Home—Blog—The government's latest ludicrous idea to boost house prices
Jul 12, 2011, 11:54
Posted byMerryn Somerset Webb
Comments (26)
Are most annuities mis-sold? That depends on your definition. But you could make a pretty could case for it.
How? Simply by noting that the vast majority of people (two thirds) buy their annuities from their pension provider, despite the fact that they could very probably get a much better deal from shopping around. That suggests that they aren't being given particularly good information on their options.
No-win no-fee legal firm Brunel Franklin thinks that isn't good enough and has announced that it is to bring some test cases of possible mis-selling to the Financial Omsbudsman, says the Guardian.
On what grounds? All sorts. The main one is likely to be that providers have failed to properly explain to clients that they have an Open Market Option (OMO) – the right to buy their annuity from anyone they like. Note that in 2008 the Financial Services Authority had a half-hearted go at the industry after noting that 40% of letters send to retirees didn't properly point out how the OMO works.
But they could also have been sold a type of annuity without the risks properly explained, or they could have been sold an ordinary annuity when their health would qualify them for an enhanced annuity (higher payments for people who are likely to die early). Only 10% of the investors eligible for an enhanced annuity end up getting one.
Pensions campaigner Ros Altman is with the critics on this. "There is an enormous amount of mis-selling of annuities and it has gone on for years," she says. But the trouble isn't just the companies (it isn't in their interest to be honest about annuities). It is the government and the regulator: they "know customers don't understand what they are doing when they buy an annuity, but they haven't done anything to stop it."
That's an interesting point, particularly given that it isn't that hard a problem to solve. According to Tom McPhail at Hargreaves Lansdown, the key thing to do is to simply swap things around. At the moment the default option is buying an annuity from your pension provider. Make the OMO the default option (so retirees get a letter not with quotes from their provider but with instructions on how to shop around) and all of a sudden you will have a properly competitive market.
Lead indicators for Britain's economy
But pensions aren't the only place where you might be beginning to think that ongoing mis-selling is as much the fault of the government as anyone else. Take last week's ludicrous suggestion from Grant Shapps that lenders should be offering "mates mortgages" to help the young on to the housing ladder (or housing snake).
If Shapps could 100% guarantee that house prices would go up every month forever and that every house bought by mates would sell at any time by enough over its purchase price to cover stamp duty and costs and to make a profit that would be just fine. But he can't.
Volumes in the market remain very low indeed – with any less-than-perfect properties languishing for months – and prices are still falling. Halifax figures for June showed they're down 3.5% on last year. If you add in inflation (which the mainstream is finally realising that you should) they are down 7.7% (and that's using the rather more forgiving consumer price index measure).
So buy with a mate now and you may find you and he are together for a long, long time. That's not going to be good for your relationship. But things could be even worse for you if your friend isn't the patient type: if he defaults, the lender is allowed to chase you for the repayments. Then you'll be down a mate, a bank balance and a credit rating. And wishing that you'd ignored Mr Shapps and just waited for prices to fall and the mortgage market to free up before you tried to buy a house. Getting the wrong annuity might make your retirement less than it should be. Ending up stuck in negative equity with a friend you grow to hate is likely to be a great deal worse. If I were Mr Shapps I'd start thinking about how so many bad recommendations end in mis-selling cases before I started interfering in the mortgage market.
Published in Blog More articles by Merryn Somerset Webb
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(12 July 2011, 02:44PM) Complain about this comment
But with the government and the financial industry pitched against 'first time buyers' and indeed the general public what sort of a society does it make modern Britain. What era would you would say this was most comparable to. Particularly, in terms of housing ownership and affordability?
(12 July 2011, 03:11PM) Complain about this comment
The pathetically ineffective Grant Shapps rules not by decree but by plea, which can only fall on deaf ears. He is one of the weakest and most uninspired members of the Tory Party, and reflects disquietingly upon David Cameron's poor selection abilities. Housing will stumble inevitably onto the next crisis under his ministerial sojourn.The question is this: Are houses over-priced and heading for a dramatic fall? The strange and discomforting answer is... maybe not! Consider new build house prices... pre-2007 the National Builders sold the average house for £172,000 and made approx £33,000 profit per house, that profit is now (2010) down to £16,000 or 9.8% of turnover on a £168,500 average house built. They can't go much lower or their shareholders would be advised to cash in and put their money in an interest bearing account? So how can prices fall?
