house prices – finance grabs punters by the balls with the invisible hand of the free market

Housing is the third rail of British investment classes, and I don’t usually go there for the simple reason that I don’t invest in it.

However, I never really spent much time working out exactly why this asset class is so heady and dangerous. I spent a lot of time looking in the rear-view mirrror working out how it hurt me, examining how, after 20 years of actually paying down the mortgage I had just about broken even relative to the estimated cost of renting, and how terribly front-loaded the risk was – I got away with it because I stayed in the same job for 24 years and bought that house six months into that job.

Even Monevator declared the asset class overvalued and he’s not a fellow who likes to let on that crystal balls have their place at very rare times 🙂 Although I am still chortling about this –

by the 1980s they could begin amassing the property wealth they have today – aided enormously by the right-to-buy and buy-to-let booms that the current Government is only just applying the brakes to.

Not me, mate, I took the sucker punch here and I’ve read the early 1990s news reports that predate the Web where 3 million of my compatriots were in negative equity. The specifically housing part of my networth is probably less than a tenth of the total, and I own half the equity in the house outright (Mrs Ermine owns the other half, not a bank 🙂 ). I do own land elsewhere that roughly doubles that, arguably my property asset class worth is about a suburban semi . Before Londoners start to spit bricks and think the Ermine is on the Sunday Times Rich List, remember that house prices in the provinces are much lower than in London.

As an aside, I’m intrigued by the result of 80 years of peace in Europe leading to the nonchalance of

it could eventually be the country I live in. The gulf between what you can buy in the UK and in the great livable cities of Europe is staggering.

The ermine is a jittery fellow, and even if we discount Brexit, I hear the distant drumbeats of serious social unrest in Europe. Sometimes it takes an outsider to clarify the matter

At different times and for different reasons, all of the large European states—the United Kingdom, France, Italy, Germany—have blocked attempts to create a common foreign and defense policy, and as a result they have no diplomatic or political clout.

They haven’t wanted European leadership, and most of them wouldn’t have wanted American leadership either, even if any had been on offer. The richest economy in the world has a power vacuum at its heart and no army. Now the consequences are literally washing up on Europe’s shores.

But that’s not the point of this post. It is the discovery of the cogent rant linked to here in the comments of Monevator’s Yes, we do have a house price problem article. Unfortunately it’s far too long, so my service here is to summarise some of the observations in a post that is too long but a hundredth of the size:

In an industrial consumer society, shelter is the one basic Maslow need most people buy on credit

1402_Maslow's_Hierarchy_of_Needs.svgTake a look at the bottom two layers, which are basic and fundamental needs. Most of us don’t buy food on credit – cash is king here, from income. If you do buy love you probably use cash too 😉 Unlike in the US, healthcare is free in the UK. Although I am sure that there are many who would like to try, we don’t currently charge for air, and most people pay for water as they go along too.

Unfortunately there’s one big item that addresses homeostasis, sleep, security of body etc, and that is shelter from the rain and other hazards, in short, housing. A hairless mammal in a Northern European climate needs a home. The vast majority of people, on leaving the parental home, are not rich enough to buy a house outright. They need to borrow most of the price.

The free market fails dismally where everyone buys an essential product with credit

If I want to buy a pound of apples, or a car, markets work well, because what is called market substitution happens if suppliers price-gouge. I switch to oranges if apples are too dear, I use public transport or a bicycle if cars are too dear. In this way the balance of power is matched – if the buyers are too tight the product is withdrawn from sale because producers don’t find it worth their while, if the producers want all the money the buyers disappear. Adam Smith’s Invisible Hand does its job well when everybody can walk away and do without. When you can’t, the Invisible Hand grabs you by the balls and your heart usually follows. Nowhere is this clearer than with housing.

Where the essential good is being sold on credit, the price is simply determined by the amount of credit the buyers can muster. I was able to drastically and stupidly overpay for a two-up-two-down in 1989 because I had a decent job, with good prospects so I could correctly use a low-start mortgage, and was able to borrow £15,000 at true 0% interest-free credit on an MBNA credit card – and pay all that back in a year from a combination of savings, selling stuff and earnings. Lucky me for being able to raise that much capital to misallocate, eh? So the price rises to match the amount of credit that people can raise. I am ashamed to say that I was well through half my mortgage term before this obvious fact finally dawned on me. This is why all Government intervention on the demand side to make buying more affordable, ie Right To Buy – underpricing sales to selected buyers,[^1] Help To Buy – underwriting the risk of default to lenders meaning they can lend more for the same risk, end up in higher house prices. House prices aren’t particularly determined by the component costs plus labour, they are determined by buyers’ ability to get credit. Where do you get credit from? Britain’s mahoosive financial industry, natch. How does this industry make money? Lending money to people. How does it make more profit – by lending more money.

[^1]: who then arbitrage the difference

Interest-Only mortgages were a wheeze to write more mortgage finance

I had an IO mortgage in 1989, but the mortgage company would damned well not let me out of the room without arranging an endowment and they took a primary charge (ie first call on the money)  over it, I couldn’t just quietly drop it and wing it to save money. I switched to part repayment on moving in 1997 I think, but the charge was still there on the endowment backing the IO. And I had to write to them and ask them to release the charge before I could pay off that part of the mortgage, with the proceeds of a mis-selling claim on the endowment[^2]

[^2]:I gather most people took this as a windfall and treated the kids on a blow-out holiday.

In the end mortgage companies wised up. They want to write as much mortgage book as they could, and servicing that pesky endowment or ISA mortgage tediously reduces the borrower’s ability to pay interest. Over 25 years house prices will never fall in nominal terms so just cut out the middleman – take the charge on the house, run IO and if the borrower can’t repay the much eroded capital sum then tough luck, at least they had a break from the tender ministrations of Britain’s amateur landlords for a quarter of a century.

