Property Owning Plutocracy

Living in London comes at a (hefty) price. For homebuyers, the calculation provided by the Office for National Statistics (ONS) for 2022 was that the price/earnings ratio (PER) was 13.3 times income for the privilege of home ownership.

In the rental market, the ONS reports that 35% of average income puts a roof over your head. In a moment, a brief explanation as to what sits behind these numbers. But, first, some context.

In the grand scheme of things, the housing market isn’t simply habituated by homeowners and renters. Follow the money trail and what becomes evident is that there are those who experience housing as a basic social need, then those more motivated by asset accumulation and wealth creation. Not convinced? Total UK net housing wealth hit ￡7tn in 2022. (1)

A powerful cabal of property developers, builders, financiers, and intermediaries, aided and abetted by largely accommodative fiscal and monetary policy, have propelled the modern housing market into a financial behemoth. The numbers don’t lie:

·?????? New mortgages advanced in 2022 totalled ￡322.4bn; (2)?

·?????? The UK real-estate industry generated turnover of ￡65bn in 2022; (3)

·?????? Residential property stamp duty was ￡10.17bn in 2021/22. (4)

Today’s housing market is big business, accounting for 13% of UK economic output. (5) For consumers, the challenges are daunting with the sums of money involved life changing, compounded by the payment of fees and commissions at every point on the transactional continuum. Caveat emptor.

The housing industry and media obsess with analyzing every blip in a slew of data which hints at its future direction. But the reality is that the forces which have collectively shaped today’s market, and its onward trajectory aren’t confined to shifts in supply and demand and fiscal and monetary policy over a period of months.

The liberalized financial environment which has proven conducive to London house prices hovering at near record levels was built, brick by brick, on the foundations of government policy over the course of several decades. Getting to grips with this back story is essential to understanding what comes next.

Affordability

The 2022 PER of 13.3 represented a marginal decline on the 13.68 years of median, full-time income required to buy property in the national capital in 2021. Indications are this number will further soften in 2023. The benchmark for England is 8.4 times income.

But don’t be fooled, the PER in London has almost doubled over the past two decades. In 2002 the average London house price was ￡174,000, the equivalent of 6.9 years of income.

Housing affordability improved in 2009, post GFC, and marginal gains were also posted in the period 2018-20 as the housing market dithered post-Brexit vote. Otherwise, it’s basically been one-way traffic as low-middle income earners have found themselves priced out of the market.

The ONS data paints a mixed picture for the London rental market. The 2022 calculation of 35% of income sits well above the ONS affordability benchmark of 30% and is considerably higher than the English average of 26%. As a consolation, it is positioned well below the 2017 peak of 50.3%.

But as we recently noted, the ONS methodology fails to adequately capture the severity of the environment for those currently seeking a rental property. Demand is far outstripping supply, driving double digit price growth. Hamptons, a leading London estate-agent, is forecasting that in the period 2023-26 rental prices in the capital will increase by 25%, more than double the projected growth in house prices.

Read: Winter of Discontent (https://www.dhirubhai.net/pulse/winter-discontent-terence-stephens-jexde/?trackingId=p%2BokqBy8TGqSvQhN5cNP7A%3D%3D)

Many tenants in the private rental sector (PRS) are caught in a pincer movement – unable to make the leap to home ownership and deprived access to a social housing sector lashed by funding cuts.

Politicians drearily drone on about the ‘housing crisis’ and the need to build more homes. That throwaway line is a convenient scapegoat for endemic housing affordability problems that demand systemic solutions. How did it come to this?

Property Owning Democracy

Urban myth has it that Margaret Thatcher coined this phrase in the 1970’s. In fact, it was Noel Skelton, a fellow Tory MP in the 1920’s. No matter, by the time Thatcher was elected Prime Minister home ownership was firmly in the ascendancy.

The prosperity of the 1950’s saw an increase in home ownership from 32% in 1953 to 42% in 1961. This trajectory continued through the 1960’s and by 1971 there was an equal proportion of homeowners to those renting. Upon Thatcher’s arrival in Downing Street in 1979, it had crept up to 55%. A decade later, as the ‘iron lady’ reluctantly relinquished office, home ownership had climbed to 67%.

It is the radical economic reforms of ‘Thatcherism’ which serve as a reference point for the challenges of today’s housing market. But before we get to that…

Taxation Changes

The 1960’s wrought two significant changes in tax policy that proved to be essential enablers to increasing home ownership:

·?????? The abolition of Schedule A income tax in 1963 that relieved owner-occupiers of the burden ‘to declare or pay tax on the notional rental income they would receive from the property in which they live.’ (6)

·?????? Private residence relief (PRR), which provided exemption from Capital Gains Tax (CGT) introduced in 1965 for dwellings that served as an individual’s primary residence. (7)

This was no small beer. The PRR was estimated to be worth ￡27bn in 2018/19 by the National Audit Office. (8)

Right to Buy

Nobody could argue with Margaret Thatcher’s impact upon the economic and social landscape of the UK. Defense, education, and local government all got a shakeup. State-owned-enterprises sold off. Union busting and the poll tax. Quite a hit list. Then there was the 1986 ‘big bang’ deregulation of banks, financial services, and the City of London. But our focus is on the Housing Act, 1980.

