Housing market trends and recent policies Daniel Chandler © Institute for Fiscal Studies

Context Strong upturn in the housing market in 2013 Very active area for government policy Concerns raised about: House price ‘bubble’ Affordability © Institute for Fiscal Studies

Outline What has been happening to house prices? What do recent trends suggest about a potential ‘bubble’? What impact will Help to Buy have? © Institute for Fiscal Studies

What is a ‘bubble’ and how can we identify one? A ‘bubble’ is when rising prices are driven by expectations of future price increases Differs from a ‘boom’, where prices are driven by economic ‘fundamentals’, i.e. supply and demand for housing Characteristic features of a ‘bubble’ Speculative buying for capital gain Speculative mortgage lending Rising prices followed by decline or collapse A ‘bubble’ and a ‘boom’ might indicate different problems, and require different solutions How can we identify a bubble? Compare with historical peaks and trends Look directly at supply and demand (why is London different?) © Institute for Fiscal Studies

UK house prices since 1988 - 9% -19% Notes and sources: see Figure 5.1 of The IFS Green Budget: February 2014 © Institute for Fiscal Studies

UK house prices since 1988 -25% Notes and sources: see Figure 5.1 of The IFS Green Budget: February 2014 © Institute for Fiscal Studies

House prices in London -17% Notes and sources: see Figure 5.1 of The IFS Green Budget: February 2014 © Institute for Fiscal Studies

Real house prices in the UK and London -13% -17% Notes and sources: see Figure 5.6 of The IFS Green Budget: February 2014 © Institute for Fiscal Studies

Why are prices growing faster in London? Short run London’s economy has performed better than UK average since 2007 on some measures e.g. total output, employment Large flows of foreign investment, increased since 2007 Long run Population growing faster than housing stock in London (in contrast to England as a whole) © Institute for Fiscal Studies

Prices growing significantly faster than earnings in London Nominal house-price-to-earnings ratio for first-time buyers + 17% Notes and sources: see Figure 5.7 of The IFS Green Budget: February 2014 © Institute for Fiscal Studies

Help to Buy - overview Aim: describe two components, explain rationale and objectives, initial assessment of impact Equity loan: loans of up to 20% on newly built homes (launched Apr 2013) No interest for first five years; govt shares in capital gains and losses £3.5bn over 3 years; 74,000 properties Mortgage guarantee: provides mortgage lenders the option of govt-backed insurance on high LTV loans (launched Oct 2013) Lenders pay a fee calculated to cover expected costs £12bn contingent liability to fund £130bn or loans over 3 years Eligibility is very broad for both schemes Properties worth <£600k Residential only, no second homes Borrowers have to pass mortgage ‘affordability’ checks © Institute for Fiscal Studies

Help to Buy - objectives Increase affordability of homeownership Address deposit constraint (enable purchase with 5% deposit) Major reduction in availability of high LTV loans Equity loan: top-up ‘deposit’ Mortgage guarantee: increase availability of high LTV loans, correcting perceived ‘market failure’ in market for high LTV lending Stimulate housing supply Equity loan: direct stimulate spending on and demand for new builds Mortgage guarantee: no direct link; potential indirect impact via increase in demand/activity © Institute for Fiscal Studies

Help to Buy: equity loan, assessment Impact on affordability Concerns policy not targeted at those who need help to get on property ladder (FTBs, low-income households/‘starter’ homes) Available data suggests this is not major issue: 92% of loans made to FTBs Above average incomes, but lower than typical house purchaser Average purchase price of £195k, close national average (£170k) Impact on supply Will the scheme generate ‘additional’ demand? How will supply respond? Supply historically not very responsive But may be spare capacity in short term So far: increase in construction, but hard to isolate impact © Institute for Fiscal Studies

Help to Buy: mortgage guarantee, assessment Impact on affordability Has the scheme increased availability or reduced costs of high LTV mortgages? Bank of England survey reports increased availability, linked to policy Reduction in interest rates, though impact of policy less clear Impact on supply No direct link to supply of new homes, has caused concern Short term upward pressure on prices is likely (given rel fixed supply) Eventual impact depends on additional demand and supply response Given supply concerns, could target purchases of new builds only © Institute for Fiscal Studies

Summary Strong growth in house prices in 2013 No clear evidence of ‘bubble’ based on comparisons of real prices with previous peak and trends Faster growth in London partially explained by strong economy, foreign investment and population growth, though prices growing faster than earnings is potential source for concern Help to Buy is likely to improve affordability in the short term Uncertainty around impact on supply (and prices) © Institute for Fiscal Studies

The IFS Green Budget 2014 5 February 2014, Beveridge Hall, Senate House, London www.ifs.org.uk @TheIFS © Institute for Fiscal Studies

The squeeze on incomes and policies to help the low paid Andrew Hood © Institute for Fiscal Studies

Are real pre-tax average earnings rising? Different measures give different answers Relative to CPI... Govt figures (from ASHE) show small rise from Apr 12 to Apr 13 Latest weekly earnings data (Nov 13) shows 1% annual fall OBR forecasts imply real earnings now rising What’s the bigger picture? Real weekly earnings 8.6% lower than October 2007 Earnings only one component of total household incomes © Institute for Fiscal Studies