The regulator woke up from its Rip Van Winkle slumber in 2014 with the Mortgage Market Review(MMR). Presumably some civil servant noted the the impending doom of all these people who will become homeless just as they stop working and decided the social security budget wasn’t ready for that. Apparently BTL wasn’t covered by the MMR. As a result BTLers can carry on IO, which puts them at a massive advantage relative to putative owner-occupiers. Over a 25 year term you roughly pay three times the sticker price for a house at typical long-run British interest rates, but because inflation erodes some of that it roughly works out to twice the sticker price in real terms. Obviously, if you don’t have to find the capital you are up on the fellow who does, and can outbid the sucker and leave him for dust 😉

The promotion of BTL was a wheeze to write more mortgage finance

To a first approximation Britain’s stock of housing per capita is static or falling behind. Given that, simple arithmetic shows that if you are Britain’s banking sector and want to increase the size of your mortgage book so you can make more money in real terms, the average price of housing has to go up in real terms. That’s particularly important in a time of historically low interest rates. [^3]

[^3]: When I bought that house in 1989 I think a lender would lend you 2.5 times the man’s salary and 2 items the woman’s (‘cos she was going to go and have kids, don’t shoot me, I am the reporter here) or 3.5 times a single person’s salary. The deposit didn’t particularly matter then, I was able to drum up a 20% deposit by adding savings – I was 29. As a result I could buy a house 3.5 * 100/80 = 4.3 times my salary, well done me, eh?

The trouble is, that rising house prices eventually choke off first-time buyers somewhere around the 5 to 6 times household income mark, because they are early in their working lives and  so their salaries are lower. What the banks wanted was a pool of buyers who had more money, because those damned FTB dudes were too poor after a few years of rising prices to feed  the banks need to make money.

What about people like Connie, eh? Offer her interest-only, so she can beat out those bottom-end first-time buyers. Conveniently these guys can provide the warm bodies to occupy those houses and pay the mortgage, since Connie can offset the mortgage interest against tax, which they can’t [^4] Since banks have been ramping prices for a long time by inflating credit, Connie gets to believe that it is a deep law of economics that house prices always rise in real terms, so she is perfectly happy to borrow shitloads of money and ignore the BTL rules as she chases the pound signs. I would imagine UTMT, who works in finance, earns a bit more than Connie who is a teacher, and yet UTMT is clearly short of ambition as he has only three BTL properties as opposed to her five. Or just maybe he understands risk better than she does, let’s face it, that is what he does 9 to 5 😉

[^4]: this used to be possible – MIRAS was axed 15 years ago when the government of the day realised all it did was pump up house prices

I have no idea of who this woman is, someone on the telly, it seems
I have no idea of who this woman is, someone on the telly, it seems

It’s a perfectly reasonable thing to do, buying something on margin that always goes up in real terms. Let’s hear it from Sarah Willingham, who many of you will recognise from the telly. She espouses many of the underlying beliefs about ‘property investment’

Earlier in my career, before I had children, I had always gone very close to the wire when it came to risk… but now I would never risk the security of my family.

Do you have a personal pension or long-term financial strategy?

I have a small pension. My property portfolio and business investments are the main focus.

Do you invest in stocks and shares?

We invest in businesses that we have become involved in. I have trust funds for the kids, but our proper investments are property and businesses. I prefer stocks and shares Isas.

Now if you want to get rich, run a successful business. If you think you will get rich through investing alone, you are very seriously on the wrong track. Running a business adding value to other humans’ lives in some way is what people will pay you handsomely for, and it appear this Willingham woman has some of these skillz. So it’s perfectly possible that she is a property landlord in the true sense of the word, ie she owns the properties, as opposed to being a self-employed worker for a bank whose capital she is using on margin. The sentiments, however, are widespread.

The banks solved two problems with BTL. One is increasing size of the mortgage book and the other was to eliminate the tedious limitation of needing first time buyers on the input side of the housing ladder. Employ a BTL ‘landlord’ to rent the house out to what would otherwise be a first time buyer. You can get more money out of the FTBer for a given house that way.

This house price misery is being caused by the needs of banks to increase the lending pool

We’ve already had one financial crash largely caused by excessive risk-taking on residential property – American res property. In Britain our banks are smarter in that all home loans are written with recourse, whereas in America you can walk away from negative equity with the quaint practice of jingle mail.. I personally hope all BTL loans are written with recourse on the BTL investor’s main residence too, but I’m just mean that way. It’s a common requirement for small biz loans to take a charge on the business owner’s property, because Chuck Colson was right.

Once you have them by the balls, their hearts and minds will follow

so obviously if this is a real business, similar terms will apply to raising finance…

Why did previous generations not have this hurt?

tl;dr – it’s largely Margaret Thatcher’s fault

First, some history. Once upon a time in living memory, Britain had a flourishing manufacturing industry and we used to make things, this lasted up until the 1960s. Far more people were employed in making stuff – this however did have a corollary, in that life was hard, and people were bitterly poor. Cars and television sets were expensive and unreliable. Britain had fought two world wars and was in the process of losing an empire, because the falcon could no longer hear the falconer and the centre was unable to hold, though those colonial upstarts of the US of A also gently put the boot in because they quite fancied the crown, and indeed got it – symbolically the Suez crisis was the passing of the baton from the Old World to the New.

This decline had its denouement in the 1970s, when after having made an unholy mess of the retreat from Empire in Palestine there was the little issue of unfinished business in the Middle East, where it so happened most of the easily winnable oil was to be found. In 1973 the Arabs decided they would try and catch the Israelis napping on the religious festival of Yom Kippur. Israel persuaded the Americans to airlift them military supplies and then used these to beat the shit out of the opposition, in particular to seize the Sinai desert from Egypt.

The American military airlift to Israel, moreover, had led Arab oil producers to embargo oil shipments to the United States and some Western European countries, causing international economic upheaval.

