Sunday, 16 December 2012

Ten Year Tenure Tips

The headlines greeting the decennial 2011 census have focused on changes in country of origin and religious affiliation, but these simply reflect continuing trends that are either worrying (foreign neighbours!) or thrilling (better restaurants!) depending on your general outlook on life. The ethnic mix is a feature of a world in which labour mobility and international education are increasingly common. What should worry those parts of the UK that remain overwhelmingly white is that their exclusivity is a sign of economic poverty. As for religion, the census figures have always been misleading as they reflect emotional allegiance rather than participation (do the Jedi Knights actually have harvest festivals?), which is why they will continue to gradually but inexorably decline.

The more significant news, I'd suggest, is the change in housing tenure. Even here, most media commentators have focused on the decline in home ownership as the corollary of increased renting, which is hardly news. The huge sums diverted before the 2008 unpleasantness into buy-to-let properties were not a sign that the bottom was falling out of the rental market, while the continuing under-supply of affordable housing has been conscious policy for decades. What is news is that we reached an inflexion point in home ownership ten years ago, round about the time of the last census in 2001. As the HomeOwners Alliance lobby group put it:

The decline in homeownership started well before the financial collapse and housing market crash – it started in the easy credit boom years in London in 2000, and the rest of the country followed. Homeownership levels across the UK have been declining since 2002, five years before the credit crunch of 2007. But the decline has been notably accelerated by the drying up of mortgage credit, as well as rising unemployment, with homeownership levels currently dropping by almost 1% a year.

Parallel to this decline, the number that now own their home outright has increased. Homes owned with a mortgage or loan dropped from 8.4 million (39% of all households) in 2001 to 7.6 million (33%) in 2011. Homes owned outright increased over the same period from 6.4 million (29%) to 7.2 million (31%). Some housing market experts now anticipate that non-mortgaged owners will exceed the mortgaged as soon as 2014. That date will probably also see the number of private renters exceed the number of social renters (i.e. renting from the council or a housing association). The former have increased from 1.9 million homes (9%) in 2001 to 3.6 million homes (15%) in 2011. The next couple of years will therefore witness a watershed in terms of housing tenure composition.

Does this matter? I think it does, for two reasons. First, outside of the super-rich, people who own their homes outright tend to be less willing to sell and trade on. This is largely a factor of age, i.e. that they pay off their mortgage in their 50s or early 60s. After a couple of decades of trading up (in most cases), they're probably happy to sit still once the music stops, certainly since Spanish villas went out of fashion. The problem is that these properties are then less likely to return to the market. Even on death (or when they need funds for a care home), there is now a good chance that the property will be occupied by an inheritor (the destiny of many a baby-boomer's child who could not otherwise afford a mortgage), even where the inheritance is split across multiple children (I suspect open market selling will be a third option after an inter-sibling sale of shares or an agreement to let the property and divide the rental income). In other words, such properties are likely to stay within the family. The second reason is that buy-to-let properties are less likely to to be converted to owner-occupied homes as their revenue stream is a hedge against both inflation and a potential property price crash. Baby-boomers, or even those in their 40s who were able to invest before 2008, have long seen buy-to-let as a pension fund. They are probably going to sweat their assets.

What this means is that, short of a massive housebuilding programme, the supply of properties on the open market for purchase by owner-occupiers via mortgages will remain constrained. The drop in house sale volumes since 2007 is not likely to reverse any time soon. This will keep property prices high, which will please builders (they prefer high margins to high volumes), existing homeowners, and (by extension) certain political parties. It will further limit social mobility and will reinforce the trend towards a rentier mentality. The ideological opposition to higher inheritance or property taxes is likely to grow further on the right, leading to calls for outright reduction or abolition (the freeze on council tax revaluation is a de facto real-terms reduction for the upper bands). The popularity of the mansion tax among LibDems is based on the assumption that it won't catch the majority of homeowners, just rich oligarchs in Kensington and Chipping Norton.

The more I look at the current political establishment, and its knowing acquiescence in this dynamic, the more I see a childish nostalgia for the Edwardian era (Cameron, Clegg, Osborne and Johnson could be transplanted with zero adjustment - Gove would be shown the tradesmens' entrance). The popular resonance of Downton Abbey is perhaps less about the upstairs-downstairs class boundaries and cultural snobbery and more about the attraction of unearned income. The census implies we are losing our faith in religion, but not our faith in property.


  1. David,

    I have just been discussing these points with George Carty on my own blog - here.

