House prices are 28% too high and mortgage debt is “unsustainable”, a new report has claimed.
It says that total household debt is massively up, and that the recovery is “extremely fragile”.
The report, Consumer Credit Trends by independent research company Verum Financial Research, says the UK economy is risking a major downturn due to unsustainable levels of household debt.
The report says that for every 0.5% increase in the Bank of England base rate, there would be a £48bn reduction in household spending.
If the base rate increased to 3% it would tip the UK economy back into recession – and house prices would undergo a “sharp correction”.
Professor James Fitchett, of Leicester University School of Management, says in a foreword to the report: “The prospect of even slightly higher marginal lending rates could have a catastrophic effect on the economy.”
The Verum report says that household debt remains unsustainably high due to spiralling mortgage debt. Last year, it says, of £1,437bn total household debt, 89% was mortgage debt.
Robert Macnab, Verum’s director of research, said: “This elevated level of mortgage debt is unsustainable.
“In a stable housing market, house prices should grow at the same rate as household incomes so that periodic ‘booms and busts’ are avoided.
“So unless wages increase quickly, which is unlikely, our analysis of the relationship between household incomes, debt and property prices indicates that UK house prices are currently over-valued by 28%.
“The average should be nearer to £180,000 and not £250,000 as it is at present.”
Ironically, the Government’s two “official house price indices” suggest that prices somehow manage to be both not far adrift of £180,000 (Land Registry) and also £250,000 (ONS).
The ONS is currently quoting £264,000 UK-wide, and the Land Registry’s latest monthly report is quoting £169,124 for England and Wales.
It begs the question: had these researchers chosen the Land Registry figures, would they have argued that house prices are actually too low?
Comments (30)
"Hmm, think you're splitting hairs."
THEY put the hairs up there to split, Mr Byrite – not me. And the fact that the hairs are able to BE split is prima facie evidence that the information is fatally flawed.
"I think what they mean by…"
But that's the whole point – you shouldn't NEED to think what they mean. It should be crystal clear – ESPECIALLY considering the cost of the actual report (a snip, I'm sure, at £875 plus the dreaded…).
You somewhere 'oop North, like me?
Hmm, think you're splitting hairs. I think what they mean by "prices 28% too high" is that prices could fall from £250K to £180K if indeed they are that high, which I guess they are if you live in the South.
Whatever the price level, I think what they’re saying is quite interesting…. We get too many people through our door expecting to buy a £200K house with a £10K deposit on a £35K income …. people’s price expectations have got to change ….unfortunately I think MMR is changing it for them. We're getting a lot of mortgage applications turned down now which is starting to worry me.
I don't think we're proposing that property prices be "controlled", all we're concluding from the research is that house price growth is out of align with income growth which is unsustainable in the long term and damaging to the economy, especially if interest rates rise. I think you are probably taking issue literally with the word "should" when we meant "should ideally" or "can only", purely from an economic perspective. All we're trying to do in an unbiased way (I'll ignore your rather insulting insinuations as to our professionalism!) is point out the economic dangers of outstanding household debt (£1,437 billion and rising!) which is directly linked to house prices, with interest rates that can only go one way, UP!! If you want to stick your head in the sand or anywhere else, then that's up to you! But if you want to be better informed then see some of the free info from the report here: http://www.slideshare.net/VerumResearch/trends-in-uk-credit-lending?qid=646740ec-52b1-4b0f-8ff9-4693b859f0f8&v=qf1&b=&from_search=9
I blame the baby boomers!
Story body: "“In a stable housing market, house prices should grow at the same rate as household incomes so that periodic ‘booms and busts’ are avoided…
The average should be nearer to £180,000 and not £250,000 as it is at present.”
3.47 today: "I don't think we're proposing that property prices be "controlled""
Oh, I think you are.
"all we're concluding from the research is that house price growth is out of align with income growth which is unsustainable in the long term and damaging to the economy"
JUST house price growth? I think not. Lets do the same exercise – this time on the price of the tin of beans I referred to earlier.