US Dept of State, Office of the Historian

All modern economic growth is driven by excess energy being transformed into Stuff and Services that people can be made to like, and the Arabs controlled the supply of the black stuff that powers the modern world still now. As a result of the embargo, the economy of the West was smashed, and in the turmoil the collection of rules of thumb known as the post-war consensus were destroyed. Britain suffered stupendous inflation, and the trade unions ran amok, destroying both the Conservative Heath administration and the following Labour administration. We had the three day week, rubbish piled up in the streets, and a jumped-up piece of scum called Arthur Scargill charged around the country with his heavies like he ran the bloody place. Which he did – not only could he choke off the supply of coal which was used to generate electrical power, giving us the three-day-week, but he also got his hired goons to charge around the country to stop other people going to work using heavies – flying pickets. The apotheosis of his tactics where when a couple of striking miners dropped a concrete block from a footbridge over the A465 highway onto a taxi carrying a strikebreaker, killing the taxi driver. It’s virtually impossible for anyone under 40 in this country to comprehend just how stupendously powerful the trade unions used to be. What they said went, and they knew it. Londoners get a faint taste of it every so often when the RMT stop the trains. It appears that the RMT prevents LU looking for candidates to drive underground trains on the open market, despite that fact that you can train a spotty youth to drive a tube train in six months. Apparently it is essential to have been a grunt in the ticket office first.

The Ermine measures slightly left of centre on the political compass, but I loathe trade unions and their rabble rousers with a vengeance because I have lived in the country when these guys ran it and gave us 26% annual inflation, and I don’t ever, ever, want to see that again.

Into the eye of this storm came an apparent saviour

1509_margaret-thatcherAs soon as he was able to vote the young Ermine voted for her (but never again) and faced with the same circumstances I would happily do so again. Not because what she offered was good, but it was a lot less bad than having Art running the joint. Should I outlive him and come across his gravestone at some point I would be quite happy to make a detour and piss on it; I have a deep and existential hatred for Arthur Scargill and everything that he stands for. Although I took the shaft from Thatcher in the housing area and was unlucky enough to graduate into the first of her three recessions, she changed for the better a good number of things that seriously needed changing in Britain; breaking the power of the unions was one of them.

What was so good about the postwar consensus for housing

It recognised that many people are too poor to own their own home, and built council housing for them. This was not an unalloyed success,  but compared to the poor living at the mercy of a BTL landlord on a six month assured shorthold tenancy they got a lot right. Council houses weren’t just for the poor in the 1970s, although there were many sink estates. Half the kids at my SE London grammar school lived in council houses. South London and in particular south-east London has always been the wrong side of the tracks, but many of these council house tenants were white-collar parents with soft hands.

Coincidentally, until 1971 there was the Bretton Woods agreement that attempted to keep the currencies of the industrial nations fixed in a band relative to each other. One of the ways governments did of that was regulate credit and foreign exchange – you could only take so much currency out of the country on holiday. Credit was tightly controlled – both consumer credit – there were few credit cards, but also mortgage loans were made by building societies – I believe banks were not permitted to advance loans for buying a house in the 1970s. Building societies took the money from savers and lent it to people buying a home. This naturally limits the amount of mortgage credit available; try and lend too much and you run out of savers.

Thatcher laid the foundations for house price inflation in all these ways:

Let us count the many ways Thatcher truly f*cked up the UK housing market. Other people added to the mess, but Thatcher poured most of the foundation concrete.

1- Right to Buy, 1980

She introduced Right To Buy. I can see absolutely no good societal reason for RTB whatsoever – the concept still incenses me. If you’re rich enough to buy your own house then go right out there on the open market and buy one FFS, knock yourself out. Why do you deserve a free bung from me and other taxpayers which would be better spent on some other poor sod who can’t take the risk? RTB at a single stroke smashed half the house building in this country because councils weren’t permitted to plough back the revenue into building more council houses, presumably this saving subsidised Thatcher’s purchase of votes through RTB from people who would normally have been too poor to vote Tory 🙂

post-war housebuilding
post-war housebuilding

Not only that, but in 1989 I was fighting more people in the owner-occupier housing market – my own taxes were being used to shaft me, because houses were being taken out of the social housing arena and not getting replaced. Diehard Thatcherites always boil my head on this saying that sold council house still holds a family, so no net loss, which is absolutely true, but the second half of the problem is councils stopped building houses in the UK – look at what happened to the orange line and just STFU guys!

2 – Relaxing credit controls

Thatcher herself admired prudence, so I am told, so this was a backfire. I can do no better summary than pinch this from Stumbling and Mumbling

her relaxation of credit controls in the early 80s had a bigger economic impact than she intended. She envisaged these as a step towards economic freedom. But they were more than that. They permitted a consumer-driven society and economy. This was not her intention. As the Heresiarch rightly emphasises, her vision of Britain was of a property-owning democracy of savers with moral restraint. She got indebted spendthrifts. She wanted the British people to be like her father, but they turned out more like her son.

If you want to know why getting to FI is hard in a consumer society, well, you know know who to blame for making all the credit available. Hopefully in her next life, Thatcher will be a clerk in a Money Shop as penance. Your house is the biggest consumer good you buy…

3 – ending the building societies’ monopoly on home loans

Monopolies are a bad thing, right? It was tough to get a mortgage in the 1960s and 70s – I recall my Dad putting on a suit (he was a fitter, so it looked odd) in supplication to borrow £500 in the 1960s.

in the 1970s building societies operated a kind of ‘cartel’ where their national association met periodically to ‘recommend’ the interest rates to be paid on savings and charged on mortgages. Although it stopped just short of outright price fixing, compliance with these recommendations was pretty much universal. It’s supposed that the main reason this was tolerated by the government was because it helped keep a lid on the mortgage rate while so much else was spiralling out of control.

Ain’t the free market a wonderful thing, eh, giving us the cornucopia of joy and delight that is the modern housing market in the UK? I love the pragmatism of those postwar governments, sometimes you have to look the other way because the results of purist thinking can lead to a rapacious evil stalking the land 😉 Just think of the upside though – you can probably get a mortgage even going in in ripped jeans and a T shirt. Progress indeed, even if you can never earn enough in a working life to pay off the loan. It’s one of those funny things about free markets. People are always at pains to tell you about the things they have improved – we have a better telephone service, electricity is cheaper and more available than it was under Art, we got consumer goods coming out of our ears and British homes are better insulated. And people live longer. All of this is good, and fantastic.

On the debit side of the equation is the social cohesion of our societies has been shattered because everybody has to move to chase increasingly precarious work, ever fewer Britons can afford to buy those damned homes and the gamification of modern life pits us all against each other in a dog-eat-dog world. Maybe the watchword is balance, here, between the winner-takes-all of free-market fundamentalism and the paternalism of the postwar consensus built from an era when Britons collectively withstood overwhelming odds.

