Generation Rent

Generation Rent refers to those who feel they will be unable to ever purchase their own property and will be forced by economic necessity to live in rented property .

This is regarded as something new, and at least in the media leads to a feeling of resentment. So how did we get here?

History of UK home ownership

The charts shows data from the Office of National Statistics on housing categories.

There are three categories of housing:

• Social Housing - this is housing provide by charities or local councils. This category scarcely existed prior to 1918, but following the World Wars councils were required to provide housing. Councils expanded further after 1945 as they rebuilt the depleted housing stock. The Right to Buy scheme saw much council housing sold off in the 1980s at a steep discount. Additionally much council housing has also been transferred to Housing Associations.
• Private Rented - This was the largest category after the First World War. However controls on rental prices were imposed in 1915 and this made renting a less profitable investment. In 1988 new laws on tenancies made owning properties to let out a more attractive position. There also arose new Buy-to-Let mortgages which fuelled many investors purchasing properties to rent out. This is a tax efficient form of leasing property as the interest costs can be offset against the tax on income received from rent paid.
• Owner Occupied - Housing that owners own or have a mortgage against. This rose steadily throughout the last century. However the percentage of people in this category fell in 2011 vs 2001 for the first time in a century. Within this category there was an increase in absolute number of people from 14.9m to 15m. However the number owning outright(no mortgage) rose by 0.8m, the number with a mortgage fell by approximately 0.7m.

Reasons for decline in Owner Occupied Housing

There are several reasons why owner occupancy fell and might be expected to continue to fall.

• Lenders now require greater deposits. Previously lenders were prepared to offer loans up to 100% of the properties value, now they require at least 95% deposits. This is made worse as the cost of renting are not necessarily that much higher than servicing a mortgage.
• Lenders are more careful in who they lend to and require perfect credit records for loans with lower deposits.
• Graduates now leave university with much higher debts than in the 1990s, the repayment of these loans is a drag on disposable income available to pay mortgages. New graduates may face loans of c£60k and so be wary of taking on additional debts even if these are available.
• House prices are higher than they were in the 1990s(even accounting for inflation)
• Wages have failed to keep pace with inflation over the last decade. This means individuals have less money to spend on mortgage payments or save towards a deposit.

Generation Rent is the media friendly name given to a problem of lack of affordability for property for First Time Buyers. The government has attempted several schemes to resolve this, but the problem still appears to persists.  

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Why Wait?

The HousePriceCrash forum is populated by people who believe house prices in the UK are going to crash.
House prices did fall recently, but they were still above the level that they considered reasonable. This is a pretty pessimistic forum, even by the standards of the internet.

I don't believe a major crash is likely, certainly not to the extent house end up costing only a bit more than cars. But many of them hold this position and have done since the early 2000s. This post caught my eye.

So, regardless if if its realistic or not, sentiment is improving. The doom is not as bad as it was. With government meddling (QE, negative rates, help to buy, etc) they have prevented a full blown crash. Now it looks as though they are inflating houses prices to win an election although they will not ever admit that.

10 years I have been at HPC. Summer 2003 I became effectively a STR'er, although my rent is a shared ownership. I have crap neighbours, the house is a tiny poky box but I have not moved and put my life on hold for all this time because to put all my savings into a house in a market that was 30% - 40% overvalued seemed insane. But prices carried on going and went up beyond expectations due to Brown's meddling then crashed a fair bit but are above 2003 levels which has made the whole exercise pointless. So at various stages I considered buying, but I have always believed that eventually the market must return to normal. The end never comes, it's one new scheme after another, I never would have dreamt the extent that governments would go to to prevent house prices falling.

So in this 10 years my HPC ethic has really been on of the main causes of the failure of my relationships. Why?
1. GF wanted to live together, then arguements would ensue over not buying one. So bad that we would split before even trying renting instead.

2. In this 10 years through not buying and being ultra annoyed at everything going on I have cut expenditure to the minimum as a response to negative rates, invested as well as I could, worked a lot of OT, and saved up a big HPC fund ready to use when the time actually comes, this has caused me more problems.
It has made me rather worried that a woman could take half of it, again this is an obstacle to happiness. If they want kids, even worse, you know how much they cost and women at my age who don't have kids are running out of time with the biological clock. Another cause of relationship failure.

