We have to be honest with ourselves at this point in time and admit that the current housing market is an absolute shambles. In a country where owning your own home is the norm it’s unacceptable that, for me to be able to purchase a house of a small amount lesser value than my parents or grandparents, I need a mortgage which requires a £60,000 deposit and at least a £70,000-a-year income. This should be expected considering my area of residence: Oxfordshire where house prices in the main city of Oxford, on average, exceed eleven times the average salary in the region. For me, that multiple of eleven brings me close to a £300,000 house which would require the figures I mentioned previously before I could even think about a mortgage.
I am indeed saving towards buying a house. But it appears as though this will be a slow process, even to get to a relative minimum 10% deposit, especially when house prices increased by 9% in 2014. This 9% increase would mean an additional £27k of value on a £300,000 house. For a 10% deposit this means I would need £2,700 more, nearly a quarter of what I plan to save each year, just to keep pace with the housing market. All this before you take into account the other niggling costs of buying a house – but we can save those for another day.
The Government introduced a budget on Wednesday that seeks to rectify many of these problems. However, I can’t really see that it will be that successful. The policy introduced in the 2015 Budget centres around a Help-to-Buy ISA which provides £50 for every £200 saved each month (and £200 is maximum you can save in this ISA each month). This is termed as a ‘demand-side’ policy, a policy that helps people to buy homes. This is in contrast to a ‘supply-side’ policy which helps homes to be sold. Both policies work through different mechanisms but their ultimate aim is the same: ‘More homes for more people’.
The major complication, and perennial thorn in the side of a 2015 potential first time buyer, is the huge swath of Buy-to-Let investors attracted by the high yield in the housing market. The number of landlords taking out mortgages on new purchases grew by 21% between January and November 2014 and with their average mortgage deposit standing at £100,000 it is of no surprise that these buyers are favoured by banks. The Buy-to-Let industry has boomed in interest as pensioners and other investors, in the face of low interest rates, seek a yield from their savings. It’s only rational that they should seek to make as much money as possible and enjoy a high quality of life (especially in their later years); however, their presence in the housing market spells trouble for first time buyers like myself.
Consider this diagram of the current housing market:
We have an equilibrium at (P,Q) created by the activity of first time buyers (FTBs) and buy-to-let investors (BTLs). The price that the average FTB can pay for a house is represented at PE and the long-term yield of a BTL property is represented at PR. At the average price for FTBs of PE there are QE properties demanded – this is the number of FTBs in the market seeking homes. It is assumed that if an FTB cannot purchase a home at the prevailing rate then they must temporarily rent. At the equilibrium (P,Q) the quantity of FTBs hat are able to purchase homes is ‘FTB’ on the quantity axis and is represented by the orange shading. Q to QE represents the resupply of homes from BTLs purchasing houses (the purple shading) and then letting them out at the long-term rate of PR. BTLs make long-term profit of PR-P on their investment (good for them) whilst FTBs are only able to purchase a small number of homes. Some FTBs have to rent whilst others have to explore other options such as living with parents or social housing.
The governments demand-side help-to-buy policy intends to have an effect as below:
FTBs see an increase in their purchase power from PE to P (represented by arrow A). This makes them more competitive in the market without necessarily taking away from BTLs and hopefully increases the number of FTB purchases above the ‘FTB’ mark.
This seems like a great plan but has a few pitfalls. Firstly, and most obviously, there are still Q – QE buyers without homes which means that this isn’t a complete policy for all buyers in the market. This policy certainly doesn’t suffer the lower end of prospective house buyers and really only benefits the lower middle class and upwards.
Secondly, we should also see elements of the below:
The increased income of FTBs shifts demand from D1 to D2 as more people are able to purchase homes. This means that, whilst home buyers can purchase homes at a price P1, the new prevailing price in the market is P2 and they are again priced out of the market. Whilst we may see more FTBs purchasing in this market we would also see a large rise in rental prices as BTLs have to invest more and will still seek out a yield. Those FTBs who are now purchasing under this policy will definitely not be purchasing the quality of house that they anticipated as they have been priced out of those homes and so whether or not they can purchase depends on availability at the lower end of the market (which at present is notoriously poor). Essentially, the money that the Government provides to FTBs goes straight into the pocket of the House Developers as profit.
An alternative policy that the government could pursue comes from the supply-side; building more homes.
Through this policy we would see supply increase from S1 to S2 (as the supply of home increases). This would drag the price of those homes down to around the PE mark and make them more affordable to first-time buyers.
This policy sounds great. We get no shortfall in the homes available for buyers as with demand side policy and everyone wins.
Even BTLs it would seem, as profit increases from pi1 to pi2. But this increase is crucial to the failure of this policy. More profit attracts more investors.
So what we end up seeing is the below:
The increased profit for investors means that demand for houses increases from D1 to D2 raising the price back to its initial level P. Bascially all of those cheap homes that were built to increase supply from S1 to S2 are now in the hands of BTLs making them a tidy profit.
As the reduction of house prices is permanently linked to a BTL entrant’s profit it is unlikely that any FTBs will be able to snap up the newly supplied homes leaving them at the FTB point they were in the original equilibrium.
So, what can be done?
The basic answer is that there need to be a decision made on whether to a) favour BTL investors in the market or b) promote people purchasing their own homes. If option a is preferred then it is likely that the majorty of British citizens will be renters in the long term as the few soak up home ownership enriched by lucrative private pension schemes from yesteryear. There will need to be new, tougher rent legislation to protect tenants and the average citizen as a whole will probably be worse off in both cash and assets.
If option b is preferred then BTLs need to be flushed out of the market using measures such as rent control and taxation – which would usually make any right-leaning person like myself shudder. But in this case I can really see no other solution. When neither demand or supply side works there has to be another option.