When a Home Becomes an Asset
In the United Kingdom, as in a number of other countries, housing is the largest nonfinancial asset class and became, over decades through the 20th century, integral to the economic prosperity of the country. In fact, one of the main reasons for the largest global economic downturns in history has been placed at the feet of voracious lending practices to would-be homeowners in the US (that resulted in the 2007-08 world financial crash in a market that parallels the UK one). This article takes a look at the seemingly unsolvable problem of the inflated housing market that has been in the existence in the UK since the late 20th century.
A Home Becomes a Property
It was largely the period of time between 1900 and 1939 that housing in the UK as a sector, and more specifically the perception of home ownership, went through a revolution. As quoted by Wikipedia (via Peter Scott’s “Marketing mass home-ownership and the creation of the modern working class consumer in inter-war Britain”), rates of home-ownership increased from around 15% in 1914 to 32% in 1938. By 1996, 67% of households owned their own property.
One might even consider that the very words have changed in that time. Where once a home was a home, it has now become a property since that term is far more akin to business and finance.
The concept of a mortgage as a long and grueling weight around the neck has been replaced with a more enlightened approach: it is a long-term investment in the future. The housing boom of that time was financed by savings placed into building societies by regular people. Things really took off in the 1920s when investments were piled into said societies. In turn, their available revenue for loans hugely increased and the UK housing market never looked back.
After War
In post-war Britain, the number of homes available was in a shortfall (the war both put a halt on the sector’s growth as well as destroyed many homes outright). The returning Conservative government in 1951 made a priority of addressing this.
By the 1980s, Margaret’s Thatcher added greater vigor to the sector by introducing a “Right to Buy” scheme. Overall, an unanticipated effect of the sporadic momentum of house building policies by the UK government in the decades between the 1950s and the 1980s however, resulted in restricted construction of new housing throughout the period and has had an impact into the present day (according to the Economic History Review).
Crisis Overseas, Crisis at Home
Over the longer term, the UK housing market - indeed the world housing market - has come to be considered a low-risk investment opportunity. Having said this, the price doesn’t always and predictably go up (as pointed out by Investopedia).
A poignant example of this is the global economic crash that occurred from 2007 through 2008 (also courtesy of Investopedia). There are a host of reasons why the crash occurred and they are still being debated to this day. Certainly though, and very much established by scholars and professionals alike, the predatory lending practices of financiers in the build-up were a key cause.
Various events and consequences of those events led to a situation in the US that set the stage for the crisis. Still reeling from the September 11 attacks in 2001, America had also suffered a series of corporate scandals. Consequently, the US Government’s Federal Reserve lowered the federal funds rate to 1% in June 2003.
The motive was to make money cheaply available to consumers and businesses alike and ultimately boost the economy. The US housing sector soon became a seller’s market since buyers were more readily able to take advantage of low mortgage rates. Thusly, even low-income earners were able to become what is known as subprime borrowers (of greater risk) to buy their own homes.
In an effort to create new financially awarding instruments out of the humble mortgage, Wall Street Banks bought up the loans, bundled them together in groups, and created what is known as mortgage-backed securities and collateralized debt obligations.
Default Momentum
The lowly risky borrower became inextricably linked to the high-flying Wall Street banker in this new industry (through various levels of complicated financials) and where one sector was sure to teeter and collapse, the other would be struck a devastating blow as a result.
Short-term high gains perpetuated the risk (as well as the Securities and Exchange Commission relaxing net capital requirements for five key investment banks in October 2004 which allowed them to treacherously leverage their own positions in the marketplace).
Predatory lending led to the US real estate market’s lowest end becoming bloated with mortgages that, once interest rates rose, could no longer be serviced. Defaults picked up momentum and eventually a domino effect inevitably occurred.
In time, and what with investment banks striking for bankruptcy or collapsing altogether, the problem burst the borders of the US and spilled onto the international market. Northern Rock in the UK was forced to make approaches to the Bank of England to assist with its liquidity problem. By February 2008, the UK Government was forced to nationalize the company. In September 2008, the largest bankruptcy in the history of the US occurred with the fall of Lehman Brothers.
Perception and Volume
According to This is Money (via Knight Frank) and shown in figure one, house prices in the UK are predicted to increase over the next five years. Historically, this is far from a surprise. The smallest accumulative increase is predicted in the southwest of England (over 10%) while the biggest increases are predicted to be in the East Midlands (nearly 15%). The increases in value are ominous for struggling first-time buyers despite the fact that 2023 is anticipated to be a lackluster year for the property market.
The data succinctly expresses the investment opportunity that the housing market has become. Across the entirety of the UK, and across the five years, the value of house prices is predicted to increase by nearly 14%. That also means that anyone saving for a house has to increase their savings by more than 14% in order to make any headway (especially if they have no idea where in the country they might want to live).
According to many professionals and policymakers, and the wider consensus, the problems with the housing market in the UK are primarily down to one thing; undersupply (as discussed by the UK Collaborative Center for Housing Evidence).
However, new thinking suspects this is not the case. New analyses of the data indicate the volume of housing has been sufficient to curtail the rising pressure on the price of houses (but which has risen by over 160% since 1996).
Largely speaking, ‘the number of houses has grown faster than the household count.’ So what is it then that has driven the increases in house value?
Well, changes tend to be determined by things such as market rents and the cost of money itself (or capital). House prices will tend to fluctuate in response to the movement of the main constituents of the overall cost of capital, such as mortgage interest rates, taxes, and the presumption of future price increases.
Nuance
Ever since the 1990s, mortgage rates have abated. Inflation-adjusted interest on fixed-rate mortgages (for five-year plans) has reduced from approximately 8% down to 2%. As these rates tend to be the main consideration for capital costs for prospective homeowners, this type of change can manifest as a material increase in the price of houses (parallel to the 160% increases seen since 1996).
The issue of affordable housing in the UK then is a much more nuanced issue. It is apparent that perception and market forces are responsible for the problems the sector faces today, rather than the supply vs demand dynamic that has been endlessly touted since the UK housing market entered its prolonged bubble in decades gone by.
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