3 The lack of a HPC has made me very angry and maybe a bit bitter and twisted since everything I have done or not done for the last 10 years is because of it. I am not the fun person I used to be because everything about the economy and high HPI holds me back through the anger I have stored up. So in dating if the topic of money comes up its like opening a can of worms, most women do not understand the system at all, to them I have now turned into a man obsessed with money and doom and gloom rather than a catch.

If I had just bought a house in 2003, got married, had kids I would have been in a different place today.

What to do?
1. Give up and buy in the UK. They might go up 10% after buying before something happens to trigger the full blown crash but hey at least I have moved on and not waited anymore.
2. Wait some more, save some more, but how long for? it would be another 3 years before a crash if any comes. Then I will be 43.
3. Buy abroad in a place that is having a proper correction. I can only think of Spain or Ireland, but these places are not good for my sort of work.
4. Find a woman financially on par with me? Not likely since to have a house without a large amount of debt would mean they would have had to buy pre 1997. Not many women around who did that still single who are not way over 40.

I am sort of at the end of my tether, hence this frustrated post. Maybe I am being way too negative, but I woke this morning thinking what the hell am I doing with my life. Only a HPC'er would understand my situation. Any comments bad or good anything at all would be gratefully received.

I am not sure houses are going to do much price-wise over the next few years. But it seems quite sad to have allowed a belief to have stalled one's life dreams. And for money to have tainted someone's future romantic interactions.

This is nothing against those who believe house prices are going to fall(they are sometimes called Bears)The same applies to those who are waiting for prices to rocket(Bulls)

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Is the property market cooling down?

There is an article in today's Daily Mail claiming house price growth cooled in July.

The underlying data does not seem so sensational with prices increasing by 0.3% per month down from 0.4% in the previous two months. It will be interesting to see if this is a trend that we can expect to continue or if it is merely some sort of statistical blip. Even a rate of 0.3% implies an annual increase of over 3% which is a little bit higher than inflation. We need to adjust for inflation to see the real rate of increase, and it seems prices have been broadly static - up a bit, down a bit - since 2009.

It seems we can assume the market may or may not be cooling down. But the market is currently rather tepid.

The other interesting point in the article is that the average deposit by a first time buyer is now £26,859(I am not sure of the source). I am not sure what the source of that information is. But it is clearly a huge amount of money - equivalent to almost a year's worth of income for the average household before paying for any items of expenditure.  You can see why the government is keen to offer support to those who wish to buy.

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UK needs more houses

Household in UK increasing

The UK does need to build new housing for the new households being created.

 In some countries the years prior to 2007 saw a huge increase in home building. But the UK even in the boom years there was not enough development to cover the increase in houses required.

 Households required

The chart below shows the number of new houses required in England by 2033. Most of the increase is driven by increases in population, and as many of those who will be establishing households are already born. There may be trends towards large households or large scale migration.

Source: UK National Statistics

This means we need about 2.4 million new houses a decade, or 240,000 houses per year between 2008 and 2018. We are already nearly half way through that period so the question is how are we doing? The answer is pretty badly.

Homes built to 2012 and required 'till 2018

My figures are based on the NHBC homebuilding figures. I have grossed up by 20% as they are responsible for approximately 80% of the housebuilding activity and I have annualised Q1 figures. I have also assumed that the new houses are built in the correct parts of the UK and that existing houses are not demolished.

My thoughts

It seems that demographics have mandated we need a lot of new houses, but there seems to be too little building. This is odd as with so much unemployment there are plenty of idle builders sat around, or people unemployed who could be building houses. By the time we start building it may well be the case that unemployment is lower and wages will be higher.  There is quite a risk in waiting and it seems little to be gained.

It is not that the government is unaware of this. They believe the reason for the lack of supply of housing is that people cannot afford to buy housing because they cannot access credit. Increasing the credit will increase the demand for housing and this will encourage supply. The UK faced a huge housing problem in the 1940s as a result of Hitler's bombs. The solution then was a huge increase in social housing. Interesting this is no longer on the political agenda. Infrastructure spending tends to be on transport rather than housing. It does seem to me that  government could build more housing now, even if the plan is ultimately to sell it off.

