The cause of the failure of large numbers of buyers to be able to continue to afford to get onto the housing ladder is primarily on account of government banking and finance policy.
10 years have past since the 2008 financial crash and the effects of using quantitative easing (QE) are, at last, beginning to reveal themselves.
Virtually all capital assets have increased in value against sterling, whilst savings have simultaneously experienced a decrease in value – in real terms. This situation, as everyone will now undoubtedly realise, does include significant price increases right across the housing markets.
The effect of this policy has resulted in a majority of millennials (i.e. people coming-of-age around the turn of the millennium) becoming unable to afford to buy houses. Instead they will have to accept becoming long life tenants as being the only viable alternative to having to stay with their respective parents into middle age.
In my opinion, along with many others, this is a sufficiently bad effect to warrant a complete re-think of the way monetary policy is managed both by government and equally as importantly, by the separate institution of The Bank of England itself.
Here is the brief reason for this conclusion:
10 years ago (2008), the government was faced with coming up with a rescue plan to deal with the global financial crisis which was seriously affecting Britain as well as the currency markets in America and other major nations’ currency markets. The required decisions were extremely time critical.
As a response, the government decided to authorise The Bank of England to issue digital money to purchase government bonds as loans for use to fund public borrowing by financial institutions.
The effect of this (which was well known at the time) would be to reduce the yields on such bonds owing to the increased demand for them. The secondary effect (which would also have been known at the time), was that we were going to have to accept permanently lower interest rates across all financial markets.
This would result in banks everywhere having access to more funds to lend but (and this is a big but), they would then need to lend more money in order to earn enough from the lower rates of interest able to be earned from it.
The scale of QE engaged upon following the crisis was huge and at unprecedented levels. Indeed such a course of action had never been tried to such a massive extent previously, even though it was deemed essential and the only plausible course to take.
Knowing that this was about to happen in the USA our government decided, along with The Bank of England, to follow suit.
The effect was going to be that suddenly, practically everyone in employment would start to have more borrowing ability and hence more purchasing power. This was intended to help the economy to recover and save it from diving into a full blown recession.
The policy however would, at the same time, adversely affect those with savings to the extent that the interest earned on all such savings would no longer keep pace with the erosion of the value of their savings both by the risk of inflation as well as the severely reduced interest rates expected to be obtainable.
What the government was perhaps understandably somewhat coy about however was, knowing the only way to counteract the resultant inflationary pressures following the severe dose of QE which was about to be prescribed, they would have to simultaneously engage in a severe program of austerity cuts. This they did with a determination that suggested their lives (or at least their appointments) depended upon it!
The unavoidable difficulty in doing this was that more substantial mortgages, to be available to those who could afford to borrow, would cause house prices themselves to increase very substantially. In some places house prices have actually increased by between 40 and 60% over the past five years alone because of these policies.
As wages were never going to be able to keep pace with such increases, those having to save for a deposit to buy a house were soon finding themselves unable to save enough fast enough to keep up with expected house price increases.
The result of this, as we can now clearly see, is that many hopeful first-time buyers have had to defer and in many cases completely give up the aspiration of ever becoming home owners in their own right. This is a tragedy for all of them and is now clear for everyone to see.
Owing to the resultant house price increases the direct effect of QE has been to cause a very significant slow-down in the numbers of houses being sold across all housing markets, certainly in England and Wales. Whilst this is true it has not been very well documented, perhaps for fairly obvious reasons.
A further side-effect is that estate agency is suffering significantly, since they generally get paid after the sales they have actually arranged are completed. Thus they are suffering a similar fate to other organisations more directly subject to the targeted austerity measures.
The true aftermath of the risky QE approach embarked upon is now becoming clear. We are destined to be stuck with very low interest rates for years to come and our house prices, like a mirage appearing to stay just out of reach of the thirsty, will remain similarly out of reach of a large proportion of future home-makers or home owners. There seems to be no easy alternative – now that we have been driven down this particular road for such a great distance and to a large extent, in our own ignorance.
There is however one way in which houses may be priced more competitively and market sales turnover thus restored. It is what is advocated by The House Price Virtuoso Solution which is explained more fully in the link below.
Implementing this solution would greatly help both the present and future affordability of all houses by improving open market conditions. This would allow the prices paid, to more closely match peoples’ ability to buy instead of having prices set based largely on the projected financial returns of house builders and developers – as generally happens at present.
The House Price Virtuoso Solution is a new and innovative way to make all housing markets across the land behave more in accordance with what local people can actually afford, by placing less reliance on vendors’ asking prices as being the primary price mark.
In the long run The House Price Virtuoso Solution, if implemented, would begin to restore confidence by enabling successful house purchasing across all areas, both within our towns and in our country.
I therefore strongly suggest that this proposal should receive detailed examination and I would encourage healthy debate in regard to it by all those with genuine knowledge in the housing sector.
To find out how such a significant market improvement could be achieved, please go to:
The House Price Virtuoso Solution: Full details of our proposals for properly reforming all housing markets in England and Wales.
Posted by: Peter Hendry, Housing Valuation Consultant