Average real net household incomes since 2007–08 5% fall 6% fall Note: Incomes deflated using the CPI Source: Table 6.1 in Green Budget document © Institute for Fiscal Studies

Real income change by percentile since 2007–08 6% fall Notes and sources: see Figure 6.1 in Green Budget document © Institute for Fiscal Studies

Changes in real annual incomes since 2007–08 For a childless couple at the... 2007–08 2010–11 2013–14 Fall : 2007–08 to 2013–14 10th percentile £12,000 £12,347 £11,711 -£289 50th percentile £24,719 £23,989 £23,210 -£1,509 90th percentile £50,763 £48,455 £46,349 -£4,414 Note: Incomes deflated using the CPI Source: Data underlying Figure 6.1 in Green Budget document © Institute for Fiscal Studies

Has inflation differed for rich and poor? Low income households spend more of budget on food and energy Energy prices up 60% since 2008 Food prices up 30% over the same period Consumer Prices Index up 20% High income households spend more on mortgage payments Mortgage costs down 40% since 2008 We calculate specific inflation rates for different groups based on spending patterns Since 2008, average annual inflation 1 percentage point higher for poorest fifth of households than richest fifth © Institute for Fiscal Studies

Real income change by percentile since 2007–08 6 ppts Notes and sources: see Figure 6.1 in Green Budget document © Institute for Fiscal Studies

Difference in real income changes for households in top and bottom income quintiles since 2007–08 6 ppts Notes and sources: see Figure 6.11 in Green Budget document © Institute for Fiscal Studies

Why have living standards fallen? Fall in living standards so far driven by decline in real earnings Real weekly earnings 8.6% lower than October 2007 Has led to policy focus on helping those with low and middle earnings 2 different ways to do this: Increase their take-home pay through tax and benefit changes Directly increase their earnings © Institute for Fiscal Studies

Increasing the income tax personal allowance Allowance in 2014–15 to be £2,545 higher than inherited plans Costing £10.7bn a year, and taking 2 million people out of income tax Further increases poorly targeted on low-income working families Only 15% of gains from increase to £12,500 would go to working families in bottom half of income distribution Why? 1 in 6 workers already pays no income tax Gain for low income families often largely offset by lower benefits Helps low income individuals in high income families Cuts taxes for individuals with unearned income eg. pensioners © Institute for Fiscal Studies

Cutting National Insurance contributions Raising NICs thresholds a better way to help the low paid 1.2 million workers to pay NICs but no income tax in 2014–15 Cutting NICs only reduces taxes for earners so it would do more to strengthen work incentives Aligning thresholds simplifies the direct tax system facing workers © Institute for Fiscal Studies

Increasing Universal Credit work allowances In-work benefits are a more targeted way of supporting low income working families withdrawn as family income rises gets round issue of direct tax cuts reducing benefit entitlements Under Universal Credit, could help working families by increasing the work allowances no gain for non-working families © Institute for Fiscal Studies

Impact on working families by income decile Notes and sources: see Figures 7.9 and 7.10 in Green Budget document © Institute for Fiscal Studies

Increasing Universal Credit work allowances In-work benefits are a more targeted way of supporting low income working families withdrawn as family income rises gets round issue of direct tax cuts reducing benefit entitlements Under Universal Credit, could help working families by increasing the work allowances no gain for non-working families But there are drawbacks weakens work incentive for slightly higher earning families non take-up means not all eligible families will benefit © Institute for Fiscal Studies

Increasing pre-tax pay Why do some workers have low hourly pay in the first place? Low productivity Policies should focus on improving productivity eg. education, training Higher minimum wages reduce employment Employer power leaves pay lower than productivity warrants eg. costs of moving job gives current employer power Higher minimum wages may not reduce employment © Institute for Fiscal Studies

Raising the National Minimum Wage Minimum wage has risen slightly compared to average earnings since the recession, but has fallen by 5% in real terms Pressure for real increases to restore pre-recession value ‘I want to see above-inflation increases in the minimum wage, precisely because the British economy can now afford that’ George Osborne, 16 January 2014 Broad consensus is that so far there has been little evidence of negative employment effects... ...but any large increase would carry risks © Institute for Fiscal Studies

The Labour Party’s “Make Work Pay” contracts Employers that increase pay of all workers to Living Wage in 2015–16 get one-year 32p tax rebate for every £1 of extra wages May incentivise some employers to raise pay voluntarily Still a trade-off between higher wages and lower employment eg. higher cost of employing a new worker below the Living Wage Could distort other employer decisions eg. timing of pay increases © Institute for Fiscal Studies

Conclusions Big squeeze on real household incomes across the distribution One response is to help low paid through tax and benefit system NICs cuts are better than further increases in the personal allowance In-work benefits more targeted, but have their drawbacks Policies to increase pay directly, whether compulsory or voluntary, likely to face trade off between earnings and employment Big increases always come with risks Increasing productivity must play role in long run policy © Institute for Fiscal Studies