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Help to Buy only for first time buyers

The government has announced the second stage of the Help to Buy Scheme will not be available to those who already have a home and are looking to purchase a second home. This is mostly likely to be achieved by asking buyers to confirm that they do not have an interest in property elsewhere in the UK.The previous government implement a scheme where first time buyers were exempt from Stamp Duty for properties below £250k.

The Stamp Duty exemption ended in 2012, and was not hailed as a big success. It effectively cut the price of a house by 1% for first time buyers. The new scheme is harder to analyse, as it ought to drive down interest rates the borrowers pay but it will be hard to determine by how much. The scheme is supposed to run for three years. So as a ball park the average saving for first time borrowers will be similar to the stamp duty cut if it saves reduces average rates by more than 0.34%.

The government believes the market for house purchase borrowing is distorted and so they are trying to correct it by taking some of the risk from the banks(the message is slightly mixed as the government are at least claiming their will be strict controls on the creditworthiness of borrowers). This should ensure there is more lending as well as the lending being cheaper. The costs for the government are more interesting. Stamp duty meant the government lost 1% on the price sale of houses, with the new scheme it might lose between 0% and 15%. The aims to support £130 billion of lending, or about 700,000 average houses.

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Help to Buy Scheme

The Help To Buy Scheme was introduced in April 2013. The aim to help Generation Rent(who are unable to buy houses due to high prices and the lack of mortgage availability).

There are two parts to it, for both of them help is only available on properties worth less than £600,000.

New Build

The scheme offers to lend a 20% deposit for a new build house, providing the borrowers have been able to raise a 5% deposit themselves. The loan is interest free for the first five years and then is charged at 1.75% for the sixth year and thereafter increasing by 1% plus RPI inflation rate.

The aim of this is to allow potential purchasers to get access to the much cheaper mortgages that are available with deposits of 25%. The Government hopes that this will stimulate demand for new houses, this is important as construction is a labour intensive part of the economy and so may help to reduce unemployment. There is also a looming shortage of housing in the UK driven by demographics.

Guarantees for small deposits

This scheme guarantees the mortgage lender against losses where deposits are small. Interests rates often differ dramatically where individuals have very low deposits. This is because if the borrower stops making payments the bank has to repossess the property and sell it. There are expenses involved in these activities and so in order to be prepared to accept the extra risk of being repaid banks require higher rewards.

There is not much information on this yet.

The government is consulting on this scheme. It seems to want to target first time buyers, rather than just provide a tax funded boost for Buy to Let investors.

Aims

Both schemes aim to address the high interest rates that people with limited deposits face. I have taken some data from a big high street lender for five year fixed rates. Those with low deposits face far higher rates than those with large deposits. Anecdotally mortgages with lower deposits are harder to obtain as lenders have stricter lending criteria. The difference between a 10% and 40% deposit is about £7,000 per £100,000 borrowed.

It remains to be seen whether either scheme will achieve the aim of stimulating the housing market and the increasing access. However it is noteworthy that the political consensus is that these schemes are good ideas, although there is some concern that these may cause a housing bubble. Certainly although falls in prices may benefit want-to-be buyers(and those on some internet forums) there is nobody in any major political party after this.

The limit of £600k is interesting as this is not a trivial sum of money, and although the scheme is aimed at first time buyers is  far above the typical first time buyers budget.

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Fall in sales for affordable housing

The Generation Rent problem will be solved when first time buyers begin to start purchasing their own properties. An indicator that this might be happening is an increase in the number of sales at the affordable end of the market.

I have looked at the number of sales registered at the Land Registry in May 2013 versus May 2012. Overall there has been a slight increase in sales(59,642 to 60,335). This shows a small increase in activity. For reference there were over 110,000 in 2007.

The chart below shows the change on sales in May 2013 versus sales in May 2012. They sales are split out by value in £10,000 increments.

