Collapse of the UK housing market

[Mike4]

Is there a "crisis"?

No not really. 20 years ago house prices were half what they are now and all the same hand-wringing about a housing crisis still existed.

Even if prices fell by 90% to 10% of what they are now, there would still be exactly the same number of houses in existence for the same number of people to squabble over, so how would that help? (Question is for Tara et al rather than you.)

Clue: The down-and-outs sleeping on the street still won't qualify for mortgages.

[JohnB]

One clear solution is CGT on primary residences. You had the shelter benefit while living in it, and had the choice of mortgage or similarly priced rent. If the asset value rises, you share the gain with the state, as you do with equity. Clearly with high inflation CGT needs to be index linked, but that's true for all assets.

Never going to happen, because of all the people who's net worth is almost entirely in property, either by accident, or design playing a distorted system.

But reducing the attractiveness of housing as an asset class would bring prices under control.

(the IHT bung for housing is also unfair, but it was politically popular)

[Tara]

The problem goes to the heart of what the Bank of England (MPC if you like) SHOULD be doing. They are charged with the responsibility to maintain economic stability, yet one look at house prices*, the amount of money borrowed on houses, and indeed the amount of money borrowed throughout the British economy, shows that they have achieved nothing like financial stability. They have failed in their main task.

*primarily during the period of near ZIRP, but one can trace the problem back to 2000 when house prices really started to take off (https://www.housepricecrash.co.uk/indic ... inflation/).

Yes they have completely failed in their task.

It is also important to look at a graph of UK house prices v UK average earnings, where the multiple has gone from about 3x average earnings in 1995 to about 10x average earnings in 2023.

It is really quite a shocking failure on the part of the Bank of England and all UK governments in the last 25 years.

[Mike4]

It is also important to look at a graph of UK house prices v UK average earnings, where the multiple has gone from about 3x average earnings in 1995 to about 10x average earnings in 2023.

It is really quite a shocking failure on the part of the Bank of England and all UK governments in the last 25 years.

And entirely predictable, which plenty did. SO very much in the interest of <whatever> government of the day to encourage house prices to inflate, so why not fill yer boots instead of whining about it?

[1nvest]

Is there a "crisis"?

No not really. 20 years ago house prices were half what they are now and all the same hand-wringing about a housing crisis still existed.

Even if prices fell by 90% to 10% of what they are now, there would still be exactly the same number of houses in existence for the same number of people to squabble over, so how would that help? (Question is for Tara et al rather than you.)

Clue: The down-and-outs sleeping on the street still won't qualify for mortgages.

What with reduced ethics (more divorces, a former couple requiring two homes instead of one), uncontrolled migration (boats) and general population expansion, the infrastructure and building of new cities/homes just can't keep up. Demand is outpacing supply. House/Gold ratio doesn't suggest any crisis



Also since the end of WW1 house prices at the end of 2022 were pretty much spot on the log linear regression line.

Seems more fundamentally a case of house prices becoming less affordable due to higher interest rates for those who have to borrow in order to buy, that are a relatively small proportion of the total who live in/own private homes.

With higher interest rates/inflation, so also might rents rise, and higher rental yields with lower house prices is a attraction for those with surplus capital. What the housing market loses in the way of new/first-time buyers could be compensated and more by others if prices were to decline to historically relatively lower levels.

[Tara]

So you did not really have any solution then to the problem.

And your solution is?

Interest rates above the inflation rate would probably solve the problem fairly quickly.

So, perhaps a 10% BoE base rate, and then keep raising it until the problem is solved.

[Bubblesofearth]

IMO the inclusion or not of house prices in cpi can be justified both ways.

Many goods can be seen as assets. IHT certainly takes into account 'chattels' which are essentially assets. Anything from cars, sofas, tv's, etc can be viewed as assets. Houses are no different in this respect.

Where houses differ from most other goods is that they are massively more expensive, last much longer and tend to go up in value. But these can be seen as extremes of the properties all goods possess and not necessarily an a priori reason to exclude them from cpi.

I suspect the main reason to exclude houses from cpi is that they would, given their price and hence likely weighting, not only dominate cpi figures but cause huge volatility in the same. How useful is that when setting IR's? Would we have had to have had ZIRP during the early 90's when house prices crashed?

The argument for including mortgage payments in cpi is IMO also debatable. Money moves counter-cyclically to goods and services so I'm not sure it make sense to include the cost of money in cpi. IR's are increased to basically increase the cost of money in the attempt to simultaneously reduce the rise in the cost of goods and services (consumer inflation). From that pov it is counter-intuitive to include mortgage rates.

