In the UK, years of conventional wisdom suggests buying a property is the smartest thing you can do with your money. Yet home ownership is at a record low, and the chances are that if you do own one, you also have a significant mortgage that sucks up most of your spare cash. With rising rents, a housing shortage, record house prices, spiralling private debts, wage stagnation and rising inflation, are properties still a good place to put your money or is the UK’s obsession with home ownership going to end in economic tears?

House prices and rents can’t keep rising

Nothing can keep getting more expensive indefinitely, because eventually supply outstrips demand (there’s more stock available than people who can afford to buy it). Now, consider that house prices are at an all-time high, and rents are rising at about twice the rate of wages. But there’s also been an 18% slowdown in completed house sales in the UK over the last year. And repossessions for buy-to-let landlords are rising, tenant evictions are rising too. Rising prices but slowing sales? Rising rents but landlords and tenants struggling? These inherent tensions within the property market suggest we’re reaching a point where prices have to come down or else the property market will grind to a halt, and crash. But prices aren’t coming down so… oh.

These inherent tensions within the property market suggest we’re reaching a point where prices have to come down or else the property market will grind to a halt, and crash.

The property crash bases are loaded

In the late ’80s UK’s household debts were lower than they are today. In 2008, household debts peaked at 135.56% of gross national income (GNI). They are currently at about 125% GNI and rising. Similarly, the ratio of household debt to GDP in the late ’80s was about 60%. In 2008 it peaked at around 92%. It is currently at 88% and rising. Household savings, meanwhile, have fallen back to pre-2008 crash levels, and are significantly lower than the late ’80s.

These economic indicators show that, as a nation, we haven’t got much spare cash, and we’re exposed to a cash crisis if the cost of borrowing goes up. A relatively minor rise in the Bank of England base rate would translate into an unaffordable rise in credit card bills and mortgage payments that could push a lot of people into debt problems, stimulate repossessions and cause a property crash through a sudden increase in supply. The odds are mortgage rates will go up (the cost of borrowing has never been this low for so long) and experts are predicting between a 20% and 40% property price crash (or ‘market correction’ as they say) is coming if interest rates rise close to the 50-year norm of approximately 7.5%. Ouch.

Supply is warping house prices

The ONS reckon we need 250,000 new homes per year, and we’re building between 100,000 -150,000. There’s much talk of building ‘affordable’ homes but ‘affordable’ doesn’t mean ‘people can afford it’ in government terminology, so affordable home schemes can’t fix the housing shortage as planned. Government ‘affordability’ means properties available to rent at no more than 80% of average market rates, and homes available to buy where the mortgage payments are equivalent to a figure between council property rents and market rents, which is a very wide range, and definitely not affordable for many people.

‘affordable’ doesn’t mean ‘people can afford it’ in government terminology

There’s a nominal figure, proposed by Shelter, that ‘affordable’ homes should mean properties where mortgage payments are no more than 35% of take-home pay. Which means most homes are already at the limits of affordability (the average UK mortgage payment is 34% annual pay). Except in London, where rents are on average about 53% of income, and the average first-time buyer in London needs a salary (based on mortgage averages) of between £60-70k to get on the property ladder (over twice the UK average salary). So London is not affordable at all. Not even close.

House prices are warping the real economy

Rising house prices have made property the central building block of UK wealth, but assuming you’ll cash-in on your property value and come out with a profit isn’t really a substitute for decent wage growth and savings, is it? Money locked-up in properties and paying mortgage debt isn’t any use to the rest of the economy, which needs tax revenues and consumer spending to build infrastructure, create social mobility, pay wages and drive investment. Our obsession with property ownership isn’t good for our general economic prospects, even when growth is healthy, debts are low and homes are affordable. And they’re not.

Money locked-up in properties and paying mortgage debt isn’t any use to the rest of the economy

Crisis? What crisis?

Serious economic shocks (like the ‘Black Wednesday’ crisis of the late ’80s and the 2008 credit crunch) always have a negative effect on property prices. Right now, many economic indicators (like household debts and savings) are in a worse state than the late ’80s, and close to 2008 crash levels. But unlike those previous crashes, the general health of the economy is also worse. Economic growth is at prolonged flat-line low. Consumer spending is faltering. Inflation is rising faster than wages. Rent and home affordability is pushing at the limits most people can manage, and private debt is climbing back to 2008’s pre-crash levels. Which means a property crash might not be inevitable, but in the economic scheme of things, it is very likely.

Renegade Reading List:

At Renegade Inc. we’re all about giving people space to make up their own minds. If you want to explore this topic for yourself, here’s a bunch of interesting links we found when researching the topic, that make a good starting point for your own research. Stay curious…

Trading Economics data explorer – this is a great resource for exploring graphs that chart all kinds of key economic indicators.

Good places to start reading around the complexities of property markets and the role of property within an economy…

Andrew Keith Walker

Andrew Keith Walker

Andrew Keith Walker is a Renegade Inc. correspondent.

Andrew Keith Walker is a professional geek, writer and speaker. He’s co-founded three successful technology startups, was the first person to interview senior UK politicians (including the UK Prime Minister) on Twitter, written ad campaigns, built games, helped set-up the Child Exploitation and Online Protection Centre (CEOP), reported on elections for the BBC, been the guest technology pundit on Sky News and radio (BBC R4 Today, PM, World at One, World Have Your Say) & written in newspapers (Independent, Guardian) and magazines (Linux User, .Net, WebUser) about digital technology, business and culture.

Twitter: @Killdozer
Andrew Keith Walker

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4 thoughts on “The Housing Market vs. The Real Economy

  1. A good indication that a property market is reaching the point of collapse is when the median land-to-total value ratio of residential properties exceeds 40 percent. This means that anyone purchasing a residential property is paying 40 percent or more of the total price for the location. In some high cost markets this ratio might exceed 80 percent, although the result is frequently a turnover of property from moderately well-off property owners to very well-off property buyers (a sort of high end gentrification process. In such instances, the properties undergo extensive upgrading. In Manhattan, for example, the median price of a residential property is around $780,000. A studio condominium unit might cost $500,000. Prices in many parts of London certainly equal or exceed these levels, an indication of just how high land costs are. A developer will generally only acquire land at such high costs and break ground for construction if the market will support a final selling price of at least four times the cost to acquire the land.

    Absent a property tax regime that captures rising land values (i.e., that imposes an annual tax on land equal to its potential rental value), the only way communities can provide decent, affordable housing is by using already-owned public land to construct housing offered to households with limited incomes (e.g., 80 percent of the area median income), and with deed restrictions on the resale of these units. The private land markets are credit-fueled and speculation driven.

  2. Hi…We live in Chiang Mai Thailand, we have a luxury furnished apartment, we pay 15000thb a month, a bit over the average but we like it…we left Australia where we were paying equivalent to 51,000thb. lunch 3-5 AUD, unless we are celebrating, then it could cost as much as $20-$40….so, no brainer….cheers bryan….oh!….the CM people are reason enough to live here….

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