Thatcher laid the foundations for a borked housing market, Others were merely accessories to the crime

Other people also did their bit. F’rinstance, the peculiar piece of f*ckwittery that pole-axed the neophyte Ermine was the 1988 Lawson Budget that announced that he would be making the £30,000 MIRAS limit apply to a house, not per borrower. Being the gentleman that he was, Nigel Lawson gave the market notice, that this would happen in August.

A stupid Ermine, having arrived in a new town being spat out of London where I couldn’t buy, started looking in this market, and projected the same London shadows against the cave wall in the flickering swansong, along with every other stupid prick who shouldn’t have been licensed to drive a ten pound note, never mind permitted to pledge 25 years of mortgage payments. And at least the others were couples who had an extra £30k of MIRAS to defray against the overpayment, which at an income tax rate of 25% was worth a decent £7500 a year. Here’s a report of those times, with the benefit of a decade of hindsight –

As 1988 began, the property market looked – to use a phrase from that era – unassailable. The year started with the average London house worth pounds 81,452, up an astonishing 50 per cent on the figure just two years earlier. Buying property looked like a sure way to make money. Many young people, fearing it might have been their last chance to get on the property ladder, clubbed their wages together and borrowed to the hilt. Lenders, desperate to maintain their market share, fell over themselves to accept business they would not even consider today.

Ian Darby, of independent mortgage advisers John Charcol, says: “It was an extraordinary period. House prices were steaming ahead and the only way it was affordable to buy for a lot of people was to join up as couples or join with friends.

“What it did was draw a lot of people into the market who weren’t ready for home ownership. There were a lot of people with no savings and no history of affording large debt repayments. At that time you could have sold mortgages with a sandwich board on your back.”

It is, of course, different this time. Oh yes it is. It’s always different this time. Until it’s not. Then it’s the SOSDD. We’ve seen this movie before. But I hadn’t, so I bought into the single fastest annual rise in house prices in my entire adult life. Well done me, eh? There’s no point in making colossal mistakes if you don’t learn from the blighters, though. History may not repeat, but it does rhyme, and now feels like a refrain of 1988…

Let’s take a look at some of the accessories to the crime

Some nasty sorts point the finger at immigration. Sad fact is that Britain seems to need immigration to keep the wheels of industry running, since we love our children so much we don’t have the balls to tell them when they are going wrong, since everybody’s a winner and needs their self-esteem boosted.

A now economically worthless document because my human capital is worth jack shit in the marketplace. One line stands out ;)
Norm/cohort referencing tells you I was in the upper 10% of the peer-group ability range for a few things, though a f*wit in Eng Lit. The modern equivalent holds no such truth – the upper 10% still exists, but you can’t identify it this way.

As a result our companies look elsewhere. Bring back norm referencing, eh? If you look at the Table 3 of this ONS doc net migration is about 243,000 p.a. over the last ten years, roughly comparable to the result of people having the temerity to live longer than they used to1 at 210,000. As evidence I cite this. London is a very successful city by all accounts. You only have to get off the train and open your ears to observe that maybe some of the residents drumming up this economic success weren’t educated in Britain’s schools.


It’s a symptom, not a cause. Just like haters gonna hate, lenders gonna lend. The beauty about housing from their point of view is that while it’s possible to stop buying consumer shit, living in a bender in the woods or living in a car gets really old really fast. I haven’t tried the bender, but the car gets tough in days, not decades 🙂 BTL is the way to keep a load on the lending machine so it doesn’t rev up and spin out of control, like the American version did in 2007-9. As we all know, that ended so well. That’s. of. course. not. going. to. happen. here. Rrrrright….

BTL is popular because it’s lucrative – Britain’s army of 1.6million BTL landlords have collectively outperformed Warren Buffet with an annual return of 16% But remember this is still a highly leveraged market. Any leveraged asset carries a latent risk of a turkey distribution.


It’s very easy for a novice investor to focus on return on investment (ROI) and indeed BTL is the dog’s bollocks it seems, 16% beats the 5% average TR on equities into a cocked hat. Old stagers, however, have usually learned through bitter experience that return of investment also matters. The jury is out on the true total return of leveraged BTL since the first BTL mortgages appeared in 1996 because the BTLers are still subject to margin calls, just like homeowners were in the early 1990s. I saw what that margin call looks like – the neighbours on both sides of me were repossessed, though one jumped first.

Land ownership

Nearly 1000 years ago a French geezer came in and seized ownership of Britain, and the descendant aristocracy still owns a third of the land in Britain, and fights tooth and nail to prevent this inconvenient truth being recorded in the cadastral records of the country, such as they are. Iniquitous as this is, modern living is about cities, and it is the kicking that Thatcher delivered to house building that hits the supply side. Britain is not hugely short of land, though I do wonder where we are going to grow food once the oil runs out. The remaining 100 harvests from our rapacious abuse of the soil are probably going to see me out, though your kids and grandkids may have an issue with that. That is a different rant.


Is basically the reason why the average Briton is getting relatively poorer with time and inequality is rising, because Capital has got Labour by the short-and-curlies, and will probably carry on for a generation or two until living standards equalise with what we used to call the Third World, whose living standards have been improving dramatically since the 1970s. In the end that’s the Faustian pact the consumers of the West made – they wanted cheap iPods and DVD players, and accepted that their kids would be poorer than they were. This hits the earning side of the equation, and why BTL had to be invented, because first-time buyers weren’t earning enough to feed the Beast.

Modern Living

Average household size, ONS
Average household size, ONS

We are becoming increasingly antisocial barstewards, wanting to live as singletons in our houses2, from this alone we need 25% more housing units to store the same number of people as in 1971. I know one fellow who rattles around in a four-bedroom house on his own. There were three families in the house I was born in, this is almost unheard of now. Curiously enough reversing this trend is one of the ways some people are addressing this in London.

Wot no Ermine BTL empire?