BoE

[dealtn]

Why do you think that the MPC appear to have ignored this data when setting base rates for the 15 or so years prior to the recent increases ?

It's not ignored, but its very much secondary. But in answer to your question it's because its not their mandate. If you, or others, think that it should be then your beef isn't with the MPC.

[dealtn]

Clearly the current measures of inflation, whether CPI,CPIH, or RPI, are not correctly capturing the cost of living in the UK for ordinary people. And that is mainly because none of these indices have ever included the soaring cost of buying a house in the UK.

Incorrect. CPIH inflation does capture the (change in) the cost of living of providing housing. It doesn't, and shouldn't, capture house prices directly, or the change in value of them, because this isn't in itself a change in the cost of living with respect to house consumption (how much it costs to live in one, and maintain it). House prices and rents (and other costs) are correlated for sure, but measuring house prices is an inaccurate measure of the consumption cost.

Measuring the value of your stock portfolio might give a good estimation of your financial wealth, but that number, or its change over a year, doesn't tell you with much accuracy a story about your dividend income, correlated though it might be. It's the same with housing.

[leedm]

Why do you think that the MPC appear to have ignored this data when setting base rates for the 15 or so years prior to the recent increases ?

It's not ignored, but its very much secondary. But in answer to your question it's because its not their mandate. If you, or others, think that it should be then your beef isn't with the MPC.

AIUI, the mandate of the MPC is to maintain price stability. As said before, I’m struggling to see anything in the rate of increase of house prices in the last 15 years that could be described as stable.

If, as you seem to imply, that the MPC were aware of this but chose not to do anything about it, then either they couldn't foresee the issues that are now arising as interest rates increase, or they chose to ignore them or were influenced in some other way which perhaps meant they couldn’t do anything about it. Either way, it smacks of incompetence at best or downright corruption at worst.

[dealtn]

It's not ignored, but its very much secondary. But in answer to your question it's because its not their mandate. If you, or others, think that it should be then your beef isn't with the MPC.

AIUI, the mandate of the MPC is to maintain price stability. As said before, I’m struggling to see anything in the rate of increase of house prices in the last 15 years that could be described as stable.

If, as you seem to imply, that the MPC were aware of this but chose not to do anything about it, then either they couldn't foresee the issues that are now arising as interest rates increase, or they chose to ignore them or were influenced in some other way which perhaps meant they couldn’t do anything about it. Either way, it smacks of incompetence at best or downright corruption at worst.

The mandate, as introduced when that regime started, and most recently agreed by the BoE executive in 2017, is to primarily "maintain price stability". That measure is referenced specifically to the CPI and therefore that is the mandate.

https://www.bankofengland.co.uk/about/p ... -committee

Again if you think that is wrong, then attack the mandate, not the MPC itself, nor CPI.

The MPC is comprised of many intelligent people, and many more over time (and perhaps many less so such as myself that failed to get appointed to it!). They understand this.

Your argument has parallels with many that attack judges, or the supreme court, regarding their deliberations when in fact most such attacks are better represented as attacks on the inadequacies of the legislation, not its interpretation.

[leedm]

AIUI, the mandate of the MPC is to maintain price stability. As said before, I’m struggling to see anything in the rate of increase of house prices in the last 15 years that could be described as stable.

If, as you seem to imply, that the MPC were aware of this but chose not to do anything about it, then either they couldn't foresee the issues that are now arising as interest rates increase, or they chose to ignore them or were influenced in some other way which perhaps meant they couldn’t do anything about it. Either way, it smacks of incompetence at best or downright corruption at worst.

The mandate, as introduced when that regime started, and most recently agreed by the BoE executive in 2017, is to primarily "maintain price stability". That measure is referenced specifically to the CPI and therefore that is the mandate.

https://www.bankofengland.co.uk/about/p ... -committee

Again if you think that is wrong, then attack the mandate, not the MPC itself, nor CPI.

The MPC is comprised of many intelligent people, and many more over time (and perhaps many less so such as myself that failed to get appointed to it!). They understand this.

Your argument has parallels with many that attack judges, or the supreme court, regarding their deliberations when in fact most such attacks are better represented as attacks on the inadequacies of the legislation, not its interpretation.

Not really.

What I am saying is that the MPC have a mandate to maintain price stability and yes the rate of inflation as measured by CPI. However, your statement above appears to suggest that because of this, even though they are clever enough to foresee that their mandate would lead to price instability, there was nothing they could do about it.