(12 July 2011, 03:13PM) Complain about this comment
Building materials are inflating, labour costs are static, only land prices can be squeezed down, and there is the perennial shortage of plots and planning restrictions. So new house prices are what they are because of pure economics and you aren't going to change them in the near future. The prices of old houses is influenced by the price of new builds. The current average price of older property in the UK is now about £164,000, which is very similar to the new build average. Some older houses do have an antique enhancement value, with attractive quality features that command a premium. Often their re-build valuation (undertaken by insurance and mortgage requirements) is actually higher than their present market valuation. As it will cost more to rebuild your house than it is presently worth, can it be said that houses are over-priced? Perhaps not. So why is everyone moaning that houses are over-priced? Only because of one thing... they cannot afford to buy one.
(12 July 2011, 03:16PM) Complain about this comment
So... now we have the answer, Britain, the working or the 15% unemployed and the 40% non-employed, the many non-wealth creators... don't create enough and don't earn enough to own a house in which to live. It is the same in many 2nd and 3rd-world countries. Thus renters and slaves they have to be. Therefore please stop moaning, stop hoping for a price crash, stop hoping for a miss-selling windfall... get creating! Or give up the dream of owning your own house. There is another solution which Grant Shapps has rejected. As in France, create small special development areas in every village and town in the UK. The Government buys the land at agricultural prices, splits it into building plots which are available at cost price (about £3,000 per plot) to self-builders, especially to young people in the locality with either a working or an historical residential qualification. Result: housing become affordable again to the priced-out majority. Cost to Government... zero.
(12 July 2011, 03:17PM) Complain about this comment
Jaw,It may be so about new builds. But i hazard a guess that the main input cost of land has in no way been written down or depreciated since peak prices. To write down on their large landbanks would be catastrophic to share price, so they would rather spin it that their margin on the build is lower. Land cost IMO is probably more than 50% build cost there. They are probably putting those units up for under 50k each.
(12 July 2011, 04:34PM) Complain about this comment
As you commented earlier today via Twitter, house prices HAVE effectively crashed. If you combine the drop since the 2007 peak with inflation in the meantime then this represents a sizeable drop in property prices since the peak. It's unlikely that property prices will rise in the next couple of years, but it does appear that inflation will continue to run at current or higher levels. So within a few years we'll have seen the size of correction that many commentators were calling for at the height of the market.Which means that properties ARE becoming more affordable for first time buyers and, as a result, we're seeing buyers coming back into the market. Which makes this hare-brained 'mates mortgages' idea seems even dafter.Blogged about this earlier today actually: http://www.mov8realestate.com/blog/item/84-property-prices-in-scotland-are-they-going-up-or-down?.html
(12 July 2011, 05:10PM) Complain about this comment
Jaw - in response to your rather narrow minded comments in post 4:Firstly, I'd love to know you views on what you considered to be 'wealth creation'. From your comments I'd guess that the selling of Credit Default Swaps and other Mortgage backed Securities might be high up on your list.However you might spin it, this property market is a slowly deflating asset bubble - demand is now simply not high enough, nor is the average UK wage substantial enough to sustain these fantasy prices and they will fall if the market is allowed to operate under normal conditions. Why do you think the BoE is doing everything to supress interest rates?Things are going to get a lot worse for everybody (possibly excluding yourself) when the Govt runs out of options. And Grant Schnapps' ridiculous ideas suggest that's not far off.
(12 July 2011, 09:13PM) Complain about this comment
Post No. 3, "So why is everyone moaning that houses are over-priced? Only because of one thing... they cannot afford to buy one."Isn't this the definition of overpriced?
(13 July 2011, 09:01AM) Complain about this comment
Robert,To point out the gaping hole in your theory, it's wage inflation that makes houses more affordable. All other inflation makes them less affordable as you have to spend more money on other essentials. Guess which one we have. Think it's going to reverse soon? I don't.Simon
(13 July 2011, 09:34AM) Complain about this comment
JAW, I actually agree with you wholeheartedly, at £164k the fact is that the average house isn't actually overpriced at all. A bog standard couple with the man earning £30k and woman £20k would/should have no difficulty at all in affording that.