The key picture is sales below £150,000 decline year-on-year. These are probably the sort of properties that ought to appeal to first time buyers. Government seem keen to improve the ability of first time buyers, but it seems they are having limited success. There are some new schemes(Help to Buy schemes) that are being introduced to help first time buyers, it will be interesting to see if in a years time this situation has reversed..  The value of the under £150k sales is £2.5billion over 23 thousand properties. It seems unlikely many purchasers are going to be lured in the market by a saving of a small financial inducement, so for a scheme to work it is going to require billions rather than a few hundred million pounds.

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UK rents up in June?

The BBC has reported that rental prices are static in June and the reason given for this is an increase in house buying activity.

The source of this data is LSP Property Services Plc, who have managed to generate some PR if nothing else. They are the parent company of two estate agent chains; Your Move and Reeds Rains.

The basis of these figures seem to be simply the average of 18,000 properties that they look after and are not adjusted for changes in the mix of properties. This is actually a small number of properties compared to 3.8m privately rented properties(about 1 in 200)

.

Area	Rent	Monthly Change %	Annual Change %
London	£1,143	0.1	6.4
East	£743	0.1	-0.1
South West	£636	0.5	0.7
Yorkshire	£533	-0.6	-0.4
North West	£572	0.5	-1.1
Wales	£551	-1.9	1.2
South East	£741	-0.4	1.4
North East	£531	-0.1	2.5
West Midlands	£565	-0.5	0.7
East Midlands	£558	-0.7	3.4
England and Wales	£737	0	2.6

Source :LSL Property Services Plc

Looking at the table it is slightly surprising that this was reported as news at all. All statistics are subject to errors, especially when they are based on a small sample of a large population. Until there are a few more months where prices are static it seems that we cannot be sure that rental prices are really falling. This may be a problem with the sample or a simple one month blip. Indeed prices were reported as rising  in May, April and March. So there is a hardly much of a trend going on.



Data on rental prices is harder to obtain than for house purchases. There is no equivalent of the Land Registry, where prices of sales have to be logged. Nor are there large private indexes like Halifax or Nationwide as the rental market seems to be more fragmented than the mortgage market. Landlords do not have to disclose rents they are receiving. However rental properties are important for house prices, especially over the long term as people have to either pay rent or mortgages. Higher rental prices should encourage people to buy. They should also encourage investors to purchase property in order to let it out.

I previously posted how difficult it is to forecast house prices moves. It seems that it is difficult to ascertain even actual rent prices.

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Are houses affordable for everyone?

Following on from my post on Generation Rent, I will look at if housing really has become less affordable?

I have looked at how disposable income has changed over time. Disposable income is simply income from all sources(salaries, pensions, benefits, etc) less direct taxes on income(National Insurance, Income tax and Council Tax). I have then split this into five categories(which are called quintiles). The first quintile is the poorest 20% of housesholds, the second quintile the next 20%, etc.

For 2011/12 the data looks like: -

 

	Total Income(salaries, investments)	Total cash benefits	Gross income	Disposable income	No households in the population ('000s)
Lowest 20%	5,436	7,419	12,855	11,548	5,282
2nd 20%	11,813	8,448	20,260	17,997	5,291
3rd 20%	22,946	7,187	30,132	25,352	5,287
4th 20%	38,906	4,388	43,294	34,407	5,285
Highest earning 20%	78,283	2,453	80,736	60,831	5,291
Average	31,477	5,979	37,456	30,027	26,436

The highest 20% earn about 15 times more than the lowest 20% from income and salaries. This gap is equalised by benefits. The lowest 20% gain most of their income from benefits, but even the highest 20% still derive quite a lot of money from benefits. The total of cash benefits and income from investments and salaries is called Gross Income. Direct Taxes further reduce the disposable income households have available, and these fall most heavily on the highest earning households. The gap between the lowest and height incomes fall to five and a half times. Government is a potential force in redistributing incomes.

There has been a lot of inflation between 1977 and today and so I have adjusted for inflation to give the real change in income.

There are a couple of things to note:

• Real household  incomes have been flat since 2000. Actually the poorest people seem to have done slightly better. 
• The top 20% have seen there income rise the fastest and have pulled away from the rest. 