Well, I’m afraid that if the BOE is truly independent as we are told, then the buck stops with them. If their mandate or legislation is wrong then they should be influencing the change of it. If they really are unable to influence the legislation that impacts the economy to such an extent, then way then what is the point of them ?

[dealtn]

The mandate, as introduced when that regime started, and most recently agreed by the BoE executive in 2017, is to primarily "maintain price stability". That measure is referenced specifically to the CPI and therefore that is the mandate.

https://www.bankofengland.co.uk/about/p ... -committee

Again if you think that is wrong, then attack the mandate, not the MPC itself, nor CPI.

The MPC is comprised of many intelligent people, and many more over time (and perhaps many less so such as myself that failed to get appointed to it!). They understand this.

Your argument has parallels with many that attack judges, or the supreme court, regarding their deliberations when in fact most such attacks are better represented as attacks on the inadequacies of the legislation, not its interpretation.

Not really.

What I am saying is that the MPC have a mandate to maintain price stability and yes the rate of inflation as measured by CPI. However, your statement above appears to suggest that because of this, even though they are clever enough to foresee that their mandate would lead to price instability, there was nothing they could do about it.

Well, I’m afraid that if the BOE is truly independent as we are told, then the buck stops with them. If their mandate or legislation is wrong then they should be influencing the change of it. If they really are unable to influence the legislation that impacts the economy to such an extent, then way then what is the point of them ?

Well I don't know who has told you that but they aren't. They are bound by legislation in exactly the same way you are. You can't be an independent decision maker, but free to drive at 100mph on a motorway, for instance.

They can have influence over the mandate (and do). There is considerable economic research into the relevance of inflation to an economy, and what should be included within that eg. are wealth effects to be taken into account, or not?

The BoE have been involved in a number of consultation exercises regarding inflation over the years (I was involved in 2 of these).

As an institution the BoE (and the MPC) are open and relevant in these matters, but ultimately the UK, and its independence of monetary policy from the executive branch of government, isn't far different from much of the capitalist world. We certainly aren't an outlier.

If you think differently, and that asset prices are a necessary input in the setting of monetary policy, then that is perfectly fine. That will likely have produced a different path of interest rates (as acknowledged by you) with the consequences of that alternative strategy. House prices may be (and have been) lower - but employment and incomes may also be lower, as might the level of GDP and the quantum of the national debt. That outcome may not be the preference of others who would be arguing against you.

[funduffer]

This is what the BoE themselves say about their role in the housing market:

https://www.bankofengland.co.uk/explain ... %20lending.

The Bank of England needs to know about, understand and predict changes in the housing market. This is to keep an eye on risks to the economy and the financial system and to judge the impact of our policies.

Our role in the housing market covers a few areas – for example, we set the interest rate, which impacts the cost of getting a mortgage. We also make sure banks are able to meet potential losses on their mortgage lending. This means you can save and borrow money safely. Last but not least, we process big payments like buying a house.

I agree with dealtn on CPI - no need to explicitly include house price changes. CPIH includes 'imputed rent' which indirectly relates to house prices.

FD

[Tara]

This is what the BoE themselves say about their role in the housing market:

https://www.bankofengland.co.uk/explain ... %20lending.

The Bank of England needs to know about, understand and predict changes in the housing market. This is to keep an eye on risks to the economy and the financial system and to judge the impact of our policies.

Our role in the housing market covers a few areas – for example, we set the interest rate, which impacts the cost of getting a mortgage. We also make sure banks are able to meet potential losses on their mortgage lending. This means you can save and borrow money safely. Last but not least, we process big payments like buying a house.

I agree with dealtn on CPI - no need to explicitly include house price changes. CPIH includes 'imputed rent' which indirectly relates to house prices.

FD

So called “imputed rent” and CPIH is full of flaws, and it has also done very little to capture the full effect of rising house prices.

As stated before, the best solution would clearly have been for the BoE to take account of rising UK house prices v average UK earnings when setting interest rates, but various vested interest groups have obviously prevented such a sensible thing from ever happening.

Perhaps the new Labour government will be wise enough to introduce a new “Fit for Purpose” Inflation Index when they win the upcoming election.

They also seem to have the same problem in Australia with flawed inflation data.

https://www.afr.com/policy/economy/cba- ... 420-gvoevv

[dealtn]

This is what the BoE themselves say about their role in the housing market:

https://www.bankofengland.co.uk/explain ... %20lending.



I agree with dealtn on CPI - no need to explicitly include house price changes. CPIH includes 'imputed rent' which indirectly relates to house prices.