BTL is a sure-fire way to earn a better ROI than Warren Buffett, and I am probably better off than Connie (though not for long, natch, as her Buffett-beating BTL empire leaves me standing). But there’s no BTL line in my spreadsheets. I have learned a bitter truth through crashes in two asset classes. When everybody around you is saying this will go on for ever, just because, and teachers like Connie are thinking they are better off investing in something rather than sticking with  the day job, then I need to put on my finest pair of running shoes and run like hell the other way. In investing, run  towards fire and run away from the sound of flowing champagne. If you can only do one of those things, run away from the champagne.

I was viciously bitten by British housing as a young man, and despite every man jack saying that BTL is the closest thing to a legal money printing press in your basement I’ve had the experience of leveraged property when it goes wrong. There’s a turkey distribution on offer here IMO and I am mindful of the words of Warren Buffet on LTCM

To make the money they didn’t have and they didn’t need, they risked what they did have and did need–that’s foolish, that’s just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense. I don’t care whether the odds are 100 to 1 that you succeed, or 1,000 to 1 that you succeed.

I don’t need the extra wedge BTL could most probably give me, so I’m just not gonna drink the water from that well. The best of British luck to y’all, and may the devil take the hindmost.

So what’s going to happen to house prices then?

Obvious, innit? They will go up like gangbusters. Until they don’t, and then it will all go titsup with a big bang. We will have the papers full of misery and tears about negative equity and how it’s so damned unfair. I was an actor in the last showing of this movie, early 1990s.

The big problem with housing is that you need to get into the asset class somewhere in your 20s and 30s unless you plan to become a snail or tortoise. The market cycles, however, are slow and ponderous, much longer than other asset class cycles because of all the feedback mechanisms fiddling with it – maybe 20 years or so before exploding bubbles finally overwhelm the forces trying to stop them popping. That’s a very large proportion of your working life, and you have absolutely zero control of when you enter it – that was set when your parents made the beast with two backs. If you happen to come along in the latter stages of the market then your finances will be blighted permanently because unlike shares you can’t sit out the market – you’re in it as an occupier or a tenant. The only people who have any elective choice or control of their exposure to the housing market are people who own more houses than they need. They can choose to buy more, or to sell off some of their estate.

There is one thread running through the whole sorry story. The price of housing is set by government. Look at what the government is doing, and take appropriate action.

  1. inferred from the excess of births over deaths, an underestimate given that the birthrate is lower than replacement level over the same timeframe 
  2. some of us are getting old and dying off, and we pack fewer children into more space – children sharing rooms were widespread when I was growing up whereas now it’s probably against their yuman rites 

32 thoughts on “house prices – finance grabs punters by the balls with the invisible hand of the free market”

  1. Nothing quite like returning from the blissful peace of the French countryside (far away from any striking port workers or illegal fence jumpers) only to be brought back to reality with a heavy does of Ermine’s beautifully blunt but accurate observations on the mess that is UK housing.

    There’s too much here for me to really comment on in depth (although I might take a shot at the unfairness of right-to-buy one day). Instead, a question; If housing as an asset is over-valued and so unpredictable.. what should the young FTBs be doing? Buying a small/cheaper place but with the risk that they may need to upsize at some point due to children and possibly being stuck in negative equity just as they reach that point? Or instead stretch themselves to a larger property which saves the risk of trying to move during negativity equity but at the mercy of mortgage interest rates?


  2. Thanks Ermine, my personal take is that there needs to be a better understanding of what the problem is, so we can move forward more honestly. I am not going to hold my breath though…

    To put some number flesh on these bones if I may, Sir Jon Cunliffe at the BoE provides the following context (

    “Some numbers from the UK illustrate this point starkly. In the long upswing of the credit cycle, the stock of domestic lending by UK banks in the UK grew enormously from 95% in 1997 to 170% of GDP in 2008. The stock of non-property lending to companies as a proportion of GDP, however, grew only modestly from 19% in 1997 to 23% in 2008. Meanwhile, mortgage lending increased from 45% to 70% of GDP; lending to real estate tripled from 5% to 15% of GDP; and lending to the UK non-bank financial sector – including institutions like hedge funds, securities dealers and insurance companies – shot up from 25% of GDP to 60%. And these numbers do not count the explosion in UK-owned banks’ overseas exposures which more than quadrupled between the end of the 1990s and 2008.

    In other words the massive increase in the stock of lending – an increase of £1.7 trillion in absolute terms – did not lead to very much of an increase in productive investment at all. Of course there are benefits in enabling people to buy their homes. And much of the financing of financial markets almost certainly came back to productive investment in the form of market investments in business. But as we discovered in the crisis much of the lending appears to have financed the increase in house prices and a large part of the market investment was simply misallocated and lost.

    Nor did this increase in lending drive a commensurate increase in economic growth in this particular credit cycle. Over the period 2000-2007 GDP growth averaged little more than its long-run average of around 2.8%. In fact, business investment over the period averaged just 1.3% a year and it appears that most of this was related to commercial real estate.”


  3. @ERG One shouldn’t try and put an old head on young shoulders, but if you did then the young FTBers should consider:
    availability of work and what they do if they get fired, which determines where to live and the own/rent choice
    a rough idea of if/when/how many children

    a smaller and cheaper place gets them some exposure to the asset class, with it being overvalued (particularly if the army of BTL landlords gets its marching orders) any hit is lower and to be honest most FTBers don’t have much choice but go for the bottom end of the market – they’re not good for a 3 bed house.

    You’d only go for the larger place if you expect house prices to rise notably from here. And of course assuming you are rich enough, and expect to keep your job/easily find another one. There are also assets that track res prop indices. I have a minor holding in one and can’t wait to be shot of it – it matures next year, I fear 😦 That sort of thing allows you to slowly buy into the choice and hedge yourself against price rises. It’s how I’d seriously think about saving a deposit were I a young pup

    It’s hard to generalise, because the market varies terribly across the country. Modern living seems harder in the first 10 years of working life, and it’s exceptionally harder than it used to be for those with children early in their adult life. Those young FTBers should perhaps ask themselves what would happen if they were part of the 30% higher risk of splitting up after the first child.


  4. A cure for the London housing market ?
    Easy, just look at the Zurich / Switzerland housing market and suddenly London housing will seem affordable to all !
    Look at for samples…

    ( Short intro, since this is my first post here : early 50’s EE, dabbling on the hardware/software border, much more interested in FI since a (single) performance appraisal want disastrously wrong some years ago. Might be familiar to some here…..)