The headline act of this legislation was Right to Buy (RTB) which encouraged local authority or council tenants to purchase their homes at a discount of up to 70% of market value, currently capped at ￡127,900 in London. (9) By March 2020, the scheme had racked up 1.98m sales over the preceding two decades. (10)

With the introduction of RTB, local authorities were forced to sell their properties on request at a discount. Much of Britain’s stock of social housing was built from the ruins of the Second World War. Local authorities and housing associations built 4.4 million social housing units in the period 1946-80.

RTB was wildly popular with ‘aspirational’ working class voters who gleefully grasped the opportunity to join Thatcher’s ‘property owning democracy.’ Not so much with local authorities because:

·???????????? Most of the sale proceeds ended up in the Treasury coffers;

·???????????? From the sale revenue they did receive, councils were forbidden from replacing their housing stock, instead paying down debt.

This failure to replenish social housing stock casts a long shadow over today’s housing market. With the sale of RTB properties exceeding supply, ‘there has been an average annual net loss of 24,000 social homes since 1991.’ (11)

The lack of investment in social housing has financially crippled many low-income earners who have either joined the ranks of PRS tenants or been forced into homelessness. But it would be foolish to lay the blame exclusively on the doorstep of RTB for today’s housing crisis.?

Financial Deregulation

‘’If banking was boring, then the bond department at the bank was straight up comatose.”?A classic line from the movie, The Big Short. Well, in the context of the 1960’s, think home loans in lieu of the bond department. Back then customer deposits were channelled into funding for mortgages. As a reference point for current practice, it is like comparing an Austin A30 with an Aston Martin Vantage.

Beginning in the 1970’s UK financial markets embarked upon a series of substantive regulatory reforms. Up ‘til then, home lending was confined to building societies, banks lent mainly to the business sector.

The 1971 Bank of England competition and credit control policy triggered the unwinding of this practice. Within two years the banks had built a 10% market share of the mortgage industry. (12) One of the major innovations in this period was mortgage indemnity insurance for loan-to-value (LTV) ratios of 70% plus which offered protection to lenders.

The pace of reform accelerated in the following decade and in 1980 the Bank of England lifted the Supplementary Special Deposits (SDS) regulation, colloquially known as the ‘corset,’ which had made it relatively unprofitable for banks to lend in the mortgage sector. The starting pistol had been fired and the banks were off and racing to win market share in the emerging, lucrative mortgage market.

This was the era when banks and, later, building societies gained access to wholesale markets, coinciding with a shift to (lower) market interest rates. Easier mortgage availability, underpinned by growth in the use of mortgage-backed securities issued by subsidiaries of US financial institutions, fueled demand for home ownership. These securities took 7% of the total market in 1988. (14)

The housing boom of the late 1980’s, and subsequent bust in the 90’s, bore traits that repeated themselves in the next crisis. Banks were lending at unprecedented income levels and loan-to-value (LTV) ratios. “By 1990… the Council of Mortgage Lenders estimated that 20% of new loans were at 100% LTV or more, and anecdotal evidence suggested many were at or over 120%.” (15)

But the odd financial crisis was only a hiccup in the rapacious appetite of the banking sector to expand their mortgage portfolios. Product development continued apace and by the mid 1990’s banks were increasingly reliant upon the wholesale market for funding.

Into the noughties the banks were successfully targeting Buy-to-Let (BTL) investors, whose numbers grew exponentially in this decade. By 2006, 70% of all loans were short-term fixed interest mortgages, often with a teaser discount. Those remortgages accounted for over 40% of total loans, more than double the number of first-time buyers. (16)

Mortgage lending soared from 20% of GDP in the late 1970’s to 75% pre-GFC and, in 2022, reached the dizzying height of 126%. (17) In the years immediately preceding the GFC (1999-2007) mortgage lending in the UK ballooned from ￡115bn to ￡364bn. (18)

In just eight manic years, mortgage lending trebled, but not the number of mortgagees. That was tumbling at a rate of knots as affordability fell through the floor. The average property price in London shot up 115% in the noughties, post GFC. Affordability didn’t crash over the past 20 years because of an imbalance in supply and demand. That kind of thinking would be delusional.

Credit is pumped into the mortgage industry because it is profitable to do so. With the value of outstanding mortgages at ￡1.655tn (19), it is not implausible to suggest that finance is the business of housing. Ask yourself this simple question: whose interests are best served by rising property prices? Yes, real-estate agents see an uplift in their commissions and HMRC generates increased stamp duty revenues. Now, take another look at those numbers top of page: ￡322bn of new loans in a slow year.

But banks are not the whole story. More to come…

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