Much of the commentary around last year’s student riots focussed on the unfairness of the boomers, who went to university pretty much for free and have done well out of the UK’s property market over the last 40 years or so, visiting £9,000 tuition fees on the next generation. As a late boomer myself I can’t help feeling a little guilty over this.
This morning the Radio 4 Today programme followed up on the Grant Shapps interview in the Observer on Sunday. There he talked about the craziness of first time buyers, without the benefit of help from their parents, having to wait until they were 36 to buy their first properties. I started paying my first mortgage when I was 23. Maybe that was too early. Shapps talked about the desirability of the housing market lagging wages and making housing more affordable over time.
Shapps is on dangerous ground talking about pushing the cost of housing down and in the past I have had people get angry with me when I have suggested that it would be desirable if this happened over time. As a nation we have an unhealthy relationship with property ascribing to it supernatural powers. Most commentary on the housing market blames supply but the demand picture is just as important. Not many people have lost money being long in property over the last few decades and as a result many of us have rather large homes. We believe that we simply cannot lose if we pile further and further into property even branching out into buy-to-let when we can’t envisage an even larger home.
As you walk around London suburbs where maybe 80% of properties have been extended by say 30% with rear and loft extensions you can’t help but wonder how we have increased the size of the property stock by a quarter say and still the price has greatly risen above inflation. Surely we are doing something weird? We are. Many of us are effectively hoarding. I know there are other factors at play such as immigration and foreign property buyers in London but these factors can only have a big impact in a market which is already overbought.
There are two things which the new coalition government has done which will have a big impact on property prices over time. Firstly, it plans to take about £2 billion out of housing benefits. The social housing advocacy industry worries that this will lead to large movements of benefit recipients out of more expensive property. I am not sure how many taxpayers are that worried about this. The most likely outcome is that rents will fall. This will blow back on property prices.
The second big change is those tuition fees. Because Brits think that property is magic the price of property is strictly tied to their ability to borrow. The liquidity problems in banking have already flowed through to stable property prices. Interest rates will march up to 5% or so over the next couple of years and will bear down further on any hint of exuberance in the property market. Over the medium term tuition fees will feed through too. If future generations of young people have their property borrowing limited by education loans on a large scale this will feed through to lower property prices. Instead of maxing out their borrowing on property alone young people will need to share their credit limit between education and property loans. What this means is that when the boomers come to cash in their property chips they will get less than they would have if tuition fees had not been pushed up.
The next generation will borrow and repay pretty much the same. Tuition fees will be offset by lower property prices. The UK property market will get more normal. The boomers will pay. Rejoice!