(13 July 2011, 10:30AM) Complain about this comment
In a situation where the man earns £30K and a woman earns £20K, the historical ratio of 3x plus 1x would give you a loan of £110,000. At today's rates that's affordable, but 54,000 short of the average house price. So you'd need savings of £54,000 to hand.Because in the UK we don't save, that ain't gonna happen. Houses are overpriced, end of....
(13 July 2011, 10:37AM) Complain about this comment
JAW@2 your reasoning that house prices cant go much lower because there is no longer any marging in new builds in flawed. House prices are ultimately determined by the total amount of credit available in the mortgage market. This has reduced greatly since 2007 and doesnt seem likely to bounce back any time soon. New build prices will have to adjust to this fact and the variable in the equation is the value of land: this will have to fall to reflect the new market reality. Developers who bought land at the top of the market will get burned and there is nothing they can do about it.
(13 July 2011, 10:43AM) Complain about this comment
Andy in the historic situation that women didn't generally work at all you'd not even get £110k. But the FACT is that women now do generally work, and so it's both reasonbale and sensible to take both earnings into account. The idea that women who have children must give up work is stoneage nonsense. Whether you like it or not you will find that a couple with £50k joint earnings will have no trouble obtaining a £150k mortgage what so ever. That my friend is reality.
(13 July 2011, 12:46PM) Complain about this comment
Alex - you don't sound convincing, at post 10 you said a couple could afford £164k, in response to Andy you said they could afford £150k............any more advances......do you now think they could only afford £130k? Any how I think you are forgeting that when the couple has children they have to pay £600 or more on child care....so in all reality your £150k is impossible.......would you like to lower it again?
(14 July 2011, 02:25PM) Complain about this comment
11, Andy.Are you saying that a woman on fifty four thousand pounds a year, would have to find a deposit of one hundred and ten thousand pounds,to buy the average house. Some hill to climb.
(14 July 2011, 03:19PM) Complain about this comment
Phil. You have to put down a 10% deposit generally. You do understand that don't you? Can you do the maths and take 10% off £165 or do I need to do that for you?
(14 July 2011, 03:39PM) Complain about this comment
Alex,I think your assumption of what 'bog standard' wages are maybe a bit high. Maybe 'bog standard' people aren't being advanced any mortgages.Also, I take it the £164k is the value of properties that the Halifax or Nationwide lent on, therefore you would expect these figures to be affordable, especially lending from Nationwide. Even the Halifax will have learned it's lesson and have more sensible ratio's.
(14 July 2011, 05:11PM) Complain about this comment
as mentioned above- one earner was normaly sufficient to put down depoist having saved for same/.....the it took two earners having deposit and saved for sameNow after the madness of recent liars loans/self/certs and banks throwing 'Loans' the house bubble requires ..Mum & dad and Granparents and / (or mates mortgages - just shows how Govts need to keep house prices inflated!!) BUT all the time throughtout the past 40 plus yrs houses have got smaller and smaller,put a wardrobe in the master bedroom??-forget other bedrooms- as with gardens-for many a shared open plan lawn surrounded by other houses-garages are a luxury-street parking becoming the norm on new builds..seen this for yrs and have just visited a new build developement..so we are paying much much more --for less and less...I agree with above comments as to houses prices direction..wage rises will be slow in coming for those who have jobs and for those who have not got jobs.............
(15 July 2011, 10:07AM) Complain about this comment
Mike, by bog 'standard wages' I took the average wage for a male and a female in the UK, being respectively £30,500 for a male and £22,000 for a female in 2011. That seems appropriate when estimating the affordability of the average house.
(16 July 2011, 11:09AM) Complain about this comment
Families are smaller and couple/single person households are also more common. This would imply that the demand for more and smaller houses would be higher compared to the past.Just to add a bit of contrast as to other countries - my niece is in her late 20s, employed and working in Sydney, Australia. Her first new build home at $650k is around £400k. She has been saving since she started working (started young). She and her husband are both working and they have been renting a one bedroom flat until now. Rents used to be relatively cheap in Australia until recent shortages.