    Thanks for this very well written blog, even ifI now know more about the UK pensions schemes than the Swiss ones !


  5. Hi ermine,

    Very informative with loads of interesting links to follow up. The BTL discussion rumbles on and I agree with your take on it.

    As a child growing up in a South Yorkshire mining village with both father and grandfather working down the mine in their time I do have a very different perception of the miners’ strike 🙂

    You may think that Scargill was the devil incarnate, and he may have been guilty of some dodgy dealing but he was telling the truth about the situation, unlike Thatcher and McGregor. She blatantly lied about the plans to close the mines.which is a pretty immoral (and devil-like) thing to do?

    I think you are crediting the trade unions with far too much power and influence if you suggest that they were solely responsible for the roaring inflation rate. Winning the war took all our resources and, amongst other contributing factors, America took full advantage of this and took over the markets that we previously supplied. The whole thing is far more complex than “The Trade Unions Brought This Country to its Knees”.

    I have acted as a Trade Union Rep and have always been an active member wherever I have worked. I see the current government’s plans to reduce union rights and influence as a danger to employment rights and the protection of collective bargaining.The reason they can (and probably) will get away with them is partly down to prejudice built on half-truths. The trade union movement has bad moments, and players, in its history, but the overall effect has been massively for the good. (In my opinion :-))


  6. Jesus – you can really write. That is better than anything you could hope to be offered up in a broadsheet without a doubt. Exceptional.


  7. @JDR wow – I’m quite taken by this one near Carl Jung’s old stamping ground but I don’t think that much money will pass through my hands in my lifetime, whereas i could probably buy somewhere in outer London 😉

    I definitely recommend the pastures new 🙂 Although I can’t afford the house, I will enjoy spending the scenery in your beautiful country and stay with my camper van a while at Luzern. Life without The Man is good, he can stick his appraisements!

    @cerrdiwen, hey, I was still a kid when Art turned the lights off. Soem of the prejudice remains, after 40 years 😉 Even as a young pup, however, it did strike me as odd that here was Art telling us all that this was a damned dangerous job that took its toll (which I don’t doubt) so why exactly he wanted so many generations to do such a hazardous thing was nuts. This was something that needed mechanisation and/or shutting down because it was dangerous.

    I formed my views on unions during a period when they took the piss bigtime – if my opinion mattered in setting policy now I’d try and update it but here I fear we have to disagree. IMO Thatcher was needed at that time to smash this unelected force running the country and making Britan the sick man of Europe through naked greed and appetite for power.

    Stopping that force was done in a harsh and unkind way, because politics was more overtly confrontational then, better assistance to resettle and if necessary outplace the young in the valleys would have been good. But sending heavies to stop other people working incensed me then, and there’s no excuse for dropping concrete blocks on people to kill them and risk the lives of other drivers who happen to be in the wrong place at the wrong time. We still see some of the entitlement in the RMT – it’s ridiculous that Tube drivers can’t be recruited on the open market.

    FWIW I broadly agree with your last paragraph. Although I do think more than 50% of all relevant union members should have to vote yes for strike action to be legal, if they do then all the giving endless notice and crap is purely vindictive – employees aren’t indentured servants and have the right to do with their time what they wish, provided they are prepared to accept the consequences.

    @The Rhino Thanks, but I must acknowledge much fo the story I read in this fine rant that Underscored pointed me to on Monevator’s post. I tightened the narrative a bit and added some spin, but most of the hard work was done by the anonymous author!

    @Underscored – thanks – that is a stupendous amount of money. It wouldn’t be so bad if we’d spent it on holidays and fine dining rather than adding numbers to the price of a collection of stones!

    While writing this and researching some of the items the eerie parallels with the late 1980s struck me. This market is clearly overvalued, but just like earthquake forecasting, all we can say is the likelihood of the denouement is increasing. Sadly we can’t say when because of the chaotic nature of the system, and that’s a bastard for all the people who have to make contingent life decisions against this backdrop.


    1. If you do buy that nice penthouse in Erlenbach, don’t forget to wave across the lake, i’ll be waving back ( from a “somewhat” more downmarket house I’m afraid…)
      But Mrs Ermine will not like the missing garden, and you will not like the imputed rental value on that house, fully taxable as income here in CH !

      Nevertheless for me moving well out of the area, and renting out my (almost paid off) house will be the cornerstone of my escape from the man.

      FI is rather difficult here, we make good money, have reasonable taxation, but fixed, unavoidable, high costs like healthcare insurance ( 6000 £ / year / couple ) do spoil the fun somewhat.

      Enjoy Luzern, when I’ll be free I will retaliate by visiting Suffolk ( again !)


  8. Somewhat different in Canada – we didn’t have the large inventory of social housing to feed into the Mortgage Mincing Machine.
    However we have the same cretins in politics who have done their utmost to keep the bubble inflating – especially in Toronto and Vancouver.
    Heard recently of an 80 year old lady in our town who’s planning to sell her overpriced home to her 20 year old unmarried grandson – he’ll live in the basement and rent it back to her. Madness.
    Best blog on this topic in Canada and worth a read:


  9. “Obvious, innit? They will go up like gangbusters. Until they don’t, and then it will all go titsup with a big bang.”

    I hate – absolutely hate – that other people can leverage to this extent on an essential product. Because it forces you into the madness, too.

    So I’m saving half my take home pay, and I’m going to have to get out of the worst excess – the south east – while I still have time to buy a smaller, cheaper place and pay off the mortgage. I can minimise the madness, but I can’t avoid it.


  10. I lived in a rented property because my family were too poor to be able to buy a house. As kids we shared rooms as there wasn’t the space for each kid to have their own a room (Which seems to be expected now) and my family struggled with evictions. We ended up living in a damp-filled rental pre-fab which meant we always had colds and illnesses.
    It was because of this I wanted to buy my own house, which I have done and I am now fortunate to be mortgage free.

