howdidwegethere

Why are so many trapped in Generation Rent?

Trying to answer this question has led us on a long road of research which threw up even more surprising questions than we originally thought possible. Of course there are many factors that have contributed to create generation rent over the years but they have all contributed to the utter mess that the UK PLC has got itself into over housing.

The fact of the matter remains that two entire generations are prevented from owning a home for them to live their lifes in. There is politics involved but we have tried to remain as objective as possible and stick simply to the facts rather than push any kind of political agenda on this blog.

We have broken the contributing factors down into it’s key components to try and help you understand how all this fits together and then denies you the basic human right of having a roof over your head leaving you perpetually stuck within generation rent.

Baby boomers, the worst ever generation?

Retirement Planning

A baby boomer is a person who was born during the demographic Post–World War II baby boom between the years 1946 and 1964

“Look – it’s OK for my generation. Many of us have got on the
ladder.
But you know the average age that someone buys their first home today, without any help from their parents?
33 years old.”
David Cameron

The first sentence of that statement basically sums it up. It was and is ok for the generations ahead of X&Y. It’s arguable that generation X did have an opportunity in the early ’90s during the housing crash but in truth  mostly they where fresh out of college or university at the time and unlikely to have it high on the list. The bottom line appears to be that the baby boomers inherited a very prudent and risk averse mortgage and property market and then unknowingly inflated it.

In 1952 the average house price was £1891. Baby boomers will tell you that it was a stretch finding that kind of money back then, and indeed it really was – the average wage per year was £667.13. You don’t really need to be a mathematician to see that they required just over twice their salary to afford it and back then the interest rate was around 4% on the mortgage! (http://www.bsa.org.uk/docs/statisticspdfs/interestrates.pdf)

Basically as long as they had a job, the baby boomers could struggle to afford their homes but it was by no means impossible. Here’s the big issue though, market forces have dictated that those same homes in 2013 have increased in value 8,522.74% since 1952!

To put things in perspective, Shelters website comments that “If food prices had risen at the same rate as house prices over the last 40 years, a chicken would cost £51.18, four pints of milk would be £10.45, and a loaf of bread would set you back £4.36.”

It really made no difference if the babyboomers added value to their properties over the years or not, they still enjoyed an enormous increase in the value of their home. Add to that the fact they are living longer and staying in the family home longer instead of downsizing which is only exasperating the problem of housing stock.

Don’t just take our word for it, here is a graph from Natiowide building society that shows the rises extremely graphically…

UK House prices since 1952

What you are looking at there is a visual representation of how the market became commoditised. From 1952 to 1980 your house could cost you between two to three times the average salary. In the videos section you can watch a video called “Examining UK’s idiotic house prices” where Ross Clark points out that homes built in Mitcham in the 1930’s originally cost between £315 & £530 translated in todays money £18,000 & £30,000. He goes on to point out that one of the same houses is currently selling for £335,000. Now this is not entirely the baby boomers fault and we’re not suggesting that it was all a big conspiracy. It was the simply the collective effect that the commoditisation of property had on prices, fuelled by the next issue…

 

The “Buy To Let” Scandal

rental agreement

The  Latest news on the average deposit for first-time buyers in London is that it’s hit an all-time high of £64,000. The cost of housing is so high it does make you wonder who the hell is buying them if first time buyers are priced off the ladder. That is where “Buy To Let” enters stage left wearing a dark cloak.

Renting has always existed and subsequently landlords by default, but the largest rise of  you see in the graph above happens after 1997. Before then house prices where rising and falling in line with market forces, whereas after 1997 they just ballooned until the financial crisis in 2007 after which they fall and then flatline.

How does this equate to “Buy To Let”? Simple, enter stage right the introduction of the assured shorthold tenancy on the 28th February 1997. Before this time landlords had bought property to let for an income, but getting a mortgage to buy for letting had historically been difficult because tenants were tricky to evict and the rental income was relatively small. So the assured shorthold tenancy was born making it much easier for landlords to evict largely innocent tenants and lenders more confident to lend the funds. Such is the popularity of Buy to Let that estimates have recently put one in three new properties in London are being bought by investors.

In true british entrepreneurial spirit – many new landlords entered the market, some to make good returns and others looking to bolster their beleaguered pensions after Black Monday in 1987. Make no mistake, buy to let was actively marketed to homewners in the 90s as a way to secure a safe nest egg. The net result of all of this was that the UK’s already scarce housing supply was hoovered up in the name of profit. Oxford Economics said in August 2007 that buy to let is “undoubtably contributing to the overvaluation of housing”.

These driven up prices means any new development leads not to new family homes but endless flats which are destined for (and marketed to) buy to let landlords at a time of very low mortgage rates. Ultimately these flats are then rented to young people who cannot afford to get a deposit together to make the purchase themselves, Generation Rent is born.