(16 July 2011, 01:22PM) Complain about this comment
House price have been inflated by the so called greedy estate agents, lenders, government and banks of England for so many years, this is why the Bank of England have kept the interest rate for so low for so many years. Most of all is those greedy BTLs they have push up the price for never ending of BUYING AND LENDING, worst of all they buy those big houses or churches or etc. then converted into so many tiny box flats, then charge you over inflated price to rent or to buy. Also, the government should stop those rich oversea buyers bought houses without paying the stamps duty. SO THE HOUSE PRICE NEED TO FALL TO MORE THAN 50%, THE SOONER THE BETTER.
(16 July 2011, 01:48PM) Complain about this comment
Wage inflation does not make houses more affordable. The lender insists on being compensated for the loss of value of the money they've loaned. This has 2 effects:1. The borrower pays off the loan faster, the compensation for loss of monetary value is equivalent to a lump sum repayment. This results in the borrower paying less in interest overall.2. Because borrowers are compelled to undertake an accelerated repayment of the principal, they cannot afford to borrow as much as they might have been able to were they are not required to do so, so lenders lend them less.It is this constriction on lending that makes houses more affordable. If lending were restricted because of deflation, it would have a similar effect on house prices.
(16 July 2011, 02:37PM) Complain about this comment
Provincial property prices are very significantly down on the peak. Building Society stats on prices are nonsense. Wherever you stand on this govt cutting 400,000 public sector jobs in a short timeframe, that act is going to shaft the level of "bog standard salaries". The only way is down. Dont let the BTL lobby convince you otherwise. And in an austerity economy, hitting pensioners & the disabled especially hard but not cutting BTL tax breaks - that is a disgrace. House prices arent as low as they would be wholly due to state intervention. The longer that goes on, the greater the final crash. Weve had decades of a political class whove driven economic growth largely on the back of a housing boom: Divisive & an economic sham.
(16 July 2011, 03:02PM) Complain about this comment
No-one's mentioned fractional reserve banking - the root of the problem. When people borrow the money springs into existence at the point they sign - the money supply explodes and the new money lands on housing, pushing prices up. That is what has determined house prices. They are still way overinflated and the government and BofE is desperate to keep them up to save the banking system - not to save recent buyers. If they allowed gravity to take over, prices would plummet, banks would go bust, interest rates could be allowed to rise which would reduce the cost of living, attract foreign investment, encourage and reward saving - meaning there would be more real capital for job creation and housing would be affordable again. It's ok saying a couple can afford a house by being maxed out but where is the contingency - what happens when someone is ill? We need and end to FRB. The BofEs plan to have negative real interest rates of 7% for 10 years is theft - plain and simple.
(17 July 2011, 02:02PM) Complain about this comment
I don't know where everyone thinks that the average wage is somewhere between £20/£30000 p.a. This average includes top wage earners like Richard Branson footballers,bankers etc. The average wage in the provinces are somewhare between £13/15000 and probably less if the local government and civil servants are excluded. This kind of thinking has created a massive wage inflation particulary in government jobs. People applying for these positions and the civil servants offering them have lost touch with reality. They are grossly overpaid. These inflated ideas about average wages have helped drive house price inflation and the cost off everything else. This has also been assisted by loose fiscal constraints by all those seting wage levels.
(18 July 2011, 11:45AM) Complain about this comment
I seem to remember one Gordon Brown increasing Stamp Duty on homes in order to 'cool the housing market'. Well, it seems pretty cool to everyone commenting here - even if the reasons are contended. It might not totally solve the problem but maybe the same logic could be applied by a Government that claims to promote home ownership - but in reverse. One thing is for sure; in cases wherever Stamp Duty is applied, it does nothing to make homes for people more affordable. The economic history of the nation is riddled with failed examples of government intervenion in free markets that are effectively and responsibly operated by ordinary people and companies that traditionally made a positive contribution to the economy (home ownership taxation, pubs, shipping, manufacturing to name a few obvious cases). Wasn't the Stamp Duty issue included in the list of measures which claimed to have resulted in 'an end to boom and bust'?
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