    The Thatcher nonsense was a BAD move – selling off the council house stock and not letting them re-invest the money in building new. What was hidden was that this was a way for the Thatcher government to reduce central funding for the county councils and without ongoing council house rental income – the councils became poorer and poorer and unable to operate effectively, they had no income stream! My local council started selling off anything they could to raise money just to operate – as well as laying off many workers and sub-contract the services out to 3rd parties at low fixed fees and let them handle the issues of minimum wage and poor work conditions.
    Its the same with the sell off of the national utilities and railways, all the income generating services providing the government with steady income have gone. They can only rely on taxes, so have to come up with more tax policies to increase their revenues and try and plug the gap. Short-term ideas just to cover their term and then let the next government work out what to do next…just as bad as the bonus culture! Bonus now, someone else worry about the fallout later.. 🙂


  11. Long-time reader, first time (I think) poster.

    Love your blog Ermine – it’s a regular and enjoyable read.

    I’m a 34 year old, living with my fiancee and renting.

    We spend 18% of our take-home on rent and have enough in savings to put down a 25% deposit. i.e. I think we’re in a pretty good position financially.

    I save 33% of my take-home pay (she saves about 20-25% I think).

    She is increasingly keen to buy, but I’m terrified of getting stuck with a mortgage with increasing payments (higher interest rates) and a house falling in value. I cannot see how mortgage rates can be kept at these low levels forever, but they’ve managed it so far… something like an inverse turkey distribution – they stay low until they don’t.

    Luckily, it’s not yet an issue because neither of us are ready to commit to owning a house yet. That will change after we’re married and, more importantly, she’s in a job that pays better than her current position and she feels happier.

    I can only hope that the government becomes increasingly keen to pull in tax revenue from the richest demographic / smallest demographic (I don’t think this will be elderly/retired/young/homeowners), so BTL is a potential target market.


  12. Enjoyable but nonsense.
    By the way I would say that Thatcher did not destroy the unions as such, but rather she oversaw the destruction of the industries where unions were strong.


  13. And of course if you dare take that red pill…. Further down the rabbit hole we find that according the Bank of England

    “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

    Ergo Private Banks are printing new money, constrained only by the willingness of borrowers to borrow. Inflation never went away – it turned into asset inflation and we pretended that that was a good thing. Bubbles Away!

    Click to access qb14q102.pdf

    PS someone needs to have a word in the shell of the TI over on Monevator, seems he is having a little melt down over housing… I think you could be the man Ermine ;p


    1. ‘Ergo Private Banks are printing new money, constrained only by the willingness of borrowers to borrow.’ ?? Er No – there are many constraints affecting a bank’s decision to increase net lending not least the main one which is the subjective assessment of whether it’s profitable to lend.


      1. @Clinging to the wreckage, yes, yes read the paper that was linked.

        “So far this section has considered the case of an individual bank making additional loans by offering competitive interest rates — both on its loans and deposits. But if all banks simultaneously decide to try to do more lending, money growth may not be limited in quite the same way. Although
        an individual bank may lose deposits to other banks, it would itself be likely to gain some deposits as a result of the other banks making loans.”

        More detailed analysis of banks funding costs here

        Click to access qb14q4prereleasebankfundingcosts.pdf

        You are probably assuming that private banks have integrity. Whereas one of the lessons of 2008 was that banks were writing loans that they knew would never be repaid tomorrow in exchange for bonuses and fees today. Trading short term (personal) benefit for long term (societal) risk.

        In keeping with the smash and grab Ponzi economy we switched over to in the 80s (more here

        I must say it is amusing that most of the criticism of this line of argument has centered around, “that’s just wrong because it doesn’t fit my understanding of the world” (

        As any good scientist knows, if you want to know how many teeth a horse has – you look in its’ mouth, if the validated data does not fit your model, it is not the data that is the problem. But then scientific method has always been awkward to those in charge


  14. @JDR I must one day take a boat out on the lake and take a closer look and Jung’s place. I fired up Carl Zeiss’ finest birding scope from somewhere like this to see if I could spot his tower. But it was one of those work holidays – all expensive and rushing from place to place. I want to spend time on an around the lake – weeks not days. But then I loved Luzern too, enchanted by the sounds of nuthatches in the trees, and the gentle, though dear, cafe culture 😉

    @Ray hehe Poor old Mark thought he was getting to run away from the problem, eh, out of the frying pan into the fire

    This is precisely the quandary the Bank of Canada has faced – trying to engender economic activity, but helplessly watching the real estate gasbag inflate at the same time. Because people have no self-discipline, with brains withered and pitted from watching Hilary on HGTV, Canadians have lapped up debt as never before. And that’s why average single-family detached houses in 416 or 604 cost over $1 million each.

    Yikes. Cheaper than Switzerland, I guess 😉

    @Brendan Getting out of the SE is probably a good win when the asset class is so highly valued. There’s a case to be made that perhaps I didn’t get far enough away from London in the late 1980s – there is much charm to be had further north. Though it is bloody cold in winter as you go past the Watford Gap 😉 Beautiful, though. I can’t complain about settling in Suffolk, which has a charm of its own, particularly in the liminal regions ‘twixt wind and water, but there are jobs and cheaper housing to be had the rest of Britain. Good luck!

    @Sparklebee – I have to admit that I was under the impression the council housing was revenue neutral-ish. It probably is harder for many younger people to appreciate just how cold and damp British housing used to be – respiratory problems plagued children and adults alike, and musculoskeleteal aggro like arthritis and rheumatism were rife in adults post 40 in a way you just don’t seem to see nowadays.

    @James the thing with negative equity is to make sure you don’t have to move. I was unlucky in getting into the hole, but lucky that I didn’t have to crystallise the loss until I was ready to pay it down. I can’t begin to describe the soulless nature of pouring money down a bottomless pit to get to breaking even so you can move, however. I was able to afford it, but I say my colleagues jetting off to the sun and envied the freedom!

    Hopefully things will get clearer, and maybe some of the tectonic plates will vent some pressure by the time you are ready!

    @Clinging – an elliptical critique sans detail, a languorous meh to you too 😉


  15. From Bloomberg this morning:

    “London’s housing market is “a bubble unlike any other bubble because it’s being driven by international capital, whereas previously London property bubbles were driven by mortgage lending,” said Peter Rees, a professor at University College London and former City of London planning officer. “I have no idea how this bubble is going to end.””