You the growth of income for those at the top most dramatically in the chart below. It measures the increase in real income since 1977. For the bottom 80% of households income has increase by 50-70%, whilst those at the top have seen their income more than double. For all groups the 2000s have not been great.

 

Is society becoming less equal?

This does not necessarily mean society has become less equal. Firstly we do not have much details on the make up of these households, so it may be the case that a pensioner who lives alone in a house they own might be better off than a family of seven with a large mortgage.

Second it is not clear how much movement there is between the different bands. Over time people may move between income bands. If we assume that everyone moves randomly to a new band every year we would find that across their lifetime everyone would have a similar income, although in any given year income differences might be quite large. It is very difficult to track individuals income over time, and I am not aware of any robust surveys of this information.

Thirdly it may be argued that inequality of income is not a bad thing. This might be because rewarding the top 20% encourages them to be more productive and this benefits everyone - this is called Trickle-down economics. The other argument is that the top earners simply deserve more.

Housing Affordability

My final chart takes the ratio of disposable income to an average house prices. One way of thinking about this is how many years it would take to buy a house if a household decided to devote all of their income after taxes to purchasing somewhere. Obviously this is unrealistic as people have to buy food, clothes, etc.

House prices have risen more rapidly than disposable income. But for the top 20% this is not so bad a story as their income has risen at a similar rate. It is probably individuals in this group who are able to not only buy their own homes, but also acquire buy-to-let properties and holiday homes.This is a far from homogenous group and will consist of the likes of Alan Sugar and Richard Branson as well as headteachers and doctors.

For the bottom 20% of households an average house appears out of reach, but this as probably always been the case.

Those in the middle are likely to be the groups that aspire to purchase a house. For these groups house become less affordable. Mortgage affordability is calculated on more complex metrics than household income, but it seems that most people will struggle to borrow more than  four times their disposable family income. This would mean that houses are out of reach or close to being out of reach for the bottom 40% of the population and this has been the case since the early 2000s.

Many would argue that this might mean we should expect house prices to fall so that they become affordable again. There are a few reasons to be cautious with this conclusion.

• For high earners houses are affordable and they may seek to acquire houses to rent
• Individuals may be able to access sources of funds other than income - such as inheritance
• Government policies may be adopted to keep prices high
• Interest rates have fallen so individuals are able to borrow more to service a mortgage

The answer to my initial question was that houses have become less affordable for those not in the highest earning 20% of houses holds. This squeeze is driven by low poor income growth(from 2000) and house prices increases from the mid 1990s-2007.

There is likely to be a group within the middle of the income distribution who would have been able to buy in the 1990s, but are no unable to do so. These are likely to be people on middling household incomes of £20k-£40k, probably graduates and experienced non-graduates who see themselves as aspirational.


Sources: I have used Nationwide house price data, RPI price index data and ONS household income

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Where can I afford to buy tool[From the BBC]

The BBC has a toy on its website to show you where you could afford to buy or rent based on your expected monthly payments and the type of house you are looking for.

I had a look at two bedrooms for rental, assuming the property is average for the area. At £500 you are limited to parts of Wales, Scotland and the North of England. Double that and you should be able to find somewhere anywhere except London and the surrounding counties and Oxford.

The picture is not to dissimiliar when it comes to buying. £1,000 a month will allow you to live in almost anywhere that is not the South East(the range of disallowed counties is larger).  I have assumed you need a £25,000 deposit though which is probably the biggest issue for many first time buyers


 

It appears it is still cheaper to buy than to rent it. It is interesting to see the gap in house prices, and just how high prices can go in London(to £3k per month just to rent in inner London).

I would not advise using the information to decide where to live, but it is interesting to plan with different rent/ mortgage/ house cost scenarios.

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What is Stamp Duty

Stamp Duty Land Tax(SDLT) is charged on house price sales in the UK. It is certainly not a particularly well designed and it causes some quite interesting distortions on the property market.

It is typically a large part of the cost of purchasing a home.

 

 

Stamp Duty Bands

Purchase price of property	Rate of SDLT (percentage of the total purchase price)
£0 - £125,000	0%
£125,001 - £250,000	1%
£250,001 - £500,000	3%
£500,001 - £1 million	4%
Over £1 million - £2 million	5%
Over £2 million	7%
Over £2 million bought by corporate bodies	15%

 Source: HMRC as at July 2013

In addition there were lower rates for certain parts of the country that are deemed to be in need of regeneration, although this has been abolished.