    I disagree with your conclusions in the last few paragraphs for the reasons I've set out there. Firstly, I don't think the option of Spanish Villas is now off the table for older people like myself. On the contrary, the fact that prices in Spain have and continue to collapse, makes it even more attractive once the current uncertainty ends - which it will. But, secondly, there are now lots of other such opportunities both across Europe - I've recently been thinking about buying a house in Ireland where you can get four times as much for your money as here - and in the US, where you can now buy a 6 bedroom luxury house in Kissimee for around £70,000. My sister, who is 8 years older than me, has a couple of friends who have sold their house, and who now spend their time between a caravan in North Wales, and a house in Florida.

    But, as I said to George, even if people stay in their homes, this reduces demand as much as it reduces Supply, and so the effect on price movement is cancelled out. That is true whether the existing owner continues to live there or their kids.

    I also think you are wrong about buy to let. Unlike many of the old landlords, who did own properties outright, the BTL's are amateurs, who have run up massive debts to acquire these properties, believing that current rock bottom interest rates will continue, and that house prices only every rise. Lending conditions are tightening, and mortgage rates rising, whilst the pressure on rents is increasing - for one thing due to the changes in Housing Benefit. Many will, thereofre go bust. If they have sense they will get rid of a wasting asset before it drags them down. I doubt many have that sense looking at some of their comments at Money Week.

    There are already around 1 million empty homes in Britain, and my guess is the real figure is much higher. I know of at least three properties near to me that were bought a few years ago for between £350,000 - £400,000, which have remained empty since. I doubt they appear on the empty homes register. The proposal to remove second homes discounts on Council Tax, may have some effect on that.

    As I pointed out to George the important relationship is between houses supplied and houses demanded - which is not houses needed. A look at the estate Agent data, or just a drive down any road shows huge excess of supply over demand. As happened in Spain, people will hold out perhaps for some considerable time, hoping that someone will pay them what they think they should get, but in the end, they have to face reality and sell for what they can get. That will be increasingly the case, when banks stop forbearing, and start foreclosing.

    1. Boffy,

      My point about Spanish villas was that the number of Brits buying them has fallen since 2008, hence (in part) the collapse in prices. In theory, as property prices haven't fallen so much in the UK (and remain robust in London & the SE), now would be a good time to cash in on a house here and buy there, but it isn't happening in large numbers. This may reflect an expectation that the Spanish market still has further to fall, but broadly it looks like caution.

      I agree that the BTL crowd are largely amateurs, and some will no doubt come a cropper when interest rates rise, but enough of them have invested in high-rent properties in the South East that they will not be adversely affected by the housing benefit cap. They can rely on working professionals. Indeed, the more astute will welcome a thinning-out of the market through distressed sellers, as this may reduce total rental stock and thus keep rents high.

      I also agree that we have plenty of empty houses, though these tend to be in the wrong place - i.e. empty terraces in Pontypridd do not affect rental prices in Crawley. Where I disagree is your assertion that need is irrelevant. Since the 80s, housebuilding has been left largely to the private sector in the UK. For a number of reasons, it has suited the private sector to under-supply. In contrast, the Spanish experience has been one of deliberate over-supply, for quite different reasons. The US and Ireland are closer to Spain in this respect.

      I agree with your central premise that property is over-valued and that prices must inevitably fall, and probably quite steeply, but the growth in outright ownership and the decline in mortgages (which will partly be deliberate deleveraging in the form of early pay-offs of mortgages taken out in the 80s) means that the eventual hit, in terms of negative equity and personal bankruptcy, will probably be limited to a much smaller number of households than would have been the case if prices had crashed in 2008. What I think we're seeing is an attempt to make household balance-sheets more robust, in parallel with the similar preparations by the banks, for the day of reckoning.

      In that context, outright ownership and (for many) BTL still makes sense. Though the value of your asset may drop, you'll still have either a home to live in or a revenue stream. What we won't see is the sort of delinquency experienced in the US, i.e. people just abandoning homes and reneging on mortgages. Our historic under-supply, relative to need, has probably insulated us from that.

    2. I think that probably the Spanish Villas situation is probably reflected in my own position - well not exactly. I sold my house at the end of 2009, exchanged contracts and completed January 2010. The intention was to rent in Spain for a few months while we found somewhere to buy. I'd actually been intending to buy at the end of 2008, but the day I'd found somewhere I was interested in we got back to the villa we were renting to find everything had crashed, so we postponed the decision. In 2010, we put the majority of our personal belongings into a caravan and set off for Spain, but had an accident on the M6 Toll. We never got there, and to cut a long story short, ended up in our current rented accommodation.

