More bad news for young people trying to get on the property ladder

David Kingman reports on a series of stories which suggest the struggle facing young would-be homeowners isn’t about to get any easierMonopoly Houses

Hardly a week seems to go by at the moment when there isn’t some new piece of bad news about the challenges facing young people who want to get on the property ladder.

Unfortunately, the beginning of August was no exception, as it was announced that average property prices have risen again – and are probably set to go on rising in the future, with no end to the price increases in sight.

House prices 3.9% higher

According to the building society Nationwide, average house prices are now 3.9% higher than they were a year ago. The average property now costs £170,825, making this the biggest year-on-year increase for almost three years.

However, the really worrying piece of news for young would-be buyers is that the experts can only foresee prices moving in one direction in the future, because the fact that rental costs are continuing to rise suggests there is still significant unmet demand for property purchases.

According to Nationwide’s chief economist, Robert Gardner, prices are now 12% higher than the nadir they reached during the financial crisis, but their current level is still 10% below than the record peak achieved back in 2007. The rise has been attributed in part to the government’s stimulus measures, including the Help to Buy scheme, suggesting that concerns that the government could simply be inflating another house price bubble may be being proved correct.

The one caveat to this piece of news is that house prices are not enjoying a buoyant recovery in all areas of the UK. Indeed, there is a stark difference between the areas with the greatest demand – led by London and the South East – and the north of England, the part of the country which the Tory peer Lord Howell recently (and misguidedly)  described as “desolate.”

Significantly undervalued?

A further indication of how much more prices are likely to rise in the near future came from Simon Ward, the chief executive of Henderson Global Investors, who publicly claimed that housing is still undervalued by a whopping 13%. Again, this assessment is based on rental yields – specifically dividing rental yields by the value of the housing stock in order to calculate the true market value of property.

Interestingly, this method suggests that property was 28% overvalued before the crisis struck in 2007. A 13% rise in average house prices would be the equivalent of adding almost £33,000 to the cost of a typical home, although in real terms (once inflation is taken into account) this would actually still be cheaper than house prices were six years ago.

In fact, real house prices have not actually risen very much since 2007, but this does not necessarily mean they have become more affordable for younger buyers because many workers have seen their salaries fail to keep pace with inflation over the same period. The increased caution of banks with regard to lending has meant that young would-be purchasers have needed to find much higher deposits than was the case a few years ago, often totalling over 20% of the asking price.

Based on the average house price of £170,825 provided by Nationwide, this would mean buyers need to have over £34,000 saved up before they get a mortgage, putting home ownership beyond the reach of many of Britain’s young people.

It’s Land, Stupid

Also this week, a fascinating article from housing analyst Brian Green made a convincing argument about the root cause of Britain’s wild house price inflation, in which he demonstrated that the proportion of a house’s value which is accounted for by the land underneath the property has risen from around 25% in the 1950s to over 70% today.

This adds more weight to the argument that the biggest problem affecting Britain’s housing market is a lack of available new land for us to build on, and the only way to tame the growth in house prices in the long run will be to bring more land under development.

The controversy over the Coalition Government’s changes to the planning code shows that this will not be easy. But if we don’t want a generation of our young people to miss out on all the benefits of property ownership, then this is the idea that we will have to build on.

Posted on: 11 August, 2013

One thought on “More bad news for young people trying to get on the property ladder

  1. AW1983

    I wouldn’t give too much credibility to Simon Ward’s argument not only because he’s out there on a limb compared to most professional investors but also because he makes the incorrect assumption that house prices and rents are operating in a free market.

    Once shared ownership, ‘Help to Sell,’ government investment in banks and historically low interest rates are all taken into account, it becomes clear that housing has become a controlled market and banks can lend far more (and owners can sell less than 100% of the property) than they could in a free market and borrowers can lend far more than they sensibly should (and at the direct cost of sensible savers, adding to the woes of those trying to save a deposit).

    As a result, rents are an unreliable measure of how much property should be worth. They are high not because they reflect the true value of the property but because there is too much demand for rental property because houses to buy are artificially inflated by government policy. Sometimes we talk too much about how government uses taxpayer money to keep houses overpriced without considering how our tax money is being used to make our rents higher too.

    A withdrawal of ‘help to sell,’ banning shared ownership and forcing the government to expediate the withdrawal of public investment in banks, along with interest rates for the whole economy and not just for irresponsible lenders, would free the property market and in turn see a 20% fall in house prices and a 30% fall in rents. The Government won’t do this because it is easier to make young people transfer wealth to the elderly with sham capitalism than to tax us up front to keep them in the excessive luxury that they have become accustomed to.

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