The key thing about it is that you pay the percentage on the whole proportion of the purchase price. So if you buy a house for £250,000 the stamp duty is £2,500. If you buy a property at £250,001 the stamp duty is £7,500.  This may sound a bit weird, I don't think there are many people who disagree!

The chart shows the number of house price sales in May 2013 by the value of the sale. All this means that houses don't really sell for between £250k and £260k.  There are smaller distortions at £125k and £500k.

 Avoidance?

There are various ruses that people sometimes use to get around stamp duty rates. For people transacting at the £250k threshold these typically include selling the house for just under £250k and then selling things like carpets and curtains for more. Stamp duty is only paid on the value of the property and not any items that are sold with it.  However HMRC is aware of this and the extra items need to be sold at a market value, and in practice these items tend to have a low price.

Further up the income scale there were more complex schemes involving limited companies or schemes involving husbands and wives transfering part of the property between themselves. There has been a crackdown on stamp duty tax avoidance and so neither is as likely to work.These schemes are also legally complex and therefore expensive.

Poorly designed tax?

The structure of stamp duty is poorly designed as there are huge cliffs where just a few pounds results in thousands of pounds in additional tax. This seems quite unfair and has encouraged much avoidance.

You can also argue that the a tax on selling land makes less sense than a tax on owning it. Allowing people to move around to find jobs or be close to their families is not really a bad thing. A more logical tax would be a smaller tax for land ownership.

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Low-start mortgages

Within a market all prices are determined by the interaction of the forces of supply and demand. The fall in house prices in the UK was caused by a drop in effective demand for housing rather than a chronic oversupply of property(this was not the case in Spain). The credit crunch caused the housing market to stall as most people do not have sufficient funds to buy a house outright and so need to borrow. But banks became much more concerned about lending and so raised the amount people were required to put down as a deposit. This saw the disappearance of 100% mortgages in 2008(and even 125% mortgages where banks lent more than the entire value of the property). Additionally interest only mortgages without a repayment vehicle have also become niche products.

This changes have made it harder for borrowers without deposits or larger incomes to get mortgages. However several lenders are now offering various forms of low start mortgages. These mean that initial payments will be lower for a limited period.

• Leeds Building Society are offering a Welcome Mortgage. This mortgage means that the interest rate charged on a mortgage is 0% for the first three months. This means individuals have lower payments for the first few months - presumably so they can spend a bit more on decorations, moving costs, etc.

• Clydesdale are offering a Low Start Mortgage which offers three years of an interest only period. After this the mortgage reverts to a normal repayment mortgage.

Both of these mortgages reduce initial payments and so potentially encourage borrowers to borrow larger sums. The impact  is likely to be to increase the demand for housing. Both of these products are quite limited in scope, especially the Leeds mortgage where the interest free period only last a few months. However the mortgage market is competitive and so if these are successful then you can expect variants to emerge from other players in the market. 

The key risk of any low start mortgage is that individuals may borrow more than they are able to, believing that their future income will rise(or expense will fall) and allow them to meet the higher payments. If longer interest free periods hit the market people may also rely on rising property prices to build their equity rather then repayments.

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Surveyors think house prices will continue to rise

The RICS(Royal Instituite of Chartered Surveyors) announced they expected house prices to increase by 1.5% over the next year. Over the next few years they expect prices to increase by 4% per year on average.

Are they right? 

 

In December 2007 they were predicting that prices would be flat in 2008. Prices actually fell by about 20%.  Since then there forecast have been better, but this is because prices have not changed much. In reality it seems no-one is able to forecast future house price movements.

A common source cited as forecasting the House Price Crash was Capital Economics who did forecast a fall of over 20%. Unfortunately they seem to forecast this ever single year. This seem to start back in 2002. From 2002 house prices rose by 40% before they crashed back down, and took a further five years. Anyone who had stood on the sidelines waiting to buy because of Capital Economics forecast would have sat outside the housing market waiting for the crash and even if they had purchased in 2008/2009 would have still most likely have paid more than in 2003. For Capital Economics they have secured a role as a source of forecast to contrast with the typically rosier forecasts offered elsewhere. Good marketing if not good forecasting.

