Here are the real reasons why UK Home prices are expensive

Thursday, Sep 15 2016 by
16

Introduction

They say Britain is a nation of shopkeepers; now it is turning into a nation of property owners.

The shopkeeping part is being weaned down resulting in massive publicity on bankruptcies like Woolworths and BHS.

So, what makes property in the UK so treasured?

Let’s find out.

The most famous housing chart

When the media talks about property prices they are very likely related to this graph:


Source: MeasuringWorth.com and Nationwide.co.uk.

These measures are on average home prices and average salary meaning it includes earnings of the very rich; this distorts the averages.

For example, the top ten best-paid CEOs have a collective salary of £156m and the UK average salary is £27,195, therefore it’s the equivalent salary for 5,736 people.

A more accurate measure is the median disposable income because if the UK has a total of 30m workers, the data will give you the earnings from the person in the middle or 15 th millionth.

Also, it’s income after tax data, which helps to avoid any distortion if one is paying high taxes. 

And this chart tells you a different story:


Source: Nationwide.co.uk and Telegraph.co.uk.

First it is much more volatile, and second, it presents some interesting findings.

Back in 1970, you can afford a house for working less than one year and its salary after tax!

Now, it’s over 11 times’ your disposable income, though it varies from regions to regions, on average home prices have risen 13 times faster than median disposable income.

Who or what is to blame for this property price bonanza?

1. Population and Migration

The raw way of looking at it is to compare the number of homes against change in UK population:

data-verified=

Source: ONS.gov.uk.  (Graph created by the writer)

The number of homes built has steadily declined while the annual increase in UK population is up by half million from the 62,000 during the 70s.

For the above chart to be meaningful, you got to know how many people will occupy these new homes then compare to UK population increase.

Therefore, you required the average household size per home data, as shown below:

Decade

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Disclaimer:  

By reading my articles and newsletters, you agree to use the research of Walbrockresearch.com at your risk. The purpose of this site is to educate and entertain readers. In no way, we are giving investment advice though the information provided is to my knowledge accurate at the time of the report. You should do your research, or seek advice from qualified professional investment advisors.

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15 Posts on this Thread show/hide all

almain 16th Sep '16 1 of 15
1

Why do you compare "New Homes" built to "Total Population"?
Surely you should compare "total housing stock" to "total population"

Housing in the UK is a scarce resource, so you're probably right in that there should be a disincentive to owning more that you need.

Many people would be upset if the prices came down significantly (values halved?), but that would be good for the younger generation who have yet to buy.

It would be a disaster for the people who have newly bought a property with a massive mortgage.

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Orangetree 19th Sep '16 2 of 15

In reply to post #150746

Thanks for the reply Almain and I also did total housing stock to UK population the link shown below:
http://imgur.com/ZkfmGXe

My problem with researching UK housing is the categorisation between foreign and domestic buyers in particularly the ownership of second, third and more homes.

If you remember the tax scandal at Mossack Fonseca, rich UK Nationals can drastically reduce its tax (hence why the UK running £100bn+ deficits in the past eight years) and buy UK properties as a foreign national by creating and using offshore subsidiaries.

The UK housing market is a bit like China where if you have money you own four or five homes and remain emptied most of the year.

Yes, you are right about people buying properties at the wrong time will get burn. But, at the same time, a bubbly housing market do not promote UK innovations + inventions because offices are expensive to rent and build.

A good example is Germany because it doesn't have a housing bubble and homes are fairly priced. Therefore, the extra money went into R&D and went into start-ups it is evident in its trade surpasses.

Blog: Walbrock Research
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jimmygee 19th Sep '16 3 of 15

interesting article and ideas - thanks

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ChrisE 20th Sep '16 4 of 15

How can you possibly have a discussion about house prices without correcting for changes in Interest rates over the period, most houses are purchased with a mortgage - people do a basic calculation how much of my disposable income can i spend on property what loan can I get with that......if IR are 5% then as a rule of thumb I can afford 70-80% more for a house than if they are 10%...... that may mean people buy bigger houses although I suspect bcus everyone is in the same boat just increases to price of the average house.

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Pete E 20th Sep '16 5 of 15

I agree with ChrisE that prices inversely to interest rates. The drop in rates by Bliar was never as he stated " I have made your house cheaper to buy" but more like 'those of us with multiple houses will now get rich'. The immigration boom promoted at the same time by this government intensified the price rise. Mortgages are now kept low because banks no longer borrow money because it is simply printed to order. This has forced savings into housing (again) and stockmarkets. When these crash there will be a lot of poor people.

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underscored 20th Sep '16 6 of 15
1

Supply and cost of credit... = Price of land

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Orangetree 21st Sep '16 7 of 15

In reply to post #151040

Yes, you are spot on ChrisE about interest rate and QE having the effect of rising assets prices. Here is a piece from the Telegraph: http://www.telegraph.co.uk/finance/bank-of-england/11978397/Low-interest-rates-could-allow-unsustainable-house-price-growth.html

Another reason is the UK Housing policies such as 90% mortgages (used to be over 120%), non-income disclosure rules and much more. It is a ruse to prey on hard working people to get into debt, which is why the country savings rate have collapsed!

But there are some cases around the world where ultra-low interest rates have not caused a housing bubble. For example, Japan with its two-decade low-interest rates and property houses is still 50% below 1990s peak.

Blog: Walbrock Research
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Kelvin Prescott 21st Sep '16 8 of 15
3

Interesting piece of analysis, thank you.

You state that "new homes built since 1970 would have housed 26.8m people, despite the population increasing by 9.5m. With an excess housing stock to house 17.3m people, what is going on?"

