goes to cover the interest the builders are paying on the money they’ve borrowed. If its a bank like RBS or Barclays, who finance both builders and retail house purchasers, then they are in effect charging interest on money used to pay the interest they’re charging.
Eleven. The infantilisation of a generation
A symptom of high sales prices is that people live at home for much longer than they used to. While there are perhaps some benefits to this arrangement, it must contribute to the infantilisation of a generation that has been exacerbated by the pandemic, and which many are concerned about.
Twelve. Strategies to meet higher rents increase those rents
There is a kind of vicious circle. The higher rents are, the harder they are to afford, so the more people come together to share accommodation, potentially with strangers. As this becomes more normalised, and occupancy and density increases, the earning potential of groups of people becomes greater than that of individuals or couples, further driving up rents and perpetuating the situation. Quality of life for many — privacy, agency, health — all decreased to further enrich the few. Of course Brexit, plus the flight from city centres in the face of working from home, could fundamentally change this calculus.
What should we do?
I have no idea. I’m no expert. I have lots of reading to do. I had written most of this piece before Martin Wolf chimed in this morning in the FT saying British housing is expensive and supply must increase, linking to some interesting-looking studies.
Even in my ignorance, I think its important to get a feeling for how rigged the housing system is to the advantage of the already wealthy at the expense of the less wealthy. I think its worth considering how much discontent this system brings to so many people. Its iniquitous.
Some initial ideas worth exploring:
- You’d have to work it all out to avoid unintended effects, but taxing second homes even more, adding punitive taxes for vacant homes, and potentially annualised taxes on the value of assets — as they typically have in the US — would help stop people just collecting rents on assets they own rather than working.
- Examine developing some programme whereby long-term rents could act as a kind of hire purchase while also protecting the rights of landlords, perhaps in the form of a credit union or, god forbid, a building society.
- Investigate what appear to be eminently sensible proposals of the Common Ground Trust.
- Explore Community Land Trusts.
- Embrace Yimbyism.
- Support and form organisations like the London Renters Union, and strengthen tenants rights.
- Make central banks responsible for house price inflation, as suggested in New Zealand?
- Talk about it. Make this more of a conversation.