    I have a fair idea of how this will end, the question is over the collateral damage


  16. @Ermine & your comment;

    @Clinging – an elliptical critique sans detail, a languorous meh to you too.
    A fully justified response. After due consideration my only justification for the comment was that when I was reading your section on ‘The free market fails dismally’, my mind drifted back to the time, in the mid 90’s, when I was teaching first year A-level micro economics and unfortunately, just for a moment, I slipped into green pen mode.
    Anyway, back to teacher mode for a moment, it’s just my 2cents but if you wish to discuss the behaviour of the free market, I think you would frame that section better by thinking of the problem in terms of demand and supply and why the signaling function of price is not affecting supply.
    Ahhh it takes me back, it takes me back. Green pen back in box now.


  17. @Clinging

    You are an ideologue. No information or data can change your mind.

    #There is not a supply problem.

    Click to access English_Housing_Survey_Headline_Report_2013-14.pdf

    “Overcrowding remained uncommon in 2013-14, but under-occupation was far more prevalent, especially in the owner occupied sector.
     Only 1% of owner occupiers (212,000 households) were overcrowded in 2013-14 compared with 6% of social renters (236,000) and 5% of private renters (218,000).
     In contrast, half of all owner occupiers were under-occupying their home, substantially higher than private renters (15%) and social renters (10%).”

    Furthermore check the annexes available at

    Owner occupied housing and social housing is being 1 for 1 replaced by private rental.

    There is a demand problem driven by lending of money described by Ermine. This lending is on a non-repayment basis ergo greater fool Ponzi. People will always lever up to the max to buy a house, because house prices only go up (yes sentiment – I am sure you know all about that as an economist). This is driving prices – whilst killing transaction volumes.

    If we were to follow your “solution” as did Ireland and Spain in the run up to the financial crisis we would end up with somehting like this

    Demand is a person with the ability to pay. Any economist who does not understand that needs to be very far away from a teaching position.


  18. @Clinging > thinking of the problem in terms of demand and supply and why the signaling function of price is not affecting supply

    I can only speak for my younger self, but borrowed money is thought of much more in terms of how much to service the debt than as a sum of money. A house is a shocking amount of money – more than I had ever seen in my life when I signed on the dotted line. It’s not that surprising that a twenty-something is somewhat out of their depth to establish value – you need to have lived through market cycles sweeping through the range to establish a norm.

    I could qualify the mortgage in terms of the Micawber equation – how much I could borrow in terms of how much I could afford to pay interest on. I was fortunately limited in this respect by doing this against a more typical interest rate backdrop of about 7% p.a..

    We see this price/affordability error often when it comes to consumer debt, catalogue suppliers and Brighthouse who talk about the cost of servicing rather than the capital cost. Many consumers are just not rational actors when it comes to interpreting value against affordability (and future tail risks). They seem to use the servicing cost and availability of the loan as a price proxy.

    I do think that free markets work better when buyers and sellers have the option of walking away, but we’ll probably have to agree to disagree on that.


  19. “I was fortunately limited in this respect by doing this against a more typical interest rate backdrop of about 7% p.a” – Wow, and you still had to endure years of negative equity, can you imagine the hole that people borrowing at rates of 0.5% will be in? Personally I bought in 2006 (persuaded by the wife tbh, prices looked nuts to me back then!), not the best timing, but in retrospect, given the IRs of the last few years not the worst as at least monthly affordability and thus prices had ‘some’ level of rationality as the IR at the time was 5.25%. I consider myself fortunate that I do not have to make such an important decision in the current environment, time to raise rates and end this madness.


  20. Epic post!

    I saw the link to the Banks vs Tenants “Shoblerant” in the comments to the Monevator post and thought I’d never get round to reading the whole thing so thanks for shortening it into a “Lonblopolerant” (Long Blog Post Length Rant)

    I’ve always just assumed that house prices were simply a never ending spiral of:
    1. House prices increase
    2. Job wages increase to attract workers to area otherwise they can’t afford to live there
    3. House prices increase more due to higher wages of workers bidding for them

    And so on…

    Obviously there are many other factors at work and I never really considered that the massive relaxing of credit was even a factor, during my adult life I have just been always used to this sort of credit being available so it seemed normal.

    I also read before about the whole women going into work thing therefore mortgages effectively doubling, so attributed a lot of the salary multiple increase down to that as well.



    1. @TFS I fear the combination of politics and more credits is a doomsday machine here. Although the intergenerational foundation like to make out it’s old gits that are behind a lot of it, the people who really can’t afford prices to fall are those 0-5 years in. If my house were £20 tomorrow, of course it would grate in one way, but think of the lovely retirement bungalow I could get for £100. Bring it on 😉 But if you owe £150k and all of a sudden your asset falls, you are going to move heaven and earth to stop that. The old gits, of course, add to the problems on the supply side through BTL, but it seems that is being addressed.

      I don’t know what’s going to stop it, but a low-inflation low-growth world is not going to be the high income multiple mortgagee’s friend, because the debt won’t be eroded by inflation as much through their working life 😦


      1. My current take on it, is that the current system allows prices to track our cultural values. The value our culture (in aggregate) has placed on buying your own place, is not worth it for the ordinary person who is a net consumer of housing. This will become clear in 30 years, when my generation wake up from fantasy assett values and no pensions or savings.

        Price discover including via bankruptcy is critical to value discovery it would seem, the interferance of 2009 is looking more and more imoral imho.

        In the meantime, the balance of the law is slowly moving to address the worst elements of renting.

        Mortgage: a 30 year gamble on perfect conditions! 😉


      2. Making renting a respectable and more equitable solution in Britain would be an excellent first start. ASTs are revolting and I don’t think other European countries have these six months contracts. Two to three years would seem a much better match between the interests of landlords and tenants, with specific reasons you can be ejected earlier (antisocial behaviour, noise and wrecking the joint) and a fixed rent over that period too.

        At the moment some homebuyers are driven that way by the godawfulness of renting from Britain’s amateur landlords, rather than homeownership being suited to the lifestyle requirements. That’s rough, and shouldn’t be encouraged by policiy IMO 😦


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