So going back to the question are they right the answer is that they might be.

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How to calculate the Equity you have in your property?

Equity

Equity is a measure of how value owners have in a property, after repayment of any loans secured against it. It is calculated by the following formula.

Equity = (Property Price) – (amount outstanding on loans secured against the property)

Greater equity makes it easier to obtain finance at lower rates. Equity can increase in one of two ways either by repaying the original loans or by rises in houses prices. In the example house prices increase to £150,000. This is especially useful to the owners as they initially only invested £20,000 in the property but could obtain £70,000 if they sold.

Negative Equity

Negative Equity occurs when the amount of debt outstanding is greater than the value of the property. A mortgage holder has to agree to release their hold over the property when it is sold, normally this is not a problem where there is positive equity in the property as they are repaid from the proceeds of the sale and agree to the sale on the basis that this happens. However when a property is in negative equity the mortgage company may not agree to the sale. Negative equity can therefore prevent the owner from moving.

Negative equity is not only bad for the owners, it can also be bad for the banks/building societies who loaned the money. This is because they may face loses when home owners stop paying.

Loan-to-Value

LTV= (Amount of loan secured against the property)/(Property Price)

This is related to the Equity and is a measure of the risk a lender is making. In the event of a borrowing being unable to make payments to a loan lenders rely on the sale of the underlying property to repay the loan. The more the value of the loan as a percentage of the property price the greater the risk the lender will not be repaid. Generally the higher the Loan to Value the cheaper a mortgage will be.

Sometime mortgage offers are based on the precentage deposit that a borrower has. The formulas for that is displayed as:-

% Deposit = 100% - LTV

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Do house prices always go up?

UK Average House Prices

Property prices are often shown to be have historically increased upwards and so are seen as a one way bet. A chart shows that the increases are often astronomical. This chart shows the increase in property prices from 1983, with large increase occurring in the mid 1980s and another huge increase from the mid 1990s. Across the period house prices have increased by four and a half times.

Inflation

Inflation is a measure of how the price of goods and services is increasing generally in the economy. This is sometimes known as the price level. Much of the increase in house prices is related to inflation. Inflation means that the pound in your pocket can buy far less than it did in the 1980s. So whilst houses were cheaper in the 1980s so to was the price of beer, cars, food and salaries were lower.

In order to adjust for the true cost of housing we need to adjust for the increase in prices, to do this we remove inflation from the figures.There are lots of different measures of inflation, but the easiest to use is the RPI(Retail Price Index) which measures the change in price of a representative basket of goods over time.

The price level is about three times greater today than in 1983, so £1 today would buy the equivalent of 30 pence worth of stuff in 1983. We can use what is called a deflator to reduce the value of the average house to what it would have cost in 1983 pounds.

House Prices adjusted for Inflation

The revised graph adjusting for inflation shows a much steadier increase in prices, and the two falls in price now look more dramatic. 

House prices have increased since 1983, but they have less then doubled rather than increasing by more fourfold. 

It would have taken 13 years for a house bought at the 1988 peak of the market to return to its inflation adjusted pre-crash value. There was a lot of inflation in the period which disguised how sharp the drop in property price was.


The latest house price crash began in 2007. Price fell rapidly by around a little bit over 20%, in the five years since then inflation has largely remained above the 2% Bank of England target and so although the actual price of property has increased, the inflation adjusted price has fallen further as inflation has increased at a faster rate than house prices.

The media rarely reports the inflation adjusted figures as they are harder to understand, however they are more representative. Someone who bought an average house in 1983 and then sold today would have had more than four times as much money. However they would not be able to buy as much with the money as they could have done in 1983. This seems to indicate houses increases are less dramatic than appears when the increase is accompanied by inflation. The other conclusion is when property prices do fall they can stay below the peak for a long time.
By Dave C

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News: Halifax shows prices rising at fastest rate for three years

Halifax have released a press report that shows house prices are rising at their fastest rate for three years. The narrative for this is that the funding for lending scheme has increased the availability of mortgages and so is driving activity in the market, but a weak economy is suppressing demand.

