Most of Britain's wealth trapped in houses as value of property stock quadruples in 20 years; UK sleepwalking into another housing bubble, 57% of nation’s wealth tied up in property
Tweet Topic Started: 16 Aug 2013, 02:13 PM (1,949 Views)
Total wealth in Britain stood at £7.3trillion in 2012, official figures show Around 57 per cent of the nation's wealth is wrapped up in homes Economists fear UK is sleepwalking into another housing market bubble
By Matt West PUBLISHED: 15:15 GMT, 15 August 2013
Britain was worth £7.3trillion last year official figures showed today but over half of the nation’s wealth is tied up in its property, which has quadrupled in value the past 20 years.
Around 57 per cent of the nation's wealth is wrapped up in homes, the Office for National Statistics found, totalling £4.4trillion at the end of last year - an increase of 4 per cent on a year earlier.
But the figures also highlight the scale of the property boom since the 1990s. The value of property in Britain today is four times what it was in 1992 when the UK's overall property wealth was £1.2trillion.
The figures will make worrying reading for those who fear Government efforts to bolster the property market, such as the year-old Funding for Lending scheme, are creating another housing bubble.
Earlier this week a poll of 29 economists by the news agency Reuters found 20 raise the fear that Britain is sleepwalking into another housing market bubble.
Seven economists believed there was a even chance of the property market overheating, while 11 described the risk as likely and two as very likely.
Business Secretary Vince Cable also recently raised his own concerns that the Government's Help to Buy scheme launched in April, which sees the Government providing an equity loan of up to 20 per cent of the value of a property up to £600,000, risked creating a housing bubble.
And some economists have urged the Government to consider scrapping the second stage of the Help to Buy scheme due to launch in January 2014, which could potentially see the Government acting as guarantor for £130billion worth of mortgages held by new homeowners.
‘Should the housing market gain substantial momentum over the coming months, the case for dropping the Help to Buy mortgage guarantee scheme... will strengthen,’ UK economist Howard Archer of IHS Global Insight said earlier this week..
The UK balance sheet figures come two days after official figures showed average house prices increased by 3.1 per cent in the year since August 2012 equivalent to a little over £10,000, while average property values in London increase by 8.1 per cent.
The ONS said the UK's net wealth edged up 1 per cent, or about £74billion on 2011, driven by a £225billion increase in the value of non-financial assets which range from houses and cars to cattle and fine art.
Most of the UK’s wealth was driven by the value of households and non-profit organisations such as churches, charities and trade unions.
That came in at a net £7.6 trillion, up 6 per cent or £410 billion on a year earlier, including savings and currency deposits which amounted to £1.3trillion. But Britain’s public sector debt and tax revenues were among factors that helped depress the overall figure pulling Britain’s overall wealth down to £7.3trillion.
But the value of financial assets and liabilities such as shares, deposits, gold bullion and loans fell by £150 billion.
Financial assets of £28.4trillion were outweighed by debts of £28.5trillion, the official figures showed. The UK's total worth has risen fairly consistently over the past 20 years, the ONS said, except for 2008 and 2009 when the financial crisis drove its value lower.
Its estimate of wealth per person was based on a 63.7million population in mid-2012.
The figures include effects of inflation, and are based on the ONS's estimates of what the assets would be worth on the open market. Home values are based on sale price estimates and are not adjusted for mortgage debt.
The UK's overall value more than trebled in the 25 years from 1987 to 2012, but the ONS said the gentle increase last year reflected subdued demand from the crisis-hit eurozone and a tough domestic economy.
More new cars on the road also drove up the value of transport equipment by 11 per cent to £208billion.
The ONS also added the value of personalised number plates - worth £2.3 billion - to the national balance sheet for the first time.
But Britain's ballooning public sector debt and slumping tax revenues depressed the combined value of central and local government. The whole government sector was worth minus £305billion at the end of 2012, worse than minus £271billion a year earlier.
The ONS said central government's total worth slumped 7 per cent on a year earlier to minus £830billion and is now worth almost five times less than it was in 2006.
However, local government saw a 4 per cent increase in value to £526billion.
Companies were worth minus £253billion at the end of 2012, a £220billion decline on a year earlier as liabilities increased more rapidly than assets. The value of financial corporations such as banks slumped by a nearly a third to £221billion.
House prices are rising at their fastest pace since they hit a peak in 2006, a new report from surveyors published today shows. Meanwhile the number of would-be buyers looking to enter the market last month saw the strongest growth in four years.
The RICS Residential Market Survey reports that in July the number of potential buyers looking to enter the market grew at its fastest rate since July 2009.
That sends a strong signal that a recovery is close, according to the surveyors’ organisation.
Peter Bolton King, Rics global residential director, said: “It looks like at long last a recovery could be around the corner.”
