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

2. 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

3. 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

4. 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

5. 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

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

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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

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

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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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