The actual rate at which prices are increasing is quite modest compared to the rate of increase from the mid 1990s to 2007.

 It may be that part of this is a statistical fluke. This is higher than Nationwide who reported an increase of 1.9% over the same period. It will take a few more quarter to determine if how prices have moved from being essentially flat to one in which they are starting to increase(albeit at a historically very low rate).

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Introduction to UK Property Prices Indexes

There are several key indexes that are mentioned in the media that track movements in UK house prices. This is a brief summary of the more common ones.

Halifax Property House Price Index

Halifax(now part of LloydsTSB) provide data for house prices based on mortgages that they have approved. However only sales that are deemed to be at a fair market value are included. Certain types of sales at below market prices – sale to tenants, council houses, etc are excluded.

Overtime there may be a change in the type of houses being sold – for example smaller flats may be sold more frequently than houses due to demographic changes. If Halifax took a simple average of house prices and measured movements in these they might show prices falling, although the price of an individual houses and flats being sold might rise.

In order to avoid this they seek to collect data on the characteristics of a property and adjust for changes in the mix of houses sold. Data is collection on are price, location, property type, number of rooms, size, age of property, etc.

Prices are broken down into a formula based on these characteristics. The statistical techniques used measure how much impact each of these changes has on the prices. This is then used to create a typical house, so that changes in the mixture of properties sold do not affect the index.

Finally there is a seasonal adjustment which is applied. This is because prices are typically higher in summer and lower in winter.

Nationwide House Price Index

Nationwide uses a very similar methodology to Halifax, but the underlying data is based on their mortgage lending. They have slightly different characteristics for the typical house characteristics.

They collect slightly different data on the properties of house, although the most important factors - size, location and type(detached, semi-detached, terraced, flat) are common to both indexes. Historically Nationwide are biased towards the South of England and Halifax to the North, however the adjustment to correct the price for a typical house should remove this bias. The two indexes move quite closely due to the fact the indexes are calculated in a similar way.

Land Registry

The Land Registry records all property sales in the UK. The land registry does not collect as much detailed information on the type of property as Nationwide or Rightmove. Their index is based on like-for-like house sales (i.e. if a house sold in 2007 and again in 2012 the difference in the value of the sale is the house price movement. The movement of all house prices is then aggregated to create an index, and the actual average house is based on the average house price in 2000. As with Nationwide and Halifax houses not sold at full market value are excluded.

Rightmove

Rightmove is the leading UK property selling website. The numbers it uses are simply the average if asking prices, unlike the other indexes it does not track when a transaction occurs. I am not sure that this index has much value. The plus side it is probably a leading indicator as changes in asking prices might flow through into transactions.

Zoopla

There are various property websites that apply their own methods to value houses; I think Zoopla is most famous. I suspect these are using proprietary models based on Land Registry data. Zoopla then seems to collect additional information that it's members can supply, such as number of bedrooms, any improvement spend, etc.

It is often derided as inaccurate, probably because Land Registry data does not track go back far enough to give a complete data set of like for like sales for every house and it is reliant on the information people provide on their houses characteristics.

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Introduction

I have been looking for a blog that might fill a niche. My interests are finance and I am a guy who tends to analyse data. Initially I considered a personal investment blog, but to be honest the field seems to be heavily saturated. They are divided into two schools one of which recommends some level of active investing and passive investing. Active investing involves choosing shares, buying and selling based on research and strong data analysis. This suits my skill-set as an analyst and accountant. The problem is that I do not believe this will work. The alternative is Passive investing which posits that the market is probably smarter than any individual and the best thing to do is simply to have some sort of mechanical based rule to determine how you invest. The decisions are then around asset allocation, reducing expenses and minimising taxes. I would recommend that anyone who is interested in this pop along to Monevator.

The niche I have decided upon is property. It seems to me that property prices are(or were) a frequent source of discussion at dinner parties. Yet there does not seem to be a blog that dominates the field. So I am hoping to establish a blog that looks at property prices from a factual angle without indulging in overly wild speculation or political ranting.

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