The latest figures show that the recovery is not just restricted to the wealthy areas. While the market slipped backwards and remained depressed in most parts of the country, activity has been picking up in London and the South East. But, according to RICS, the market re-invigoration is now starting to manifest itself in the rest of the UK too.
“Growth in buyer numbers and prices have been happening in some parts of the country since the beginning of the year but this is the first time that everywhere has experienced some improvement,” said Mr Bolton King.
“It is clearly good news that those parts of the property market that were struggling are at last showing some signs of life.”
In fact West Midlands and the North East – areas which have suffered more than most since the market crash – experienced the biggest increases in buyer activity in July, the survey shows.
Looking ahead, surveyors predict that prices across the country are going to continue to rise further, with a net balance of 35 per cent more of them predicting increases. Meanwhile, transaction levels are also expected to grow, as 53 per cent more surveyors expect sales to rise rather than fall over the next three months.
Trojan and I debated the issue of wealth being tied up in property not long ago.
Apparently, it doesn't matter how high prices are, and how much debt someone has to get into, to buy a house, because on the other sides of the trade is someone selling.
The logical conclusion of this argument is that it doesn't matter how high prices go, because all the money gets recycled into the economy anyway.
I totally disagree with this view btw. Most of the wealth will be ploughed back into buying a more expensive house by the vendor.
But I would be interested in hearing the bulls make the argument in relation to this piece.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
Implicit (but not explicitly stated) in the statement that 57% of the nations wealth is "trapped" in housing seems to be the suggestion that if the housing wealth were lower then wealth elsewhere would be higher.
I can see no logical or evidential reason why this would be so. We have examples of a few countries which have seen a loss of housing wealth but I'm not aware that any of these experienced a matching rise in wealth in other things.
The article speaks "the nations wealth" but I suspect they are referring to household wealth only and it is this measure of which housing counts for 57%. The actual nations wealth includes all its government/Crown owned wealth which includes most roads, government land, defence systems, government buildings, the BBC, etc etc.
Household wealth or individual wealth consists mostly of things like bank deposits, cash, shares, bonds and pension funds, cars, in addition to houses. Do people really imagine that the value of these other things would increase if houses were worth less?
My own view is that a reduction of the value of houses results in an undesirable loss of net household wealth.
Apparently, it doesn't matter how high prices are, and how much debt someone has to get into, to buy a house, because on the other sides of the trade is someone selling.
The logical conclusion of this argument is that it doesn't matter how high prices go, because all the money gets recycled into the economy anyway.
Not true. The debt has to be serviced, and even at zero interest rates repayments have to be made.
Other than that income earned by a woman is no longer rated at zero, nothing significant has changed in 40 years in the way banks calculate whether you can service the debt or not. (I am happy to be corrected on this by people who have a better grasp on bank serviceability calculations than I)
Maybe if banks were offering 100-year loans.....
Trojan is however correct to state that the capital "tied up" in a house is the amount that it originally cost to build the house, expressed in today's dollars. Any price appreciation (or depreciation) after that does not change the amount of capital tied up in the house. That's financial accounting 101, but it does seem to be beyond the comprehension of your average financial journalist.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
By Brenda Goh LONDON | Fri Aug 16, 2013 8:56am EDT
(Reuters) - When the British housing market finally showed signs of life earlier this year, Stephen Stone's company tried to order concrete building blocks for a new homes project, only to find he would have to wait months and import them from Germany.
The experience of Stone, chief executive of housebuilder Crest Nicholson (CRST.L), typifies the industry's difficulties in responding rapidly to government pressure for more new homes to ease a shortage and help a weak economy.
"Imagine if you haven't got raw materials like bricks and blocks and you're waiting for three months to get them. It's a problem," Stone said.
Bricks and blocks aren't the only problem for a sector that shrank sharply to survive the property downturn after the 2008 financial crisis. It now faces rising costs, and financing conditions remain tough, on top of long-standing difficulties in getting projects approved under Britain's strict planning rules.
With housebuilding at its lowest in about 90 years, finance minister George Osborne has launched the first part of a scheme to lend and guarantee billions of pounds in mortgages, aiming to help Britons buy newly built homes with relatively small deposits.
But the chances of his "Help to Buy" scheme drawing a rapid response are slim, due largely to the shrunken state of an industry that had relied heavily on foreign workers, many of whom left Britain during the downturn because of a lack of jobs.
Britain is therefore unlikely to achieve anything near the 250,000 homes needed each year to keep up with a growing population, and critics fear this shortfall means Osborne's scheme will fuel house prices rather than house building.
"The government hopes that we can turn the tap on right away but it doesn't happen that way," Stone told Reuters. "It'll take at least four to six months for the supply chain to respond. The construction industry is 50 percent of what it was. The overseas workers have all gone home."
The government declined to comment on its expectations for the industry.
