The Great British Housing Crisis

There has recently been much media coverage of the British ‘housing crisis’, as if people had only just noticed, the crisis arguably began in the early 1980s and has continued ever since.

The situation prior to the crisis, what perhaps was considered normal, was for homes to cost 3 times the full time workers salary. People could take out mortgages over 25 years and pay around 20% of their incomes servicing there mortgage and still have money to save or invest. There was also a rental sector, with relatively secure tenancies and rents were reasonable. Then there was social/council housing, for those unable or unwilling to enter the private housing market. There were the experimental housing estates of the 1950s and 1960s, which many tenants moved from as they were poorly maintained  and the councils housed difficult tenants in them, all of which led to estates becoming ‘sink estates; areas of high crime.

The Thatcher government introduced the policy of ‘right to buy’ (though the Labour party had tried to introduce the policy in the 1950s), whereby council tenants had the right to buy their homes at a substantial discount on the market price (up to 50%). The idea of owning your home rather than renting now became appealing to a wider section of the population. In my view, the policy in itself is a good one, however what the government failed to do was replace the houses that were sold with new build social housing, this really is what caused the housing crisis. There remained spare capacity in property available in deprived areas of towns and cities, slowly this spare capacity disappeared without replacement.

The fall in the numbers of social houses was exacerbated with the perennial failure of private house building to keep up with demand. Demand was rising as the number of households increased and to a lesser extent population growth. The rise in the number of households was caused by social changes. Social changes, such as the rise in the divorce rate meant the traditional family home became two homes and young adults living independently for longer periods before marriage.

Demand for housing exceeded supply, causing rapid house price inflation, an inflation that far exceeded economic growth (wages, GDP, inflation) and was not a reflection of the underlying health of the British economy, although many on the right claimed it was. This has continued for 35 years. The people of Britain have adapted to these changes, absorbing the effects of the crisis. There has been a general trend of a decrease in the space or the square footage, taken up by individuals. New builds are smaller and smaller, existing housing has had rooms divided into smaller ones to pack more people in, all at the cost of individuals living efficiency. People have moved into the empty homes in the deprived areas and moved to live further and further away from their place of work. More importantly the amount of peoples income spent on housing has increased, from around 20% to up to 50% of income. Really, I think it’s quite crazy to spend half you’re income just to put a roof over your head, when it doesn’t take half an individuals life work to build a house.

Why are the British prepared to spend so much money on housing? The housing crisis has been growing for a long time. Younger people have felt a desperation to own there own home as relative cost increased further, rather than waste their money paying the profits of a landlord or a financial institution, especially when in the long term, over a lifetime, buying over renting still saves a lot of money.

I noted in the news yesterday that the average England and Wales monthly rent is £816, The average house price is £178000. The mortgage repayments, over a standard 25 year mortgage for this average house is £858. Basically, the cost of paying rent and a mortgage are essentially the same. So, it is always advantageous to buy instead of rent. The percentage of people in the 25-35 age group, when traditionally people buy a family home is falling, What frustrates young people is to get a mortgage a 10% deposit is required, this is frustrating to achieve, when they are renting at £800 a month and need to save for a deposit on top of this, knowing that when they do get a mortgage there monthly outgoings then fall. It’s a catch-22 as they longer they take to raise this deposit the amount required increases as house prices and rents continue to rise, All this in an economy where wages are stagnant.

This barrier to buying, doesn’t apply to the asset rich, who can find a deposit. The phenomena of ‘buy to let’ landlords became common. You simply paid the deposit and over 25 years the mortgage was paid off by the tenants renting the house and suddenly you have a valuable asset to sell. so, a whole industry of private landlords who made a lot of money out of very little work and no contribution to the productive economy. Because the expansion of this practice itself led to house price inflation, both encouraged it and hit the productive workers who lived in these homes.

The failure of private construction companies to supply the market with new build homes is a contributory factor. Friends of mine who live and work in continental Europe encounter locals who are find it strange that the British tend to live in old damp housing, rather than move to new builds. The answer is that new build housing is of lower quality than old housing and situated on estates that lack local pubs and shops and transport connections, they are relatively isolated. and as such command a lower market price than old housing. The majority of new build housing is constructed by a cartel of large developers, who build to minimum build quality standards, the houses are small and designed to a minimum specification of living needs, so they have limited appeal, generally those who can only afford new build. Much of this housing suffers from poor sound insulation and lack the ability to deliver real living needs. So, the traditional Victorian terrace house is superior as a place to live even if it costs a lot more to heat in the winter, really the UK should build new terrace housing in the same medium density style but with modern insulation methods.

A consequence of this hyper inflationary market has been social segregation, only those on high wages can afford to live near the places of work that pay high wages and have access to good social facilities. London and the south east of England has particularly borne the brunt of this hyper-inflation. There has been a scramble for people of my generation to enter the housing market before it’s too late, itself contributing to the inflation.

Another major social change has been work tenure. The older generation generally had ‘jobs for life’ where people could work for the same firm all their lives, taking on senior roles as their skills and experience increased. This is no longer the model, nowadays workers is contracted to a handful of years, so people move around the UK and the rest of the world to work. This has led to the idea that when buying a home to have it near by a range of potential businesses and customers, so a job can change but the home needn’t change. The resulting pressure on the transport infrastructure of increasing long distance commuting meant that homes near good transport hubs increased, distance from place of work no longer matters, it’s the time spent traveling that is important.

