Sunday, March 26, 2006

Safe As Houses - Future Shocks - Part 12

(I decided to rename my series "Future Shocks", had more of a punchy feel to it than "Looking to the Future", not that I'm pandering to tabloidesque sensationalist headlining or anything you understand!)

So, having had the ‘must buy your house’ idea spoon-fed to us for years and despite the mass repossesion crisis in the late 80s because of the slow-down in the housing market and the rise in interest rates the rate of repossessions is now up 15% and rising. The problem is particularly acute in Ulster and other areas where personal debt is high amongst the working class and lower middle class. Areas where the differential in what can and can't be bought with a standard workers pay packet is greatest.

You did not have to be an economist to see this one coming. House prices have been rising disproportionately to income for some years forcing people to take out larger mortgages of a higher multiple of their salaries. We have seen the raising of the normal 3.5x annual income as a general rule to anything up to 8x annual income and mortgage periods grow from 25 years to anything up to 50 years. For most the prospect of buying a house is subject to being able to use both family incomes.

Now whilst it is easy to judge in this situation and question the prudence of people taking out such financially punitive agreements one must first look at the fact that house prices in areas like London have gone up by so much as to be unaffordable by any other means. Even in SE London, traditionally the cheaper end a two bedroom flat will still cost you over £150,000. Now you would have to be earning close to £50,000 to be able to buy that under the old rules and most people earning £50k are not the sort of people looking to live in a 2 bedroom terraced in Catford. Furthermore most of the keyworkers: teachers, nurses, fire-fighters, ambulance workers and the like probably will struggle to earn half that amount. It is a well-known fact that fire-fighters in the London area who work 4 days on 3 days off shifts will sleep in the fire station whilst on-shift, then returning to their homes outside London when off. They do this because they cannot afford to buy homes for themselves and their families in London.

As a result people have been forced out of the cities and the surrounding areas prices have in turn risen. Add to this commuter costs etc. and already the problem becomes self-evident. As an alternative to this one can elect to rent (or if you cannot afford a house or have a poor credit rating you are forced to rent) of course renting is not immune from the house price lottery because if people are renting houses out and forced to pay higher monthly mortgage payments they must raise the rents, in turn those who have lower mortgage payments having bought their houses some time ago see the opportunity to make some extra cash and thus the prices rise.

There is another factor here as well, the local council tax, which is a blanket poll tax not charged on an individual or household’s ability to pay, nor even on the local ammenities that a household may receive, is levied based on the value of the property. With property prices inflated the councils are reassessing tax based on the current market value of a house and because the bands are smaller at the lower values the council taxes are rising more for those who can afford it least. This has a fundamental flaw because much like when the Poll Tax was brought in to replace Rates people are going to be expected to pay a great deal more money without any difference in service provision and without a thought for how they were expected to pay the extra. When the Poll Tax was introduced I lived at home with my Mother and Stepfather in a 2 bedroom house. Our rates were approximately £400 annually which seemed pretty fair since we lived in a village with 1 bus a day, no shops, and only refuse collection as a council service. The Poll Tax bill came in at £400 per person and meant £1200 for the household. Longrider writes that he feels punished by the prospected raising in Council Tax assessment values and obviously it is easy to see why. When ones house value goes up it would be a mistake to presume this constitutes in any way an amelioration of income. Naturally were one to sell said house it may be worth substantially more money than one originally paid for it but then so are all the other houses one might be thinking of buying.

As with any flat tax the council tax is based on an unfair premise that somehow one can levy taxation at an arbitrary rate. In this case it is the value of the house that people live in. Of course this neglects to take into any consideration whether the people living in said house are owner-occupiers, 2nd home owners or merely tenants. Whilst it is clear that a rise in house prices does not necessarily benefit owner-occupiers it is in fact quite detrimental to tenants who are likely to see rises in rent coupled with rises in council tax despite this being in no way linked to any changes in income.

The upper and upper middle classes who are better placed to invest in property have now for some time chosen to sink their money into this rather than more traditional savings methods as the buoyancy of the housing market has been seen as offering good capital return. This has meant many more buy to let mortgages as investors have bought houses for their children at university or simply as a means of income. With the pensions system at the moment in a parlous state it is small wonder that many have chosen the property market as their method of safeguarding their future. However many people do not have the initial capital to sink into such investments and therefore once again the deficit between the well-off and comfortably off and badly off widens.