In my supermarket, not much more than a year ago, you could buy a four-pack of this staple food for the princely sum of one pound. In the space of less than two years, the same four-pack is on sale at around two pounds fifty. That is, by my reckoning (I'm no economist so please correct me if I'm wrong…) an increase of 150%.
HOW 'SUSTAINABLE' IS THAT? For 'beans' read 'bread'; 'potatoes' – you name the foodstuff – it has shot through the roof. BBC has recently run a series dedicated to the whys and wherefores of escalating food prices. Is Verum Research planning to attack THAT subject next, by any chance?
"I think you are probably taking issue literally with the word "should" when we meant "should ideally" or "can only", purely from an economic perspective."
YOUR report. I just read the press release. and yes – I read it literally – as does EVERYONE ELSE. If the grammar isn't correct, then you need to review your proof-reading procedures – you shouldn't rely on the likes of me to pull you up on what you seem to believe to be 'literal' technicalities.
" (I'll ignore your rather insulting insinuations as to our professionalism!)" It's called 'home truths', actually.
"All we're trying to do in an unbiased way… is point out the economic dangers of outstanding household debt (£1,437 billion and rising!) which is directly linked to house prices…"
Okay – point it out another way, then. May I respectfully(ish) suggest you draw, in the same "unbiased way", equal attention to "the economic dangers of rising household debt which is directly linked to the effects of real income stagnation and rising costs of living"
THAT, I suggest, is the REAL picture. But don't worry – the population are already painfully aware of the findings, from their own day-to-day research – carried out with a ten pound note and a shopping list.
Well…?
Do you need statistical proof of the beans situation before commenting? More research into the validity of the information I supplied, perhaps?
You mustn't eat beans, then…
A bit embarrassing isn't it? the worry is they have received the reception this false conlusion report deserved on here but it is bound to be lapped up like cream by civil servants who will take it as correct.
I might be an ill informed ignorant compared with the folks at Verum Research however I know how to value property and know that it is wholly wrong to make any comment about the value of a single property based on generalisations and negligently misleading to claim prices are 28% too high when their own figures show that figure should be 38.9%. The fact they got the basic mathematics are about face shows Verum research have very little credibility in my eyes. Not answering my first basic question demonstrates they know they are on shaky ground and their unwillingness to do anything other than quote what they think they know shows them to be a little "Hubble" looking at the same thing but their focus is out.
Very clever, the rude filter picked out the 5 substituted for the letter 's' in the word a r 5 e.
Childish I know but this has to be a new posting sport; getting around the filter. Spaces, Euphemisms and Spoonerisms seem to be the go.
Erm, just intrigued, how do you get prices too high at 38.9%?
Mr Byrite
Simply put, ampersat's maths is bang on the money.
It is INCREASE, not DIFFERENTIAL, between the two figures they are quoting. Sorry – but people who claim to be experts in a particular field should not make schoolboy mistakes when it is their specialist subject.
Or am I wrong? (Hint – trick question…)
If they take the current prices of sales properties on the market they will be inaccurate as all my local competitors inflate their valuations by at least 15% to get the deal, then drop the price back 6 weeks later.
"In a stable housing market, house prices should grow at the same rate as household incomes so that periodic ‘booms and busts’ are avoided."
Care to tell us all HOW that is to be implemented, and then HOW it would be controlled?
Show us examples of it happening ANYWHERE else in the world.
"The report… by independent research company…"
But commissioned by WHOM, exactly? Which organisation PAID for this research and report?
I, for one, REALLY want to know just how "independent" it actually can claim to be…
It was commissioned, by Brit, Rant, Sibley BC & co
Arguably house prices have been inflated over time by: 1) people paying increasing multiples of income; 2) giving false information about real incomes (self-cert); and 3) interest-only mortgages. House prices are likely to be stabilised (or corrected) by the FCA's reform of the mortgage market under the MMR regulations, i.e. it will be much harder to get mortgages based on a 'true' affordability assessment and verification of income.
Verum relies entirely on subscription or sale income from its published research reports and is not sponsored or otherwise commissioned to produce and publish research reports by any third party. Its research is entirely self-funded from its own resources and is therefore totally independent. The research in the report on Consumer Credit Trends is based entirely on ONS and Bank of England data and was not sponsored, commissioned or otherwise paid for by any other party! A foreword to the report was provided in association with Leicester University.
