The buy-to-let bubble? August 21, 2006
Posted by Brickonomist in Housing markets.1 comment so far
Is there a buy-to-let bubble? We already know what these guys think, and now here’s Ashley Seager of the Guardian joining in:
If something looks like a bubble and smells like a bubble, there’s a good chance it may be a bubble. Figures out last week showed a renewed frenzy of buying in the buy-to-let market, an area of the economy that is flashing warning signs as never before.
The new figures from the Council of Mortgage Lenders were a shock. In the first half of the year, they showed that buy-to-let mortgages jumped by a fifth in value, or a record £17.5bn, a figure that almost matches the amounts paid in City bonuses in the same period. Buy-to-let mortgages now account for 8% of the total, having grown from zero just a few years ago. Were it to go pop, that is a big enough chunk to drag down the whole housing market.
The surge in borrowing, along with the Bank of England’s interest rate cut in August last year, helps to explain why the housing market has been robust so far this year in spite of relatively low numbers of first-time buyers, who are at the limits of affordability and are being squeezed out by prospective landlords.
Buy-to-let investors have apparently responded to rising rents, in turn caused by large-scale migration from eastern European countries. Poles and the like are the new tenant class, especially in London and the south-east.
But a small rise in rents does not alter the fact that the economics of buy-to-let are now very unfavourable, as they have been for some time…
Basically speaking, your monthly rent is now very unlikely to cover your mortgage, even on an interest-only basis. What worries me, though, is that people are not doing these basic sums. You hear people saying: “I am getting a buy-to-let because everyone else is and property always goes up in value.” What the average yields show is that many investors are making no income from their property investment, and are relying exclusively on capital growth to provide a return. It is the same as a gamble on a share in a dotcom company that is not making any money but which investors hope will nevertheless rise in price. And this at the end of a 10-year period in which property prices in this country have tripled. Betting on further large capital gains to compensate for low yields is brave as well as risky…
Other figures released last week illustrate a key reason why property prices are high in Britain: supply is limited.
The government said 165,000 houses were completed in the year to June – up 28% from the post-war trough of five years ago but still far below the 210,000 that it is estimated will be needed each year over the next 15 years to keep up with growth in the number of households.
Yeah, supply is limited, but there is a lot in the pipeline: there were 90,000 permissions in the last two years in London, of which about 80% will have been 1 and 2 bed flats, many if not most for the buy-to-let market. How big can this bubble get?
Housepricecrash.co.uk August 18, 2006
Posted by Brickonomist in Housing markets.4 comments
I’ve just discovered the prolific and enjoyably lurid Housepricecrash.co.uk, which bombards its readers with breathless retellings of any news that can possibly be construed as heralding the said crash. I liked the headline they attached to this news from the Council of Mortage Lenders of further strong growth in the buy-to-let market: “BTL lemmings go bonkers“! I don’t know whether or not they started out hoping for a crash, but at this point I’d be looking for one just to avoid looking stupid. Certainly everyone who has called the current years-long house price boom ‘unsustainable’ has so far been wrong, but eventually they’ll be right – but when? And will it end with a bang and a whimper? And would either really be so bad?
Second homes for students August 10, 2006
Posted by Brickonomist in Housing economics, Housing inequality, Housing markets.add a comment
A couple of years ago, Shelter released some research by Bethan Thomas and Danny Dorling which argued that the housing market was becoming one of if not the main driver of inequality in the UK. “If current trends continue”, they said, “in 30 years time the ten per cent of children in the wealthiest areas will have access to more than 100 times the housing wealth of those ten per cent of children growing up in the poorest parts of the country”. This matters because
Housing wealth gives families access to greater security and opportunity.
- Parents can access housing wealth (through downsizing or remortgaging) and help their children financially. Housing wealth gives families greater borrowing power. Children receive a windfall on their parents’ death.
- Children born into families with no housing wealth inherit nothing and have little financial help throughout their lives.
