Thursday, June 07, 2007
The Nickell report
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

If you think housing affordability is a problem now, it is going to get a lot worse, according to the new National Housing and Planning Advice Unit, chaired by ex-MPC member Professor Steve Nickell. The report does not appear to be out yet - it is due today - but here is an advance version from The Times.

Also today, ahead of the noon announcement, The Times MPC (not to be confused with The Sunday Times/IEA shadow MPC) votes 8-1 for no change.


According to the Times they are saying that in the future the average price will be 10x the average salary. Am I the only one that sees something wrong with that picture? In an environment of 6% interest rates, that would mean that 60% of someone's *gross* salary would be consumed by mortgage *interest*, before you include any repayments. Is Mr Nickell insane? Or are we all going to suddenly develop the ability to survive without food and heating?

Posted by: Minh at June 7, 2007 10:28 AM

Yes, it is a scary picture, and used to push the case for more housebuilding. But the maths would not work in the way you suggest, because of accumulated housing equity - some of it provided by parents. Even today, first-time buyers only pay a fifth of their income in interest payments, according to CML data.

Posted by: David Smith at June 7, 2007 10:56 AM

So people without rich parents (or parents that need their money for the nursing home) will live in cardboard boxes?

And who will businesses sell to if all that people earn goes into housing for them and their kids? There is not much left of people's life earnings if 10 years of their income goes on housing(more because this is counted before tax...!), of which 40% will go to the tax man after the parents' death, or, more likely nowadays, 100% to the nursing home or the pharmacy to cover the costs or paying for the medications that the NHS won't pay for (cancer, blindness etc) And where will the kids of those folks live? (...)

And, if a 3 bed house costs 10 years' wages that people can only afford with parent's help, what does the rent of a house like this cost? Because being a landlord only makes economic sense if you have a sensible return on your investment, and by definition this means that in any non-bubble situation, the rent would have to be more than paying IO mortgage on the property and possible more than a repayment mortgage when all the cost to run this business are taken into account. Sure, they could raise the rent, but if people are too poor to afford owning a house that would be cheaper than renting, where is that money going to come from?

The entire calculation be it owning to live in or to rent out does not work out.

Posted by: Cinnamon at June 7, 2007 12:26 PM

Well, as I say, the maths is not quite as straightforward as that, although the warning is that properties for the bottom 25% of the earnings distribution could be 10 times the earnings of people in that income range. But the entire purpose of Nickell's unit is to prevent it happening and tackle the problem of affordability, as this link makes clear:

Posted by: David Smith at June 7, 2007 04:22 PM

That may be the aim of the report, but I can't help but feel some of the alarmist headlines it resulted in will drive prices up in the short term, which may be counterproductive.

Posted by: Tim at June 7, 2007 06:00 PM

This report reminds me quite alot of my MSc disseration. I concluded that houseprices will continue onwards and upwards as income growth far outstrips new supply, and having one's own flat, or a bigger house or a second house are all seen as luxury items.

The answer is of course as David often alludes to that increasing house prices is only bad for those on their way up the ladder and is offset by the gains from those on their way down. The 'average' household is no better or worse off.

However, I think there has been a distinct lack of debate about how these distributional changes will impact on the economy in the long-run. I'd be interested in David's and other's thoughts: What happens to prices when the baby-boomers all start downsizing and releasing housing equity? How effective will bequests be at redistributing accumulated equity? What about those who do not have a family history of owning property or whose parents use housing equity for nursing payments and pensions?

Posted by: Paul C at June 7, 2007 07:07 PM

Paul, as for the 'average household', people looking to enter the market without the benefit of previous purchases or inheritances are priced out, whilst others are sitting upon larger and larger sums - rewarded through a quirk of fate rather than merit or hard work. This reduces opportunity for social mobility and is a demotivating factor for people, especially young graduates, wanting to 'work hard and get ahead' yet seeing only a future of debt and foiled aspirations. I suppose it depends on what kind of society one wants. Presumably, most people would not see ridiculously priced houses as a good thing for communties where local residents are 'priced out', or as a good thing for our society.

Posted by: Walt at June 7, 2007 08:09 PM

Well, as I have said, the whiole point of the Nickell report, which is worth reading - it is short - is that these trends are not socially acceptable and that something has to be done about affordability. It is also examining the contribution of buy-to-let, though one emerging theme may be that the contribution of buy-to-let in pricing out first-time buyers has been less than commonly assumed, mainly because they're not always competing for the same type of property.

On mass downsizing by baby-boomers. A good question. One possibility is that their equity will simply be recycled back into housing (downsize, distribute the money to kids to beat the seven-year inheritance rule), kids trade up in property. The other is that, as now, many older people will be reluctant to downsize.

Posted by: David Smith at June 8, 2007 10:07 AM

Wage inflation is out of the question (well wage inflation like in the past), otherwise bye bye big business, hello mass unemployment.

This Nu Labour government obviously think its a good thing that more and more money is funnelled into the houses (well banks really) rather than businesses via high street spending or pensions.

Posted by: Kev M at June 8, 2007 12:20 PM