The Trouble with Housing Bubbles

Is there a housing bubble? Since the Brexit referendum the news has been filled with threats about a possible housing crash. Tabloid scaremongering with headlines back in July like “ Britain 'is on the brink of housing price collapse' in the Daily Mail Online, and Britain on 'edge of worst house price collapse since 1990s' in the Sun. Now, however, they seem to be back peddling as the Halifax house price index shows that house prices have not dramatically fallen through the floor.

The house price index shows that in some cities like Leeds and Manchester house prices are still on the up. So, there isn’t one bubble, there are many bubbles, so it is less like one big Lindor and more like an Aero.Or because financial institutions and Governments like stability, more like a Crunchie. These housing bubbles have not exactly burst but now homeowners who have basked in rising prices for years will have to get used to slower rates of growth or maybe even a drop in the value of their home. But a generation of renters faced with increasingly unattainable property prices, when prices are much higher than incomes can afford, will be relieved to see the market cool off so that they can afford to get on the property ladder.

Mortgage lenders rushed to offer lower mortgage rates earlier this year to encourage home ownership.However, there is a lot of speculation that the Bank of England may raise interest rates to curb inflation soon, and this will make it harder for people on variable rate mortgages to repay them. High ownership ratio combined with an increased rate of low Mortgage rates may signal higher debt levels associated with bubbles.

While people are paying high rental prices they cannot also afford to enter an expensive market. At present, many first time buyers are looking to have to save as much as £33,000 just for a deposit, with an average income this just is not possible, certainly not quickly, and this slows the market. There need to be first time buyers to keep the chains alive. When the market stagnates, vendors have no choice but to lower their asking prices. This produces a small scale cycle resembling the fox and rabbit ecology model.

In November 2015 The House of Lords Economic Affairs Committee launched a new inquiry into the economics of the UK housing market. The Committee investigates the supply and affordability of housing across the housing market and reviews the effectiveness of the Government's policies to provide low cost housing to rent and to buy. Lord Hollick, Chairman of the Committee, commented: "There are clearly serious issues with the UK housing market. Across the country, young people in particular are struggling with the cost of housing, whether they are looking to buy or rent. There is an affordability crisis in housing.”

Secretary of State for Communities and Local Government, Sajid Javid, made a statement in the Commons on local housing needs yesterday. Speaking in the House of Commons, Javid said that if lasting change is to be made, a proper understanding of how many homes are needed, and where, is required, and the existing system “is not good enough”. He said a “consistent approach” is a necessity. If we stay with the fox and rabbit model, the Government is trying here to introduce some wild hares.

An ONS study published 4th December 2016 found that 1 in 4 young adults are living with their parents. If cheaper housing stock appears on the market, these boomerang children will be able to afford a place of their own. Parents living in an empty nest are then able to downsize, and therefore make more family properties available.

The Guardian has reported a positive outlook on 12th August. Martin Beck at consultancy Oxford Economics said there was a lack of drivers to push up house price growth but equally an absence of the kind of forces which have typically caused prices to fall. “UK house price growth is running out of steam. And with household incomes squeezed and the affordability of housing stretched, we think a prolonged period of very modest growth lies ahead. But the prospect of a crash is remote,” he said.

Thomas Fisher, an economist at PwC, said: “Factoring in continued pressure on household incomes in the second half of the year, we anticipate a likely weakening in UK house price inflation to around 4pc on average for 2017.”

So maybe these bubbles won’t exactly burst, but like a whoopee cushion, let out a little sigh.


Acknowledgements:
https://www.halifax.co.uk
https://www.pwc.co.uk/
https://www.gov.uk
https://www.theguardian.com
https://www.ons.gov.uk/

How do 2017-2018 students pay the rent?

The Government has increased the maintenance loan for students starting in September 2017 which means that freshers will be 2.8 % better off than those who are already doing their degree. This increase is matched by an increase in tuition fees by 2.8% in line with inflation which pretty much nullifies any benefit.

In London rental prices have decreased slightly, according to the Guardian, the typical new rent in London has fallen by 3% in a year, but the cost of food has increased by 2.3 % in the last 3 months and transport has risen. The Office for National Statistics said the Retail Price Index (RPI) measure of inflation, which is used to calculate train ticket prices, rose by 3.6% in July, up from 3.5% in June.