A child will not be able to earn their way out of this disadvantage – a social position determined by who their parents are and, mainly, by where they happen to live – very easily. For children born into families with low housing wealth or none at all, there will be large parts of the country to which they cannot consider moving in the future. This geographical immobility will affect children’s life chances and will impact on Britain’s economic well-being.
And now here’s some fresh evidence:
Second homes for students boost housing market
Published: 08/08/2006 – 10:39:26 AM
House sales have been boosted by parents buying properties for their children while they were at university, new research shows today.
Around 83,000 homes were bought on behalf of students last year, a 26% increase since 2000, according to the study by finance firm Direct Line.
The number of houses occupied by students was predicted to reach 100,000 by the year 2010.
The so-called university effect helped increase the number of “second properties” to 2.6 million, up from 2.3 million five years ago.
Around 1.6 million of the second properties were buy-to-let, while others included holiday homes and work bases.
Andrew Lowe, head of home insurance at Direct Line said: “The continued boom in house prices, the rise in parents buying properties for their children and the growth in tele-working are among the key drivers of the UK’s buoyant second properties market.”
There’s a double effect here: in buying second homes for their student children, wealthy parents are not only giving them an educational advantage but, because housing supply is quite inelastic, they’re creating further price pressures and pushing housing further out of the reach of poorer families, further reinforcing inequality.
Link-dump: energy efficiency, regeneration, densities, buy-to-let and more August 1, 2006
Posted by Brickonomist in Housebuilding, Housing economics, Housing investment, Housing markets, Housing need, Linkage, London, Planning, Regeneration.add a comment
Apologies for the light posting of late, which was due to more work demands and some very pleasant weekends away. There’s a lot to catch up on so here’s a quick link-dump – I’ll try to come back to one or two of these items in more detail later.
- The Sustainable Development Commission has published ‘Stock take: delivering improvements in existing housing‘, which details “the technical options available for minimising the energy and water consumed and waste produced by residents of the existing housing stock”. The big question for me is what can be done to improve the efficiency of privately owned homes, with a particular question mark over privately rented housing, which the report rightly identifies as suffering from a ’split incentive’ problem – the tenant doesn’t have the incentive to invest in upgrading the home when she’s not going to be living there long, and the landlord doesn’t have the incentive to do so because she doesn’t pay the bills. Personally I think the landlord should pay some of the bill, but then I would say that because I’m a tenant. See also “Reducing the Carbon Impact of Private Rented Housing“
- England’s Housing Timebomb, from the National Housing Federation, features a prediction from Oxford Economic Forecasting that “the average house price in England will increase by around 50% by 2011, from just under GBP195,000 at the beginning of 2006 to GBP286,000, equivalent to 9.2 times the projected average salary for 2011″. The study concludes that housing associations should therefore be building or refurbishing 80,000 affordable homes each year instead of the current 40,000, which would obviously require much more funding from the state. They might well be right, but this one might get filed under “They would say that, wouldn’t they?”.
- The Town and Country Planning Association has published a commentary by Julie Cowans with the ungainly title of “Cities and regions of sustainable communities – New strategies”, but the potentially radical message that traditional approaches to addressing poverty (focusing on the “worst” estates first) should be abandoned in favour of proactive policies aimed at creating mixed income communities, i.e. enticing middle-income households into poor areas and trying to capture the resulting increases in land or property values. This has already excited some comment in the housing blogosphere (such as it is): Hannah is sceptical, Kevin pretty enthusiastic. I think Cowans may be drawing on the findings of this work, which I’ve started reading but have yet to finish. Anyway, hope to say more on this in due course.
- According to CB Richard Ellis, there has been an extraordinary increase in the density of new residential developments in London, no less than a quadrupling (in terms of habitable rooms per hectare) in just four years. They seem to mostly put this down to policy changes, but surely the huge rise in land costs (which obviously isn’t entirely unrelated to policy) is the main driver? Interesting quote: “We found schemes within regeneration and other special policy areas are frequently gaining planning permission for greater density than is recommended in the London Plan”.