Brit, Rant, Sibley BC & co is not a company but a group of house price canutes who tried to shout property prices into freefall and simply ordered them to stop rising.
In response to your "happening ANYWHERE else in the world":
US – The Consumer Financial Protection Bureau pushed through rules in January to ensure borrowers could repay loans. Loans that meet the new guidelines known as "qualified mortgages" are subject to a series of restrictions. Ratios: 43% or less on a monthly debt-to-income ratio including mortgage payments to gain a "qualified mortgage". Term length: 30 years max. No interest-only mortgages.
Canada – Deutsche Bank study rated Canada the most overvalued housing market of 20 developed countries. To cool conditions, the authorities tightened rules for mortgages insured by its national housing agency. Ratios: 80% loan-to-value ratio for refinancing. term Length: 25-year limit for government-backed mortgages, down from 30%.
Hong Kong – Since 2009, the Hong Kong Monetary Authority has brought in restrictions on mortgage lending to prevent excessive lending and bring soaring prices under control. Rules included curbs on non-resident borrowers for the first time. Ratios: 50% max loan-to-value ratio on properties worth over HK$10m (£765,000); 40% for non-residents. Term length: 30 years max.
Other similar regulations and measures in force in Singapore and Spain (see today's FT page 3).
I'm sorry – but all of the above information simply doesn't answer the question posed.
You are talking about Governments CAPPING BORROWING through lenders. That will simply reduce the number of buyers who can finance a purchase. I was asking about CONTROLLING ACTUAL PROPERTY VALUES in line with wage inflation, RPI, BoE, FU2 – or whatever other obscure indices you care to quote. And to the best of my knowledge, NO Government in a 'free society' has EVER 'capped' – or tried to, for that matter… private house prices.
If I'm wrong – like I said – show me.
What you 'research' guys always seem to forget/choose to ignore (delete where applicable – but I suggest BOTH be equally the case…) is that a property isn't a tin of beans.
…and it can't (and absolutely SHOULDN'T) be sold – or bought – as if it is.
You see, WE don't 'control' our market in the way certain groups and individuals think we do. If we DID, don't you think that your nice index-linked theory would be exactly what we would want? But the minute we TRY to exercise control, we will fail in the same way hat we would fail trying to juggle jelly.
Here endeth the lesson.
I don't take sponsorship, commission, or any other payment for the information provided either, by the way.
Always a pleasure… never a chore. 😉
Japan Dave?
"Japan Dave?"
Last I heard, ampersat, he was buying up entire blocks of properties in the prime Ginzo, Cinzano and Tenko Districts, thus taking advantage of their current market values being only 0.0000001% of that of 1945.
They glow in the dark as well – very eco-friendly… 😉
Full Text ipinglobal:
A new consumer credit report published by independent research company Verum Financial Research says that UK houses are currently overpriced by around 28% and that unsustainable mortgage debt is already at such levels that there is a serious risk of the UK falling back into recession.
Verum describe the UK’s recovery as ‘extremely fragile’ reporting that for every 0.5% increase in the Bank of England base rate, household spending would be reduced by £4.8bn and if the base rate increased to 3%, that would be enough to tip the balance and plunge the nation into another downturn.
Professor James Fitchett of Leicester University School of Management comments in the foreword to the report: "The main problem facing the UK economy is therefore now a problem concerning consumer spending and debt. As these data show in considerable detail, the prospect of even slightly higher marginal lending rates could have a catastrophic effect on the economy."
House Prices Disproportionate to Earnings
According to the Verum report, total household debt increased by 314% from £347bn in 2013 of which 89% was mortgage debt. House prices increased by 318% over the same period, while household incomes have risen by only 203%.
"This elevated level of mortgage debt is unsustainable. In a stable housing market, house prices should grow at the same rate as household incomes so that periodic ‘booms and busts’ are avoided," said Robert Macnab, Verum’s director of research.