Housebuilding in Britain has fallen to levels not seen since the 1920s, according to property consultancy Savills (SVS.L), after the largest housebuilders, such as Persimmon (PSN.L) and Taylor Wimpey (TW.L), retrenched during the downturn to concentrate on raising profit margins rather than their sales.
Private housebuilders completed 88,000 homes last year, well below an annual average of 115,000 over the past four years, Savills said.
The country's 10 biggest housebuilders, such as Barratt Developments (BDEV.L), which construct about two thirds of new homes, have not committed themselves to firm completion targets. However, some say they are aiming to sell 20-30 percent more homes annually in the next few years.
Osborne and his department, the Treasury, have also not said how many more homes they want built under the scheme. Its second phase, in which the government will guarantee loans for people buying second-hand homes, will start in January.
"There are a lot of other obstacles that the government is not only not overcoming but in some respects is making worse," said Roger Humber, strategic policy adviser to lobby group House Builders Association.
LONG WAITING TIMES
Stone's lengthy wait shows how building materials makers, such as Wienerberger (WBSV.VI), Michelmersh (MBH.L) and HeidelbergCement's (HEIG.DE) UK arm Hanson, also retrenched in Britain and continental Europe. Such suppliers have shut 19 plants in the last five years as brick production halved due to the waning demand.
About 358,000 workers have left the British construction industry, a 15 percent drop since 2008, government data showed. Many building materials makers are now adding shifts and hiring workers, but say a sharp rise in production will take months.
"Our customers are going to have to be patient," said David Weeks, spokesman for Hanson, which plans to reopen a mothballed factory in Cloughton, northern England, by the end of the year.
"We've been through some severe pain in the last five years; our workforce has reduced by half to about 4,000 today, and we've lost probably 45 percent of our production volumes."
On top of this, builders say it can take up to two years to start work on sites due to delays in gaining planning permission. The government has tried to speed this up by giving local authorities more decision-making powers.
"There has been a slight improvement. The accent is on that 'slight'," said Taylor Wimpey's (TW.L) CEO Pete Redfern.
Overall planning permissions are running at about 140,000 houses a year, slightly above the 100-110,000 mark it was at previously, but nowhere near the 200-250,000 homes that the industry should probably be building, he said.
PRESSURE ON SMALL PLAYERS
Small and medium-sized housebuilders, which account for about a third of new houses, also have problems in persuading banks to finance their projects. Net bank lending to construction firms has fallen by between 4 and more than 10 percent every quarter for four years, Bank of England data show.
A Federation of Master Builders survey found 90 percent of 1,000 building firms questioned in late 2012 said raising finance was as difficult as two years ago, or even harder.
"The number of small housebuilders who are actually active at the moment is definitely falling. Some will never start again. Others want to - they want to get land and so on - but they just can't get the credit from the banks," said Humber.
Building costs are also expected to be pushed up by new regulations, with local councils to charge housebuilders fees to help finance items such as roads and a government push for a net-zero carbon emissions standard for all new homes by 2016.
With such challenges, some have questioned whether the industry has the capacity or even willingness to aim for the 250,000 home target outlined in a 2004 government-backed review of the housing market.
Britain experienced housebuilding of over 200,000 a year in the 1950s to late 1970s, bolstered by government efforts to create public housing, data from Knight Frank showed. Private housing completions reached a high of 203,320 in 1968.
"250,000 is a figment of everyone's imagination," said Martin Warner, chief executive of brickmaker Michelmersh. "We're miles off that."
(Reporting by Brenda Goh, Editing by Kate Holton and David Stamp)
There’s been no shortage of headlines warning the UK faces another runaway rise in house prices, brought on by government incentives to boost home-buying.
Economists polled by Reuters this week were clear there is a real risk of that happening.
But warnings of a “new” housing bubble may be off the mark, says Danny Gabay, director of Fathom Financial Consulting.
“I don’t think that phrase (new housing bubble) is very helpful. If I was a civilian rather than a pointy-head, I would get quite exasperated with the media – they’re either in permanent bust or boom. There’s no middle state.
So we’re not concerned about a new housing bubble, we’re concerned about the fact we never worked off the last one before they began to re-inflate it.
I’m not pathologically opposed to house prices being positive, I don’t run down Oxford Street with a sandwich board saying “My God! House prices could be up 5 percent this year!” That’s not the point.
The point is that they trebled between 1997 and 2007. They then experienced a significant fall until the Bank of England and the Treasury’s connivance stopped the process, and then, like Wile E. Coyote in the Roadrunner cartoons, have remained suspended in thin air held aloft by quantitative easing.
We’re in the process of working off the debt that we’ve accumulated on the back of house prices, and they’ve stopped that. And in fact they’ve stopped that to the extent of encouraging and subsidising – directly using taxpayers’ money – people to take on even more (debt), against exactly the same asset.