I think that the answer is that supply of housing stock is the net of new homes (additions) minus deletions (demolitions, changes of use etc). The link here https://www.gov.uk/government/statistical-data-sets/live-tables-on-dwelling-stock-including-vacants provides the net position. The data starts in 1981, and shows net growth in dwellings from 21.5m to 28m in 2014. That's the actual level of real growth in housing capacity that matters.

This increase of 30% in dwellings between 1981 and 2014 is MORE than the increase in population in the same period (56m to 64m = 15%). Even allowing for occupancy falling by 20% in the same period (from 2.75 to 2.3 people per dwelling), you are still left with this odd conclusion:

On a net basis, housing is no more scarce now than it was in 1981, but the price of housing has gone up dramatically.

With respect, I think that you had reached your conclusion "tax foreigners" before you started this analysis. I didn't see you present any evidence that foreign ownership was a major (or even minor) contributor to the increase in relative property prices.

It would be interesting to see the source of the Guardian statistic that you quoted to understand whether 10% foreign ownership is relatively high or low. For example - what was the percentage of foreign ownership in 1981? Was it higher or lower? It may be the case that the percentage hasn't changed at all, in which case foreign ownership is unlikely to be a significant factor. Even if it is higher, that doesn't necessarily mean that this is the cause of higher prices.

In the article you also seem to suggest that foreign ownership is associated with vacant dwellings (or at least a shortage of stock). Why would a foreign investor want to own a property in the UK if they didn't intent to either a) live in it or b) rent it out on an investment basis? Although there are anecdotal cases of (primarily very rich) foreign investors buying up prestige properties in London solely to export their wealth, it would be bizarre if they represented a significant percentage of market. Property costs money to own - insurance, utilities, council tax etc. Its not something you can just own without ongoing cost and I don't think that anyone, foreign or domestic, would do something that costs them money without obvious benefit.

Although I don't know with certainty, I suspect that the increase in property prices is a function of just two or three variables:
1. Interest rates and credit availability, which affect the relative affordability of a mortgage
2. The inherent tax advantage of owning your own home (gains in capital value are not taxed). This means that, other things being equal, you have a net 20% tax advantage from increases in the value of your home compared to other classes of investment such as shares. That will cause a systemic increase in property prices ahead of other asset classes.
3. Demand for housing being understated (i.e. UK population may be significantly higher than reported due to net migration from the EU that cannot easily be measured).

But, that's just my guess. Would be interested in the views of others.

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underscored 21st Sep '16 9 of 15

In reply to post #151310

Speculative demand and momentum effects...

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Kelvin Prescott 21st Sep '16 10 of 15
1

In reply to post #151334

well maybe, but as Orangetree points out, this is a trend running back a clear 45 years to 1970. That's some wave of momentum! I get that speculative demand can create volatility, but doesn't this seem a bit too long for that to be the main reason?

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MGerard 21st Sep '16 11 of 15
1

I also don't understand how you can ignore interest rates and credit growth from this analysis.

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Orangetree 22nd Sep '16 12 of 15

In reply to post #151310

Thanks for your long reply Kelvin, much appreciated!

The link you posted I did a graph here http://imgur.com/ZkfmGXe

The three points you suspected to contribute to house price rising are all valid points.

But the issue is who are owning UK homes: domestics or foreigners? The Mossack Fonseca saga exposes some rich UK Nationals were buying UK properties under the guise of foreign ownership to enable them to reduce tax bills further and build up their property portfolio.

Plus, Mossack Fonseca isn't the biggest offshore firm! We have the British Virgin Islands, Isle of Man, (possibly) Ireland, Luxembourg, Barbados and much more.


Blog: Walbrock Research
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Kelvin Prescott 22nd Sep '16 13 of 15
2

In reply to post #151496

Nice graph...;-)

But... to come back to the question: why does it matter who is owning UK homes, and is that really driving the increase in house prices?

The Mossack Fonseca revealed extensive use of offshore funds to make a whole load of investments, including in UK property. But that doesn't prove anything unless you can show that
a) the amount of offshore investment 1981-2016 is correlated with the increase in property property prices (i.e that it represents a proportionately bigger part of demand now than 4 decades ago)
and/or
b) that offshore held properties are less likely to be occupied than onshore held properties
and/or
c) that foreign national ownership of UK properties has increased or decreased significantly in the same period 1981-2016 (thought I'd have to say that doesn't of itself mean that this drives higher prices, it might just be a proxy measure of increased in net overseas investment)

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Jameshickman 23rd Sep '16 14 of 15
7

The easiest way to bring down house prices is to boost the supply of new homes, not more taxes and more regulation.

Interference by the government in the free market is the cause of the problem, more interference is not the solution.

Many small developments do not progress because by the time the developers have paid for bat surveys, newt surveys, slow worm surveys, archaeological reports and paid the myriad of ransoms to local authorities to fund new schools, open spaces, cycle paths and then given away a good part of the site for social housing, it is simply no longer worth doing. Everybody loses!

The planning restrictions are so tight that despite the fact that less than 3% of the UK is built on (yes really!)
http://www.bbc.co.uk/news/uk-18623096
residential land prices are sky high and good plots are in short supply.

How many fields could be better utilized as housing land, currently deployed as unprofitable farmland kept afloat by E.U. subsidies. Does any person (who is not employed in a state bureaucracy) really want to protect the habitat of some obscure beetle they will never see at the expense of their children being able to afford somewhere decent to live?

As a society we need to let go of Nanny's apron strings and recognise that the market will sort out the problem of effectively allocating economic resources if left alone,




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John36v 20th Oct '17 15 of 15

In reply to post #150746

If house prices fell in London the cost of moving would fall possibly saving significant sums on stamp duty and agents fees to say nothing of inheritance tax!

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