Legislation in this country favours the property owner over the property dweller. As a tenant you can delay the issue but very rarely do anything about things such as eviction orders. Any rent commissions will only be able to assess rental values based on equivalent rents in equivalent properties all of which are inflated. With utilities in private hands there is no control over bills which have risen astronomically over the last few years. For a 2/3 bedroom house outside London you can now expect to pay £500 per month in rent, add to this £100 for council tax, £30 for gas, £30 for electricity, £30 for water, then there'll be the phone bill which will be around £25 for line rental . This is £715 so far without having paid for any food and clothing and all the other assorted sundries. That translates to £8580 per year net, and add likely associated costs and you have more than £10,000 annual expenditure for the most cautious of households. That translates to around £15k minimum gross income needed just for subsistence survival, now if you take that down to its hourly rate (based on a 40 hour week) that is £7.21/ hour. At present the minimum wage in Britain is £5.05 per hour for workers aged 22 years and older (*£4.25 per hour for workers aged 18 - 21 years inclusive, £3 per hour which for all workers under the age of 18). It does not take a degree in economics to see that if you are losing 25% per hour that this translates to a massive shortfall week on week and year on year. Rents and other costs do not take into consideration what income you are on.

If childcare is added into the mix it makes the situation far more difficult. I used to pay £50 a week for 1 of my children to do 2 half day sessions at nursery a week. Bear in mind this means more than £1 an hour on a working week, and most parents who are forced to work full-time will pay far more than this. Financially-speaking I was not able to afford for my children to go to nursery any more than the 2 sessions whilst it was equally financially impossible for my ex to return to work because it was unlikely she would be earning more than the childcare costs alone.

I firmly believe that one of the reasons that the birth rate in this country and many other EU countries is going down is because of the financial implications of children on many of the couples that might traditionally have families. For example many couples on medium to low incomes have been forced to combine their incomes in order to afford a mortgage. This means the shortfall in income of one partner for a number of months is simply not viable if mortgage payments are to be met. Maternity payments do exist but only generally for people who have been in a company for a number of years, the remainder of mothers will either get incapacity benefit or be expected to live off their partner's income.

I could go on about families not being able to afford the unpaid parental leaves to allow father's to spend time with their children etc. etc. etc but I think the point is already made about what a profound effect the housing situaion has on the demographics of the population at large. It would be easy to think that house ownership has always been the norm but in fact in the time of Charles Dickens even the comfortable middle classes would have rented, some of them and the upper classes may have had family seats that had been passed down but certainly amongst those that had to live off income derived from their labour it would have been fairly unheard of to own a house.

It was to house these people that council housing was invented so that all people had the right to live in security. Sadly greed has resulted in a mass council house sell-off fundamentally started by Thatcher in the 1980s but continued by Labour albeit through slighty more covertly by handing over the rights to private companies. However one felt aboutt hat sell-off at the time the fact is that this was a case of short-termism in the extreme. As councils do not anymore have housing to offer the disenfranchised and dispossessed they will remain in temporary hostels, young people will be forced to remain in the family home for longer and couples will struggle to have a mortgage and children and forced to choose one or the other.

At the time of the initial sell-off one can reasonably argue that those in council housing were largely those that needed to be so, however no such guarantee exists anymore and in popular areas, in particular the metropolitan areas, prices of housing has risen to levels far beyond the reach of those for whom the council housing system was designed to protect.

In conclusion then the knock-on effect purely in the housing crisis is a drop in the birth rates, an absence of key-workers, an increase in the homeless, an increase in the number of tenants in rented accommodation, an increase in those living in temporary housing such as B+Bs and hostels, an increase in houses being reposessed at any increase in interest rates, an increase in 2nd housing used for renting out and holiday accomodation by the more wealthy thus fractionalising communities. I can't see these consequences being positive for any except the most well-off and they have quite enough advantages already. Whilst one expects the Conservative government of the 1980s to have pandered to the well-off, history will show unfortunately that the 1997-2010 Labour government only furthered the cause of the wealthy and simply added a small handful of people to the plutocracy whilst the majority starved.