FD

So called “imputed rent” and CPIH is full of flaws, and it has also done very little to capture the full effect of rising house prices.

It's not perfect but its job isn't to capture the price of houses. The clue is literally in the name, it is concerned with things that are consumed and that is subtly different. It is designed to capture the cost of using the things that are bought. That is less obvious a distinction for things such as food that are bought and eaten soon after (literal consumption) but for items such as houses the factor that is important is the cost of living in them. That is mostly through renting or paying a mortgage - and the price of that, and its change, is the determining factor in a CPI type measurement. People might "buy" a house only 3 or 4 times in their life, but they pay for housing continuously.

As stated before, the best solution would clearly have been for the BoE to take account of rising UK house prices v average UK earnings when setting interest rates, but various vested interest groups have obviously prevented such a sensible thing from ever happening.

At last you appear to be coming round to the argument that the target of the MPC might be insufficient when deciding monetary policy. How sensible targeting house prices would be is debateable too though. Such a change would introduce alternative outcomes in the economy, not all of which might be seen as positives by some.

[Charlottesquare]

One clear solution is CGT on primary residences. You had the shelter benefit while living in it, and had the choice of mortgage or similarly priced rent. If the asset value rises, you share the gain with the state, as you do with equity. Clearly with high inflation CGT needs to be index linked, but that's true for all assets.

Never going to happen, because of all the people who's net worth is almost entirely in property, either by accident, or design playing a distorted system.

But reducing the attractiveness of housing as an asset class would bring prices under control.

(the IHT bung for housing is also unfair, but it was politically popular)

No, it would destroy supply into the market leaving those seeking to buy chasing in a smaller pool of houses for sale- if CGT applies to your PPR why sell?

Even Sweden, which has effectively 22% tax on their private homes, allows a tax rollover, gains carried into the next owned property, you only get taxed when downsizing. If you put frictional costs in the way (And SDLT/LBTT already applies and are frictional) you will cease to have a market (Good news for architect as everyone tries to stay put and build more space/uses existing space more efficiently)

[Lootman]

One clear solution is CGT on primary residences. You had the shelter benefit while living in it, and had the choice of mortgage or similarly priced rent. If the asset value rises, you share the gain with the state, as you do with equity. Clearly with high inflation CGT needs to be index linked, but that's true for all assets.

Never going to happen, because of all the people who's net worth is almost entirely in property, either by accident, or design playing a distorted system.

But reducing the attractiveness of housing as an asset class would bring prices under control.

(the IHT bung for housing is also unfair, but it was politically popular)

No, it would destroy supply into the market leaving those seeking to buy chasing in a smaller pool of houses for sale- if CGT applies to your PPR why sell?

Even Sweden, which has effectively 22% tax on their private homes, allows a tax rollover, gains carried into the next owned property, you only get taxed when downsizing. If you put frictional costs in the way (And SDLT/LBTT already applies and are frictional) you will cease to have a market (Good news for architect as everyone tries to stay put and build more space/uses existing space more efficiently)

This, exactly. Nobody in their right mind would sell their PPR if they had to pay 28% CGT on the profit, and then up to 17% SDLT on the re-purchase.

[scrumpyjack]

The trouble is that the BoE have a conflicted mandate:

"The Bank of England (BoE) has a dual mandate to protect price and financial stability"

They interpret financial stability to mean preventing rising unemployment and recession. Protecting the value of our currency comes a long way behind that.

[1nvest]

As said before, I’m struggling to see anything in the rate of increase of house prices in the last 15 years that could be described as stable.

1968 up to the year prior to the financial crisis (2007) and 100% of average house price x base rate averaged 25% of the average (median) gross wage.

More recently, prior to the spike in inflation, some were securing 2% fixed rate mortgages on around £280K average house prices. £5600/year. Whilst average wages were around £28K. 20% of average gross wages. With interest rates rising to 5%, wages rising to 30K, house prices of 290K the figure rises to 48% of gross pay. However that 25% average came with high volatility, a 10% standard deviation, ranged from highs of 55% (1988/1989) to lows of 11% (1971, 1993). Post financial crisis was a swing-low, initially down to 10% levels, more recently we're seeing a trend towards a swing-high.

The instability over the last 15 years is a combination of the financial crisis (government handing large amounts of taxpayers money over to their banker mates (head they win, tails an taxpayers bail them out)), Covid (government dishing out contracts to their mates or otherwise wasteful spending), the Energy crisis (government permitting their oil/gas mates to make massive/excessive profits). The UK needs a government that is in it for the people, not the bankers/energy/others whom bribe them.