- Labour-run London boroughs are building a lot more affordable housing than their Conservative counterparts, according to Inside Housing: “The 11 Tory authorities in power before the election were due to deliver just 18 per cent of grant funded homes in the capital.” Word on the grapevine is that some incoming Tory administrations have effectively vetoed large numbers of affordable housing developments that were going through the planning stage. Certainly, I don’t expect Hammersmith & Fulham council will be delivering 65% affordable housing in the next few years, as it has in the past.
- And finally, the Financial Times celebrates ten years of buy-to-let in the UK
Superstar hamlets? July 19, 2006
Posted by Brickonomist in Design, Environment, Housebuilding, Housing inequality, Housing markets, NIMBYs, Planning, Rural housing.add a comment
In an earlier post, I wondered whether London might one day turn into the kind of ‘Superstar City’ researchers have identified in the US. But according to today’s Guardian, it looks more like the Superstar syndrome (high income households taking over areas that are unique, desirable and feature little or no new construction) is happening in many parts of the English countryside:
It may be an over-simplification to argue that a form of social apartheid grips rural England, with traditional country dwellers confined either to the remaining council houses or the tied cottages of the big estates, rarely in contact with their neighbours – the superannuated, and rich. But the divisions are apparent.
A good place to start is the roof of England. Drive on the country’s highest road, where the lush North Pennines briefly meets a more barren landscape, and the pressures and conflicts of the countryside are soon evident. Down the winding Hartside pass, old farmhouses and buildings – which once supported hundreds of agricultural workers – have become the preserve of a new rural elite. At the bottom of the pass, and over the Eden valley on the edge of the Lake District, Kit Scott-Harden, aged 59, has farmed 300 acres on a tenancy most of his working life. With his income around £45,000 annually – 60% met by subsidy from the EU’s common agricultural policy – he’ll be lucky to break even this year.
Most farmers are now in their mid to late 60s. The industry is rapidly contracting. Farmers’ sons often leave the land. The result: empty properties. As upland farmers, and the few remaining agricultural workers struggle to make ends meet, wealthy incomers splash out hundreds of thousands for small cottages – and, sometimes, close to £1m for larger properties. Over two years ago a two-bed cottage in the hamlet next to the Scott-Harden farm went for £280,000 to an investor. “Terrifying price,” he says. “And it would be worth much more now.”
There’s usually plenty of space to build in these areas – the main obstacles are NIMBY attitudes, an over-protective planning system and inadequate funding for new social housing in rural districts.
Lord [Ewen] Cameron, a cross-bencher in the Lords and former chairman of the government’s Countryside Agency, can see what is happening from his farm in south Somerset. He is alarmed by the rigidity of a planning system blocking affordable housing initiatives. This has led to “serious demographic mismatch in the countryside”. Why, he wonders, do the authorities approve plans to convert buildings into holiday cottages, yet refuse plans for low-cost homes? He would like to see redundant farm buildings re-classified as “brownfield land” so that they can benefit from urban-style grants and incentives. “Why can’t we build, say, 50% for straight purchase and the rest for renting? That would benefit people all round.”
But, as things stand, Mark Shucksmith, a professor at Newcastle upon Tyne University, a government adviser and expert on rural housing and planning, says the countryside is becoming too skewed in favour of one class. “While people have a clear aspiration to live in the countryside, it is becoming much more exclusive,” he laments. “You have to ask that if only people with higher incomes can afford the move, how this chimes with the [government's] agenda of choice that is rooted in the context of social justice.”
As I said, NIMBYism is a big reason for resistance to new housing developments in rural areas, but it’s hard to disentangle pure selfishness from the quite justified perception of much new housing supply as ugly, sprawling and car-centric. This takes us back to the vexed questions of design quality and planning and funding new public transport, which I hope to look at in more detail in the near future.