There is no clearer recognition of this than George Osbournes “Help to Buy” scheme which excludes anyone who already owns a home or wants to use it for buy to let. If they feel they have to exclude those groups then there is clearly a concern at government level about the issues we have highlighted above. However “Help to Buy” is just a way to stop the party from ending but as we know, even the best parties have to end sometime.

Build! Build! Build!

construction

The lack of new home building is the mantra of choice among our politicians. The coalition has pledged to build 75,000 new homes by relaxing planning permission, removing the affordable housing requirements, underwriting the debt of developers building new build, etc, etc…

Apart from underwriting the debts of private developers with public funds (a luxury many businesses would love) most of these things are apparently failing. The construction industry has been slow to respond and the new planning rules fall foul of the NIMBY’S (Not In My Back Yard) who, ironically, is a group made up mainly of baby boomers.

This is why this section is short, basically:

Our country failed to build enough houses in the last 30 years to keep up with demand. That has had an impact on housing prices of course -it’s supply and demand . So please, don’t expect that if 75,000 new homes did actually appear overnight it would have any effect on prices at all. We suspect they would all be bought with buy to let mortgages.

Have Mortgages been Mis-sold?

Real Estate Bank Owned Foreclosure Poster on House

It may sound like a conspiracy theory but it truly is in the lenders interest to lend as much money as possible, moreso when rates are so low. In his recent book “The Default Line: Why the Global Economy is in Such a Mess” Faisal Islam shines a light on a number of interesting points regarding mortgage sales by the banks and lenders.

“What is the most dangerous, toxic financial asset in the world?” This was the question put to me by the chief executive of a leading European bank. Anxious to display my superior knowledge of the darkest corners of the shadow banking system, I replied: “Credit-default swaps on super-senior tranches of asset-backed, security-collateralised debt obligations.” I thought I had come up with a pretty pithy answer.

“No,” he gently chided me. “The most dangerous financial product in the world,” he paused a moment for effect, “is the mortgage.”

Faisal Islam – The Observer, 18th August 2013

High house prices inevitably lead to big mortgages and hence big profits. There was some undeniably insane mortgage deals around in the 1990s offering in some cases 110% of the cost of the house. How the posters in the windows of lenders have changed since those days, now they try to attract savers with very low percentage returns. This commoditisation of housing creates a financial market of what is fundamentally a human right – the roof over your head.

Funding for Lending is making this issue worse still. Designed to help businesses ease their cash flow the banks instead prefer to use the cheap money for mortgages as they have to hold less capital against that loan going toxic. So they borrow very cheap money and start offering mortgages to only those who can afford the huge deposits that are needed, which isn’t anyone in generation rent.

It’s hard to say if it will be exposed in the same way as the sub-prime loans where in the US, but it’s not beyond belief that mis-sold mortgages could explode onto the front pages in the way that PPI & LIBOR did.

So Where Does That Leave Us…

Interest. The Wordcloud Concept.

Far be it for us to give you financial advice but we think, bottom line.. Wait for the next crash! Everything that is being done at the moment is propping up a market that is due a fall, a big fall at that. If we bide our time the market forces should reset the market quite quickly just as it has done in the US and Greece.

The trouble is understanding what will trigger it and when it will come. Currently the governments funding for lending and help to buy schemes are artificially keeping prices high and they have good reason for that. The governments problem is the majority of homeowners will feel a very real sense of financial loss should their house price descend at a rapid rate. Whilst negative equity is a worrying problem for many, it’s unlikely to be a crash that will hurt that much. It will be homeowners collectively perceived (almost religious) belief that bricks and mortar value always rises that’ll be shattered and in turn they will turn their anger on the incumbent government at the ballot box. Not something the coalition relishes I suspect.

However prices will fall, and the trigger…  interest rates.

At the time of writing the UK base rate was 0.6% however in 1980 it was as high as 15%! The average rate would be expected to be just above 4% which if you can imagine applying that to these very high mortgages it makes for some eye watering repayment figures. Right now the Bank of England can’t raise the interest rate, not entirely because they don’t want to stifle a recovery, it’s because UK plc could never afford  repaying its deficit if high interest rates are applied to all their borrowing and quantative easing costs. Maybe this is why Mark Carney (the new BOE governor) has said interest rates won’t rise till unemployment hits 7%, presumably because that guarantees a tax revenue stream to cover the cost rises in servicing the debt and is at least 2 years away.

But Mr Carney has now hinted at a rate rise and when it happens (and it definitely will) a lot of those buy to let mortgages and overstretched home owners will be forced to make a choice, sell or pay. More homes will come onto the market and the need for quick sales will drive down the prices. It won’t be pretty but buying in now could well be the worst time to do it!