The Government expects parents who earn over 25 K to subsidise their student child. This varies enormously throughout the country, and sticks a hefty burden on parents looking at the rental market depending where their bright spark has decided to study.

For example take 4 sets of average parents in the Midlands all of whom earn over 50K
EC studies at Manchester. GW studies in Leeds. EB studies in London. LC studies in Sheffield. All 4 receive a Tuition loan of £9000.

Manchester Sheffield Leeds london
Tuition Loan £9000 £9000 £9000 £9000
Maintenance £5256 £3994 £5256 £5479
10 mths rent £6190 £0 £2320 £7312
Surplus £934 £3994 £2936 £1833

This means that the maintenance loan for GW and LC, who commutes from home, not only covers their rent but also gives them money for transport and food, maybe even the odd book, heaven forbid. We do remember they are supposed to be studying and even ebooks cost money?

LC has the best financial situation, although living at home may not give a student the life lesson of independence, budgeting and the social freedom living in student accommodation allows. EB has the worst situation. Her Maintenance loan does not cover her rent and her transport costs are higher in London. Like EC she needs financial assistance from her parents just to pay the rent, only twice as much. Food, transport, clothes, all this has to come from somewhere, and yet if you remember, our sample set of parents all earn roughly the same.

Parents with enough savings, or their own mortgage paid off may consider investing in accommodation. Outside of London the market is still slowly rising, but within housing has dipped. The Office of National Statistics (ONS) records London experiencing a £3,000 drop in the average price of a home to £482,000 in June from the previous month, but remains the most expensive UK region in which to own a property. So the investment may not be as sensible as it seems if they are left with a mortgage for a property that is worth less than they bought it for in 3 years.

This is not just in London, one of our clients recently shared an anecdote about student accommodation in Portsmouth. He was looking at the value of a flat that had previously been rented out to students. The owner reported that the value was now slightly depressed as a new student block had been recently erected adjacent to his property. Students who had previously lived in the surrounding area had moved into the new accommodation which resulted in the value of the previously tenanted housing dropping.

According to a recent survey on savethestudent.org 80 % of students worry about money. Apart from scrounging money from friends, family and credit cards, many students are forced to work to supplement their income, often adversely impacting on the amount of time that they have to study. Parents without significant savings are taking out second mortgages or even relying on their own parents to help.

This also makes the student applying for a University place take the location into consideration. A University with a short commute time from home gives them the option of living at home and not having to pay any rent. Those outside London also have a small surplus of cash after paying rent. These students actually have the funds for a social life. Remember that?

Students at universities outside London pay significantly less rent so opting for a University based on location rather than the course is becoming increasingly more biased. Surely that is wrong, the emphasis should be on the aptness of the course not its location.

We haven’t mentioned that there is a proposal in the pipeline to increase tuition fees to £9,250. This is not only for new students, but also existing ones. How can this be when they have signed a contract? Apparently on page 3 of this contract the Government has the right to increase the fees at will, giving a further financial strain on this loan that will be with the student for the next 30 years. Interest rates on loans are rising to 6.1%, which will push up average student debt on graduation to more than £50,000, including maintenance loans. Students in England leave university with higher debts than almost anywhere else in the developed world, the Institute for Fiscal Studies said in July.

Charging £9,250 a year for an undergraduate degree makes England a real outlier by international standards. Even in the UK England does not compare well, Scotland has no fees for Scottish students, and fees in Wales and Northern Ireland are much lower.

There is no reflection in the cost of tuition as to the amount of hours the student is getting for their money. Those studying science require far more hours than those studying, say, English literature or history and yet this has no bearing on the cost of tuition.

Overall location pays a key role in the financial balance for both parents and students. But just remember, it is only for 3 years. Unless they decide to do a PHD of course!

For more information on Horizon contact: info@houseprice.ai 


Acknowledgements:
https://www.gov.uk/education/funding-and-finance-for-students https://www.theguardian.com/business/2017/mar/13/uk-average-annual-rents-fall-stamp-duty-hike-letting
https://www.ons.gov.uk
http://www.savethestudent.org/student-finance