      We went to Spain in May 2010, to look at property, but didn't find what we wanted, at a price I thought reflected what was already then an unfolding Eurozone Political Crisis. We went again in May this year, and found properties had fallen in price considerably, but now our demands of what we wanted, and where we wanted it had changed, and I still felt prices had a significant way to fall. My wife has kept looking, and we are going again in January. She has found some properties in the Northern Costa Blanca, and the main place we have in mind is 8 bedrooms, 5,000 square metre plot including its own orange grove, and a huge swimming pool. But, we have a number of similar properties lined up. The above is for sale at an asking price of €175,000, but I expect to get it for more like €150,000 or about £120,000.

      I'm still a bit concerned about the political situation in Spain, but at that kind of price, its worth the risk, and even if prices fall further from there, the risk reward ratio is now moving in favour of buying there. I expect that when things in Europe settle down, which I think they will next year, confidence of northern Europeans to buy in Spain will return.

      Housing need is irrelevant when it comes to prices, because its only effective demand that can move prices. Demand for houses is not deficient because there is a lack of need, but because potential buyers cannot afford even minimal deposits of 10%, on massively inflated prices, and because even where they can, they cannot now provide the necessary guarantee that lenders require that they will be able to make the monthly repayments even at today's unsustainably interest rates.

      In fact, the data shows that the amount of property per head today is 50% higher than it was in the 1970's! Part of what has happened is that we have moved away from multiple occupancy homes, to single occupancy homes. In part that may be demographic, but I think, in large part its also cultural or whatever. That is, from the late 1980's, as huge amounts of credit were mae available to anyone who wanted to buy, single people found they could borrow enough to buy their own house where previously they would have lived at home until they married. Why wouldn't you if you thought house prices would always rise. In part, the fact of more people going away to University may also have added to this trend. I suspect, however, that the trend is reversing, which means that former effective demand is being destroyed.

      I also think that BTL is looking to be what investors call a crowded trade. I've noticed around here, that as well as there being forests of for sale signs, there is also a forest of To Let signs. I have noticed a lot of houses where sellers have given up on trying to sell, and have decided instead to let their property. I considered doing it myself rather than selling my last house. Rents have tended to hold up, because of the number of people who now cannot buy, but I think the increasing numbers of people who are renting out there houses when they can't sell them, will at the least keep a cap on that. They will be the first to sell, if prices seem to be falling more rapidly, or if they get squeezed as interest rates rise. That is happening already in Spain.

  2. Cont'd

    We already have according to the bank of England as big a percentage of people having had forbearance from the banks as happened at the height of the property crash of the 90's. The only reason the banks aren't foreclosing is for fear of starting the same kind of firesale, but when the banks have firmed up their balance sheets, or if they fear prices falling more rapidly, they are likely to try to get their money back.

    Certainly, for me I'm more than happy at the moment to be renting even though I previously owned outright. I'm living in a very nice property, and even at today's low interest rates for savings, the money I would have had tied up in the house essentially returns enough to pay the rent. In the meantime, I can sit back and watch the value of my money rising week by week, as house prices continue to fall. I sold my 3 bedroom detached house for £150,000. Today, I could buy a house the same for around £120,000 or a bit less, or I could buy the place in Spain for around the same amount.

    On empty homes, my guess is that in places where prices are high there are also probably plenty. As I said, this is a pretty affluent area and I know of at least 3 that have been empty for 3 years in an area where there's only about 30 houses in total. Also many of the people in those more affluent areas, probably have two or more homes. If you think the price will rise you will hold on. If you think its going to fall, you will sell.

    I simply don't think there are enough affluent professionals to keep the income of all the BTL's going. They are facing rising mortgage rates because of new conditions imposed by the EU. Moroever, I think that we are experiencing a Bond Bubble as part of Financial Repression. There are at least two things which will cause that to reverse. Either another scare will spark Yields to rise - could be the Fiscal Cliff, could be UK losing AAA, or whatever. The scare might even just be that we see the return of the Bond Vigilantes, as some big Bond Fund like PIMCO decides to start selling. In fact, a large Canadian Pension Fund, has already made that move. Secondly, it could be the opposite. It could be that fear declines!

    There is a general feeling that equity markets, particularly in the US may be undervalued. Caution, has caused money to stay on the sidelines for because investors do not know what will happen in the US or Europe. The same caution has led to Financial repression, and a flow of money into Bonds. But, if the Fiscal Cliff is resolved - likely at some point - the US markets will rise sharply. That will drag a huge chunk of money out of Bonds and into US equities. I suspect that unless there is a huge collapse in Europe in the next few months - still possible - then the up turn in the global economic cycle during next year will start to reduce tensions and constraints. So Financial repression will stop, Bond Prices will fall significantly, and yields will rise substantially.

    Result, interest rates in money markets soar, which will crush borrowers.