Superstar cities July 19, 2006
Posted by Brickonomist in America, Housing economics, Housing inequality, Housing markets, NIMBYs, Planning.add a comment
According to Joseph Gyourko, Christopher Mayer and Todd Sinai, ‘Superstar Cities’ arise when high income households are sorted (or sort themselves) into areas that are (a) desirable, (b) unique and (c) feature low rates of housing construction. Their very restrictiveness makes them desirable, and perhaps their desirability makes them more restrictive. A similar dynamic certainly appears to be happening in some parts of the UK, but will it ever go so far as to make London, for example, the exclusive domain of the rich?
Here’s the abstract from NBER (the full paper is here):
Differences in house price and income growth rates between 1950 and 2000 across metropolitan areas have led to an ever-widening gap in housing values and incomes between the typical and highest-priced locations. We show that the growing spatial skewness in house prices and incomes are related and can be explained, at least in part, by inelastic supply of land in some attractive locations combined with an increasing number of high-income households nationally. Scarce land leads to a bidding-up of land prices and a sorting of high-income families relatively more into those desirable, unique, low housing construction markets, which we label “superstar cities.” Continued growth in the number of high-income families in the U.S. provides support for ever-larger differences in house prices across inelastically supplied locations and income-based spatial sorting. Our empirical work confirms a number of equilibrium relationships implied by the superstar cities framework and shows that it occurs both at the metropolitan area level and at the sub-MSA level, controlling for MSA characteristics.
Income inequality and housing affordability July 15, 2006
Posted by Brickonomist in Housing economics, Housing inequality, Housing markets, Uncategorized.add a comment
There’s evidence that relative low income can lower subjective well-being: people feel worse when those around them earn more. But can earning relatively less make you objectively worse off, even if your own income doesn’t fall?
Apparently so. In a great bit of research, Janna Matlick and Jacob Vigdor find evidence that the increasing incomes of others can raise the price we pay for housing, leading to more income spent on housing or overcrowding. Especially in tight housing markets, like we have in many parts of the UK, “the poor do worse when the rich get richer”:
Do rising tides lift all boats? If raising the income of the wealthy increases the prices that the poor must pay for certain necessities, then it becomes more difficult to argue in favor of policies that exacerbate inequality on the grounds that they at least do not lower the incomes of the poor …
In the end, the evidence on this question is mixed, and it seems relatively clear that the answer depends critically on the elasticity of housing supply. In this sense, the study of demandside determinants of housing affordability problems should not be conducted in isolation from study of the supply side. In the United States, tight housing markets tend to be those where incomes are rising rapidly at the high end of the distribution, while incomes at the low end trend upward only slowly if at all. In these areas, the poor have experienced greater crowding, and there is at least some evidence that their expenditures on housing increase as well, though not in all specifications …
Do price effects negate the impact of “trickle-down” effects? The answer appears to be “sometimes.” The key to making rising tides lift all boats appears to be ensuring that there are more than enough boats to go around.
What this paper doesn’t cover is the further effect of higher house prices on inequality: in a rising market, those who could afford to buy enjoy windfall gains which they can use to help their children buy when the time comes, distorting the market further and leaving those who couldn’t afford to buy in the first place (and their children) even further behind. This effect is already quite marked in Britain.
Reduced recycling restricts reinvestment July 1, 2006
Posted by Brickonomist in Housing economics, Housing investment, Housing markets.add a comment
I’ve posted before on how little net state investment there is in social housing in the UK. In large part this is because of the Treasury’s long-standing recycling initiative: it takes from local authorities three-quarters of the capital receipts from sales of council homes through the Right to Buy and uses them to fund its Decent Homes and new supply programmes. So it’s interesting that Right to Buy receipts look like they’re about to drop sharply just as the government has been making noises about spending much more on new social housing. Inside Housing has the details:
Right to buy proceeds set to plunge
By Martin Hilditch
Published: 30 June 2006
Plummeting right to buy sales look set to cut the amount of money the government makes from the programme by a quarter of a billion pounds.