"So unless wages increase quickly, which is unlikely, our analysis of the relationship between household incomes, debt and property prices indicates that UK house prices are currently over-valued by 28%. The average should be nearer to £180,000 and not £250,000 as it is at present."
The ‘debt-spiral’ that now threatens the economy is compounded by the increased cost of living which, combined with a real terms drop in income, is restricting the ability of households to reduce debt.
Spiralling Debt will Drag Down Economy
"With household finances under such pressure, any rise in the abnormally low interest rates will have a negative impact on consumer spending," continues Robert Macnab. "Our research has identified an important threshold when 12% of household disposable income goes to servicing debt interest payments. At this level households cut back significantly on discretionary and often credit-sensitive purchases such as vehicles, holidays, durable goods and furniture, a scenario that would bring the recovery to a grinding halt. To reach this 12% threshold, base rates would only need to rise to 3%. If mortgage rates followed suit, which they invariably do, the housing market would experience a sharp correction."
The Verum reports comes on the back of the Bank of England’s inflation report delivered by Mark Carney, the bank’s governor last week. He said that the booming housing market represented the "biggest risk" to financial stability and the long term recovery.
However, the increasing disparity between house prices and incomes represents the biggest threat to the economy as households start to buckle under the strain of household debt in a recovering economy.
Mark Carney has given the Financial Policy Committee (FPC) until June 17th to decide which tools to implement that will slow down the housing boom. Those recommendations are likely to include increased capital requirements for lenders and a further tightening of affordability tests for borrowers.
"It begs the question: had these researchers chosen the Land Registry figures, would they have argued that house prices are actually too low?" – Actually no, because it's the relative change and not the current value of house prices since 1990 that is the relevant factor (ONS and Land Registry are based on different measures – only ONS goes back beyond 1995). House prices have risen by 319% since 1990 and household debt has risen by 314% but household incomes have grown by only 203% – so is paying an ever-higher proportion of income on rising house prices and debt servicing costs when interest rates rise sustainable??
Are all property prices over inflated by 38.9% or just the ones currently on the market?
I think there is too much conclusion and not enough fact in this report. Many properties are owned outright with no mortgage and no household debt of any kind. Many properties are not owned and suffer the lions share of household debt. It surely isn't possible to collate every property with every debt and come up with a meaningful conclusion.
Doesn't look like they want to answer this question, couple that with posting "read more here URLs" much against PIE etiquette this is starting to whiff of you know who.
Verum Research…
"House prices have risen by 319% since 1990…"
Please confirm exactly WHAT you choose to refer to as "house prices".
The term has numerous possibilities.
Average house prices as defined by the ONS House Price Index: ONS average UK house price data: House Price Index annual tables 20-39 (Table 22 Housing market: house prices from 1930, United Kingdom). The index is constructed from transacted property prices and is calculated on a monthly basis. The index is chain linked to produce an index series that allows comparisons to be made across years. The data is supplied to the ONS from the Regulated Mortgage Survey.
For a detailed explanation of the methodology used by the ONS to compile average house prices please see section 3. ONS HPI methodology of the PDF document 'Official House Price Statistics Explained' at the following address: http://www.ons.gov.uk/ons/guide-method/user-guidance/prices/hpi/official-house-price-statistics-explained.pdf
"If you can't do, teach. If you can't teach, research. If you can't do that make it up, hope no-one notices and let your qualifications make it sound credible"
Dr. Bunsen Honeydew (1976)
Is "Bunsen" really a name?
You don't remember the Muppets Wilko?
…It's time to play the music,
It's time to light the lights… 😉
"If the base rate increased to 3% it would tip the UK economy back into recession"
If that is the case, and I do not dispute it, then the Bank of England will not increase the base rate to 3%. Mark Carney is very measured as proven by his work in Canada. I very much doubt anyone will risk recovery through the blunt instrument that are interest rates.
Controlling house price inflation needs measures other than tipping thousands into negative equity. Smoothing price increase by revisiting log jams cause by SDLT thresholds is one such measure. MMR's effects will filter through, restricting 'Help to Buy' and stimulating housebuilding are far more effective, sustainable methods without feeding the boom / bust cycle and, respectfully, scaremongering with hypothetical scenarios.