I’ve written before about my confusion/frustration/anger at the UK housing market. This view was reinforced by a recent Dispatches episode (for US readers, think 60 Minutes). Now I could get very investigative about the issue myself – given I feel strongly about this issue, I may well in the future – but for now some thoughts from various readings/viewings/stats:
- There seems to be an obvious market failure going on in UK housing: lack of supply. The Dispatches episode quoted the need for about 240,000 new homes each year to meet basic housing formation, with only about 100,000 being built. The figures are the same for London, in terms of housing built as proportion required.
- Call this a lack of understanding, but even Enzo Ferrari knew that you only needed to produce 1 unit less than demand to ensure pricing power. This gap seems completely self-defeating for property developers. In economics 101 terms, surely the marginal revenue isn’t maximised at this level of production; producers could still improve their (surplus) profits by producing more units.
- Why aren’t developers producing? It’s probably a similar situation to cities like San Francisco/NYC, whereby geographic limits constrict supply. In London’s case, however, these limits are self-imposed: green belts keep the property available within reasonable commute contained. Planning permission is a big issue, as well – London is a pretty low-rise city, and though that adds to the city’s charm, it lowers the city’s residential capacity. Developers must play expensive games with planners to build more, which probably leads to more production of expensive, high-margin housing than higher-capacity housing.
- The influence of foreign investors. Look, not every foreigner buying property in London is money laundering. There are loads of folks seeing London for what it is: a supply-constricted market with lots of professionals making decent cash. What I wonder about is buy-to-let hurdle rates: with mortgage rates at all-time lows, I suppose folks can be happy with a rental yield of 4-5% net of management fees. That would set a cap on property prices, unless of course rents increase at a faster pace. But if the latter occurs, who’s going to rent? Most of London is already unaffordable.
- What about those on the ladder? A frequent topic of London conversation is ‘getting on the property ladder’…maybe escalator would be appropriate here. The idea is that one just needs to buy any property, get some gains, then flip into a bigger property. Hmm… so one just keeps doubling down in the property sector. For those trading up the ladder – be aware that both losses and gains are magnified. In any case, I can see how this ladder situation puts politicians in a very tight spot: their constituents probably couldn’t handle a correction in property prices, as mortgages get called in.
- How about property tax? The UK has a sort-of property tax, like the US: it’s called council tax. The main difference, to me, is that the latter caps out at a pretty low level; US property tax is generally a set % of assessed value, with no cap. Here’s an idea for the UK, which would probably be an easy redistribution from rich -> poor: take away the council tax cap.
- What about mortgage rates? All time lows – check. UK mortgages primarily variable rate – check. Affordability based upon these low rates – check. So look out when rates rise. Again a politically difficult situation – why would the BoE ever raise rates, as so many people would probably find housing unaffordable.
In sum: UK housing is a classic asset bubble, in my opinion. So much unproductive investment pouring into land values. The fact the ‘housing ladder’ is ubiquitous should be a red flag that folks buy property because it always goes up…very dangerous. And these inflated prices mean ordinary (middle class!) workers can no longer afford to live and work in London and elsewhere. If the UK believes in equality of opportunity (and I think we do), why do we let this transfer of wealth from the lower-paid (stuck renting) to higher-paid (buy-to-let, with homeowners sharing positive externality) happen? Seriously?