Official statistics on the number of people buying their homes through the scheme in England in 2005/06 are
expected to show that sales fell by almost 50 per cent, Inside Housing understands.London is likely to see the biggest drop in sales although a decrease is expected in most regions. Yorkshire & Humberside is anticipating that the number of people exercising their right to buy will have fallen by a quarter.
In 2004/05, there were 49,983 homes sold through the right to buy. Figures for 2005/06 are due out next month.
Steve Partridge, director of Housing Quality Network, said the government, which takes 75 per cent of the capital receipts from right to buy sales, was likely to take the biggest financial hit.
A 50 per cent drop would see receipts fall by £250 million or more, he said.
‘It will certainly be a very interesting issue in the spending review because presumably they are going to have to downsize their forecast of right to buy receipts.
‘If that drops to £250 million then that is a big hole. It is now at the stage where even the increase in prices is not going to compensate for it.’
The fall in sales could also affect councils’ and arm’s-length management organisations’ ability to bring their homes up to a decent standard.
Many business plans have been based on the landlord having fewer homes to improve and more right to buy receipts to spend on the work.
‘I have seen in a number of councils it [the number of sales] just go through the floor,’ Partridge added. ‘One downside financially is that there might be more homes to make decent.’
A number of local authority sources told Inside Housing that right to buy sales had been hit by the growing affordability problem around the country. With a fixed discount and rising house prices tenants were thinking twice about buying, they said.
The amount of time a tenancy has had to run before residents could buy their homes was also increased from two to five years in January 2005.
One source said that government officials had warned them that the fall would have an impact.
‘What is coming through from government is that funding will be tight next year because of the drop,’ she said.
A London based source said the reduction in sales could be partly blamed on a reduction in the right to buy discount in the capital from April 2004.
PGS gains more enemies June 26, 2006
Posted by Brickonomist in Housing markets, Planning.add a comment
The current government here in the UK wants to introduce a major reform to the planning system: a ‘Planning Gain Supplement‘ in the form of a (mostly) fixed-rate tax on a development’s ‘planning gain’, i.e. the increased value thought to accrue to a development at the moment it is granted planning permission.
There has been and will be much debate on whether this is a good idea or not (see here for a previous post on the subject, or here for a load of submissions to a parliamentary inquiry on the subject). But I was particularly interested to read in Planning magazine (not available online AFAIK) some comment on the current system of negotiated ‘Section 106′ agreements by Tony Crook and Steven Rowley, authors of research the government portrayed as supporting the case for PGS. They point out that since even the government envisages S106 negotiations being retained for some purposes, such as securing affordable housing on private developments, the question of what rate to set the PGS at becomes critical:
Should the PGS tax rate be less than the effective tax rate on S106 contribution, developers will have an incentive to minimise section 106 contributions to benefit from the lower PGS rate. But if the PGS rate is set higher than the effective section 106 rate, developers may be encouraged to contribute more affordable homes than at present.
They conclude:
Our provisional view is that the risks of introducing an optional charge [another mooted alternative to section 106] and a PGS are high and that current section 106 policy can be made to work better.
It’s actually quite hard to find anyone outside of the government itself who thinks that PGS would be a really good idea. Any time previous Labour governments have tried to do something similar, it has been swiftly abolished by the next Conservative regime. Maybe this time around they could save us all the bother by just not trying it in the first place?
Sensible comment on demolitions shocker June 24, 2006
Posted by Brickonomist in Housing economics, Housing markets, Media, Regeneration.6 comments
Good to see someone commenting on this who has actually taken time to find out what’s happening. John Perry in Public Finance:
In the past few months alone, we have seen veteran journalist Sir Simon Jenkins in the Guardian and the programme Tonight with Trevor McDonald both attacking the notion of demolishing older houses. The Tonight programme, like several others, focused on what could be done by throwing money at one particular house, ignoring the problems of the wider area.
