House prices are booming again but the bust that’s bound to follow will cost us dear

A rise in rates would inevitably cause an immediate and deep house price crash

Share
Related Topics

I was in the beautiful city of Charleston, South Carolina where the first shot was fired in the American Civil War over the weekend for the wedding of my second daughter. Two down, none to go.

As the bills rolled in by the fistful – including for a horse-drawn carriage so I could get her to the church on time – it set me thinking about wealth or lack of it, not least because I have been reading a really important new book on wealth in the UK.

The newly knighted John Hills and five co-authors from the London School of Economics have just published an authoritative study on the distribution of UK wealth, and how it changed up to the point when the Coalition took office. They illustrate the enormous importance of housing wealth in the UK and how house price rises lowered wealth inequality.

They use the most comprehensive survey ever carried out on wealth in Britain – barring perhaps the Domesday Book – the Office for National Statistics’ Wealth and Assets Survey, which puts a value of £5.5trn on the total value of personal wealth, the survey having been carried out between 2008 and 2010.

This was nearly four times annual national income at the time. Adding in the value of people’s rights to pensions from employers and other private sources, generally of most importance to people higher up the wealth distribution, the total was even higher, £10trn. If rights to state pensions were included, the number would be higher still.

 Of that total, £3.4trn was accounted for by the value of houses and other property, net of mortgages, £1.1trn by net financial assets and £1trn by what the ONS counts as ‘physical wealth’, which includes consumer durables, the contents of people’s homes, and vehicles. It even includes £1.8bn for the value people put on their personalised vehicle number plates. 

Wealth inequalities in Britain are much greater than those we are used to seeing when looking at income differences. For instance, those at the 90th percentile of the earnings and income distributions have weekly earnings before tax or household incomes after tax that are around four times higher than those of people near the bottom at the 10th percentile.

For household wealth, the corresponding ratio is 77 to one. Absolute gaps in wealth holdings have grown rapidly in recent years, reaching a position in 2008–10 where a tenth of households had net assets of more than £970,000, more than 75 times the cut-off for the least wealthy tenth, but a tenth had less than £13,000. Hills et al found that the top 1 per cent or 240,000 households had aggregate total wealth of around £270bn in 2008–10. 

Interestingly, between 1995 and 2005, wealth inequality narrowed because of the rise in house prices – if they hadn’t risen, according to Hills et al, wealth inequality would have been largely unchanged. Those of course with little or no wealth were left behind while those with mortgages, those in middle age and those who were most highly qualified gained most from house price increases.

To put this in context, according to the Halifax house price index, average prices rose by an average of 16 per cent a year between January 1995 and January 2005. Between January 2005 and August 2007, they grew by a further 21.8 per cent, which is likely to have narrowed wealth inequality even further. But then prices started to tumble as the Great Recession took hold. By the end of 2012, average house prices were around 20 per cent below their peak.

But the downward trend in the UK has stopped: house prices in 2013 have started to rise again. Between January and July 2013 they rose 4.2 per cent.

This does not look sustainable in the long run, given that the main determinants of house prices are wages, which aren’t growing, and interest rates, which are at historic lows and eventually must rise. A rise in rates any time soon, as proposed irresponsibly by Ros Altmann and Andrew Sentance, would inevitably cause an immediate and deep house price crash.

Earnings of full-time men rose by an average of 6.1 per cent between January 1995 and January 2005, well below the increase in house prices. The chart shows that the house price-to-earnings ratio rose to 5.8 in April 2007 from 4.8 only four years earlier. By October 2012, the ratio had fallen to 4.39 but has risen since then to 4.62.

What goes up must come down again, given that equilibrium of around 3.65 or so looks sustainable in the long run. Bank managers historically don’t grant mortgages of more than four times earnings. This suggests house prices are currently as much as 25 per cent overvalued. When house prices fall, they usually overshoot, suggesting falls may be even greater when rates eventually rise.

Slasher Osborne’s irresponsible new Help to Raise House Prices Scheme seems to be driving these increases. Homeowners have started spending as they see the value of their homes rise. So the solution to a housing boom and bust is to start another boom that will inevitably bust.

It is hard to find a single economist who thinks it is a sensible idea – it is cynically designed to buy votes. Based on the Government’s historic defeat over Syria, it is likely to need every vote it can get in 2015. The inevitable fall in house prices that is coming will cost the country dear, as Mr Osborne has provided a £100bn backstop. Here we go again.

Wealth in the UK. Distribution, Accumulation, and Policy by John Hills, Francesca Bastagli, Frank Cowell, Howard Glennerster, Eleni Karagiannaki and Abigail McKnight, Oxford University Press, 2013.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Senior IP Opportunity at Major Firm

vary Attractive Salary: Austen Lloyd: MANCHESTER - AN OPENING AT A VERY HIGH Q...

Nursery Manager

£100 - £110 per day: Randstad Education Ilford: Nursery Manager Long term Ran...

Sales Consultant – Permanent – West Sussex – £24-£25k plus commission and other benefits

£24000 - £25000 Per Annum plus company car and commission: Clearwater People S...

SEN Teaching Assistant

£45 - £65 per day: Randstad Education Bristol: Supply SEN Support Jobs in Bris...

Day In a Page

Read Next
The Liberal Democrats leader says efforts need to be focused on cracking down on the criminal gangs  

Nick Clegg: We should to go to war on drugs, not on addicts

Nick Clegg
East German border guards stand on a section of the Berlin wall in front of the Brandenburg gate on November 11, 1989  

Twenty-five years after the Berlin Wall fell, Hungary’s PM thinks it is Western capitalism that is in its death throes

Peter Popham
The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

Paul Scholes column

Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities
‘A bit of a shock...’ Cambridge economist with Glasgow roots becomes Zambia’s acting President

‘A bit of a shock...’ Economist with Glasgow roots becomes Zambia’s acting President

Guy Scott's predecessor, Michael Sata, died in a London hospital this week after a lengthy illness
Fall of the Berlin Wall: History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War

Fall of the Berlin Wall

History catches up with Erich Honecker - the East German leader who praised the Iron Curtain and claimed it prevented a Third World War
How to turn your mobile phone into easy money

Turn your mobile phone into easy money

There are 90 million unused mobiles in the UK, which would be worth £7bn if we cashed them in, says David Crookes