People are afraid to move, even when this will increase their living standards. This is partly due to the cost of £5000+ simply to sell your home and buy another elsewhere. An unwillingness to move to an area where property prices may drop relative to other areas, partly due to fear of not being able to move back home is house prices change. A consequence of this is that people living in and around London don’t want to risk moving away for a great work/business opportunity as they fear not being able to move back to home to their friends and family. This has encouraged the phenomenon utilised by several of my friends of buying a home in London or elsewhere, renting it out and using the rental income to pay to rent somewhere else, giving them flexibility in where they live in exchange for the awkwardness of being a landlord and renting at the same time.

All this social change has led to the political establishment appearing to finally realisie that housing is now the UK economies biggest problem, affecting productivity and recruitment. If you are a firm based in London you are well situated for producing products for a large local market and international connections are easy to set up and maintain. The cost of these advantages has largely been absorbed by the workforce, keen to hold a well paying job. however productivity is low as workers spend hours every day on cramped trains or stuck in traffic jams, this makes them tired and stressed and hence less productive. It is difficult to recruit staff as highly skilled people, who don’t already live in the South East are unable to afford to move to the area, unless wages rise. Such wages have risen, which further exacerbates the problem, the crisis is now being discussed because firms can no longer afford the staffing costs, especially in the sluggish post-2008 world economy. the workers and financial institutions have decreasing disposable incomes and no savings to invest in innovation.

Outside the global financial industry and the South East of England, these problems caused by the housing crisis are also manifest. The social division of areas has caused people to flee to areas with cheaper housing costs. This drove up housing costs in other industrial hubs, creating tensions with the local population, again pushing wages up to fund the increasing costs costs of housing for workers. The effect of this that a new business may have a great product and skilled staff, but cannot sell the product cheaply because wages are so high. The British have absorbed rising housing costs by cutting their disposable incomes to the hilt. Many firms now manufacture their goods or use cheaper labour in call centres countries like India to manage their sales and customer service because they can’t do it locally, because of the housing crisis. Essentially it is hard to develop a business in the UK in a globalised world, because the costs of living is too high. The British people have suffered and made the best of the housing crisis, but it has reached the point where it severely impacts the British economy generally.

The UK’s failure in tackling the housing crisis is simply bad economically. Capitalism works through supply and demand, open financial transactions and a free market. The problem is that housing is not part of a free market in the UK and never has been. Economies work well by having good levels of liquidity: Basically I buy goods from company A, they buy goods from company B, company B buys goods from company C, I work for company C so some of .the money comes back to me. However when each company pays wages to it’s staff and half of that money disappears to financial institutions/ asset rich landlords in housing costs. The problem is that the money made by the financial institutions doesn’t go back into the economy, it is spent on acquiring assets, including housing, further reducing liquidity. The asset bubble has finally hit the financial institutions, they no longer invest in economic growth as there is no liquidity to grow the businesses, instead they buy assets, this bubble will surely burst sometime soon as the British have borrowed to the hilt to to maintain living standards in the hope that things will get better. In a cold country, people have an innate fear of homelessness.

So, what is the solution?

1/ Build more housing. Firstly the government builds more social housing. Any money paid by the tenants over maintenance costs allows the tenant to buy a portion of the home every month, this money can then be invested in more social housing. Secondly change the planing system, allow qualified town planners to zone land and make planning applications quick and easy and ensure developments are properly planned, with green space, space for local business to develop and for social facilities, such as shops and schools, i.e make new estates places where people can live, build communities, rather than have to travel somewhere else to take part in social events. Thus zoning will be based on community needs rather than the lowest bidder.

2/ Discourage use of housing as an asset business. Homes are places for people to live and not as a resource to be exploited. A way to do this is to tax purchase of 2nd properties at say 20% of the market price, to help fund social house building and then a land value tax on the property. This will give people buying a home to live in an advantage over the asset rich.

3/ Change the laws for homes, give people the right to a home. If someone suffers becoming unemployed and defaults on their mortgage, the state should buy  the property at the purchase price or the current market value (whichever is lower) and allow the occupants to live in the property, it becomes social housing, so when the occupants regain employment they continue buying the home, of the government.

4/ Improve the building regulations, make homes more energy sustainable and sound insulated. Set minimum space standards per person.

5/ Encourage social mobility, eliminate stamp duty and streamline the conveyancing process, enabling people to move home without incurring a penalty. This will aid people moving closer to their workplace and retired people away from transport and employment hubs

6/ Deal with negative equity, provide assistance for those who were unlucky to take on a mortgage towards the end of the housing crisis. But no support for those with an excessive square for to occupants ratio (to discourage speculation)

7/ Implement these solutions cleverly, maintain the market by managing a reduction in house prices at around 2-3% of market price year on year until a house costs 3x average wage. A sudden house price crash would be more damaging.

Of course, the housing crisis won’t be solved until the asset rich establishment realise that the whole economy will crash, rather than maintain a grip on political power to maintain the ever increasing cost of housing.

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