Meanwhile, Jenkins refers regularly to ‘Yvette Cooper’s proposal to demolish 150,000 Midlands and north country terrace houses’. Apart from the exaggeration, of which more later, there is the turn of phrase, which evokes stone-built cottages in Wensleydale rather than pokey two-up, two-down terraces in Liverpool or Stoke-on-Trent.
The prime mover against demolition has been the pressure group Save, whose assessment (on its website) is that as many as 400,000 houses will come down in the pathfinder areas. To those anxious to get on the housing ladder in the south of England, or who have invested their savings in modernising a terraced house, these figures must seem to be a travesty of housing policy. But put them under closer scrutiny, and the argument crumbles.
For a start, there are still something like 2.5 million Victorian terraced houses in England. The vast majority of these form excellent homes or can be modernised with some modest investment. But some are obsolete. That is, they are either too small, too badly designed or in too poor condition to be satisfactorily improved. Or – and this is often the case in the pathfinder areas – there are simply too many houses of the same type, age and size in the same place. For example, in Stoke-on-Trent, more than half of the housing stock is Victorian, consisting mainly of small, back-of-pavement terraces.
Sometimes, this kind of housing can be transformed and given a new niche in the housing market. As part of the local pathfinder programme, Urban Splash has converted 108 terraced houses in Salford into trendy ‘upside down’ units. There were long queues when they went on sale in April and they are now sold out. But this is redevelopment in all but name – the terraces were totally hollowed out and the yards and back alleys bulldozed. It is a tremendous example of regeneration but its effect depends in part on the scarcity value. Doing this to thousands of houses simply isn’t possible.
Opponents of demolition seem to forget that we do need to replace old houses at some point. The country currently replaces fewer than one in 1,000 houses each year – and most demolition is of tower blocks, not Victorian terraces. No-one – least of all the pathfinder agencies – is contemplating mass demolition. The aim must be selective renewal of the most difficult property, as part of the wider regeneration of poor neighbourhoods.
The other argument deployed by the critics is that local residents are up in arms against demolition plans. As Save says on its website: ‘Householders are being forced out of their beloved homes following minimal and often misinformed consultations.’ But the striking thing about many of the pathfinders is not the level of opposition, but the degree of support that they are obtaining for their renewal plans. Stoke and Hull provide two examples.
The Renew North Staffordshire pathfinder expects to replace just over 12,000 houses over 20 years. Although this might seem a lot, it also aims to refurbish or improve 63,000 houses and build 15,000 new ones. But there is no grand plan for demolition – the process is taking place at neighbourhood level, where master plans are being devised in conjunction with residents. One of the pathfinder’s innovations is the appointment of ‘residents’ friends’ in each area, answerable to the local Citizens Advice Bureau rather than to the council or the pathfinder. They help residents articulate their problems and give them independent advice. By putting unprecedented effort into involving residents, Renew is emerging with plans that have high proportions of local support – even from people whose houses might be demolished.
The Gateway pathfinder is more advanced with its renewal plans for some neighbourhoods in Hull – but still has support from residents. Houses have already been demolished, and local people are demanding faster replacement of the remaining boarded-up properties. Again, the pathfinder has used a variety of methods to find out local opinion and has high levels of support for what it is doing. It has adopted a ‘charter’, which sets out the promises made to local people. Residents engaged in the process have made a video showing their ambitions for their community. The level of support has convinced the local press, which is also calling for faster demolition of the worst houses.
The latest documentation on the pathfinders nationally – available on their websites or that of the Audit Commission – suggests that on current plans they will replace some 60,000 properties. Some further clearance might be planned in later phases, for which the pathfinders have yet to produce detailed plans. But it seems most unlikely that they will reach the total of 150,000 cited by [Simon] Jenkins, much less the absurd maximum put forward by Save. And this is over a period of up to 15 years, including of course many thousands of unpopular postwar developments as well as the cherished ‘north country terraces’. To put the figures in perspective, the pathfinders cover in total more than three-quarters of a million homes.