We’ve stopped any attempt at any of the repair work that is essential for this economy to be able to heal properly.
Mortgages are now more affordable than any other time since 1999, however record-low rates are unlikely to last.
By Nicole Blackmore 17 Aug 2013
Home loan repayments have fallen to levels of affordability not seen since 1999, according to a study by Britain’s biggest mortgage lender.
The improvement, driven by new lows for mortgage rates, has tempted thousands of first-time buyers to tentatively step on to the property ladder.
However, experts have urged caution amid signs that rates on new mortgages may be about to head higher.
The Halifax Affordability Review shows mortgage payments accounted for 27pc of a new borrower’s disposable income between April and June this year, down from a peak of 48pc of income in the third quarter of 2007.
The bank said there have been significant improvements in affordability in all local authority districts across the UK since 2007.
However, mortgage brokers are warning that rates on new deals may have already bottomed out following sharp rises in borrowing costs on the markets that provide credit to lenders. Traders appear to be sceptical about the commitment to low rates made by Bank of England Governor Mark Carney.
Improved affordability and the Bank’s promise of low rates until 2016 appears to be supporting demand with a sharp rise in the number of first-time buyers. Figures from the Council of Mortgage Lenders showed this week that 25,300 loans were advanced to first-time buyers in June, up 30pc on a year earlier. Lending to first-time buyers is at its highest level since 2007.
But sharp increases in the cost of borrowing could leave some buyers struggling with repayments and put house prices under pressure.
Jason Witcombe, a financial planner at Evolve Financial Planners, said: "The inevitable rise of interest rates is a real problem waiting to happen. A lot of people are on the cusp of being unable to afford their mortgage repayments and it won't take much to push them over the edge."
The Halifax study showed a clear north-south divide, with mortgage payments at their lowest as a proportion of earnings in Northern Ireland, where new borrowers paid an average of 17pc of income. In Scotland new borrowers paid 19pc, in Yorkshire and the Humber the proportion was 22pc and 23pc in the North West.
Payments are highest in relation to earnings in Greater London, where borrowers paid 36pc of their income towards their mortgage. Borrowers in the South East paid 34pc and in the South West the figure was 32pc.
Halifax said lower house prices, although values have recovered from their 2008 lows, and reduced mortgage rates have been the main drivers behind the improvement in affordability.
Craig McKinlay, mortgage director at Halifax, said: "The favourable mortgage affordability position is a boost for both those who already have a mortgage and those who are able to raise the required deposit to buy a home. Improved mortgage affordability has been a key factor supporting housing demand and is helping to stimulate the modest recovery that we are currently seeing.”
Lenders have busily cut mortgage rates this year, helped by the launch of the Funding for Lending Scheme (FLS) a year ago, which has given them access to cheap credit. Competition among lenders for customers has been fierce, particularly in the two and five-year fixed rate space with the lowest rates, offered by West Bromwich and HSBC, now below 1.5pc.
However, some commentators have warned Government intervention from the FLS and also the Help to Buy scheme, which will guarantee billions of pounds-worth of mortgages, could be creating a fresh bubble in the housing market by giving more people access to credit they otherwise would not be able to afford.
Last week, Mr Carney said monetary policy would be tied to unemployment and indicated that the Bank Rate would therefore stay at 0.5pc until 2016. One of the aims was to encourage lenders to offer more low-rate mortgages.
However, inter-bank borrowing markets have been pricing in a greater chance of a rate rise. Swaps have risen sharply in recent weeks.
Brokers are now warning mortgage rates are likely to rise in response and are urging borrowers to lock-in today’s low fixed-rate deals.
Ray Boulger of John Charcol said: "I can see no point in borrowers waiting for rates to fall further. Swap rates are rising and Mark Carney's attempt to engineer low rates over the medium term has clearly failed. There is no indication mortgage rates are going to suddenly shoot up, but they certainly will rise."
Mr Boulger said borrowers should consider fixing their mortgage repayments over the longer-term so they don’t struggle to meet their repayments when rates rise.
Mr Boulger added: "If rates go up slowly it won’t be too difficult for borrowers to adjust. However, if they rise quickly some borrowers will be hit hard, particularly those on short-term deals. The more people that take out longer term fixes the better, as they will be more insulated from rate rises."
We’ve just drawn up an interesting map showing the distribution of housing wealth in Britain. As can be seen below, according to our calculations, about 27% of Britain’s gross housing wealth is contained in London.
This is followed by the South East, where 17% of Britain’s gross housing wealth is held. In total, over half of Britain’s housing wealth is in the south of the country (London 27%, South East 17% and South West 9%).
Gross housing wealth is calculated by multiplying the average number of dwellings in each area by average house prices.
As such, in the North – where average house prices are much lower and the total number of dwellings less – gross housing wealth forms a smaller percentage of the total. However, as house prices continue to rise around the country these ratios will change.
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