Two reports out this morning both show that first-time buyer numbers are continuing to fall dramatically, with some unable to buy and others unwilling.
Rightmove and Halifax surveys both show deteriorating levels of first-time buyers, commonly called the lifeblood of the housing market.
Halifax – whose survey at the weekend showed house prices rose 0.3% in July – estimate that there were around 86,000 first-time buyers in the first half of this year, a 10% drop in numbers since the same period last year, and close to half the number in the first six months of 2007, when there were 181,500.
The continuing slide is happening despite Halifax finding that the number of towns that are affordable to first-time buyers is now at the highest since 2003. However, this is thanks to a sharp North–South divide.
Halifax says that 80% of all local authority districts in the North are affordable for first-time buyers, although only 8% of districts in the South are, whilst London has no affordable areas for first-time buyers on the average national wage.
Halifax says that deposit requirements for first-time buyers have come down 8% since a year ago, from £30,251 to £27,719, but first-timers are still staying away.
The lender says the average purchase price for a first-time buyer has fallen in the past year from £140,883 to £135,091, but that over the last decade first-time property prices have soared by 76%, up from £76,855 in 2001.
Meanwhile, this morning’s Rightmove report has found that most of the UK is now off-limits to first-time buyers, with seven out of 11 UK regions being first-time buyer blackspots.
The stand-off in these regions identified by Rightmove may not be about affordability but attitude. An astonishing 70% of would-be first-time buyers think property is over-priced in their areas.
The portal also reports that finding a deposit is the biggest single difficulty for first-time buyers.
In those blackspot regions, first-timers make up fewer than 20% of buyers – half what is required for a healthy market.
Although Halifax rates London as unaffordable, Rightmove finds that first-time buyers are active in London, with 41.2% of would-be first timers being the proportion of all those intending to buy in the next 12 months.
However, the London figure is far higher than anywhere else: the region with the next highest percentage of would-be buyers is the West Midlands, where the percentage of likely first-time buyers is just 23.4%.
The Rightmove report says that overall, national would-be first-time buyer levels have dropped from 30.8% to 23% in the last two years. But were it not the London proportion distorting the figure, the national average proportion of first-time buyers would be below 20%.
Miles Shipside, director of Rightmove, said: “First-time buyers perform an essential function at the start of the housing ladder by beginning chains that help others in the area to move as well.
“The emergence of so many first-time buyer blackspots has serious implications not just for those who are unable to buy for the first time, but also local housing markets in each of those regions. It is particularly bad news for first-time sellers, for example.”
The blackspots where there are fewer than 20% of first-time buyers are: South-East, East Anglia, East Midlands, Yorkshire & Humberside, Scotland, Wales and South-West.
Areas where there are 20%-plus levels of first-time buyers are Greater London, West Midlands, North-West and North.
Comments
rant: not without the appropriate Method Statement - and these were unavailable due to:
a) reduced numbers of Risk Assessment Officers - no Assessments had been made (currently scheduled for April 2015 subject to budgetary confirmation);
b) even if they had, the Method Statement Officers' were on strike for equal/better rights with the Prison Food Tasters Association and therefore no MS had been written;
c) even if they were written, the typist was on seven-year paid Adoptive Paternity leave having sponsored an Indonesian orangutan;
d) The Health and Safety Officer was unable to sanction such an assessment to be carried out as he had sprained the right index finger playing in the department's Tiddlywinks Championship and could not press 'submit' on his Blackberry;
e) those few Risk Assessment Officers who were left were all attending court making statements regarding the H&S Officer's claim for work-related injury compensation - as the Tiddlywinks Competition was held on company premises in comany time - and apparently no Risk Assessment was in place for the event...
Funny old world, innit? ;o)
PeeBee - Apparently all the relevant risk assessment officers have been culled during the cutbacks. Maybe they were out on the streets too?
rant: ahhh... of course!
Here's a question you may then be able to answer.
IF rioting and looting is now, as it seems, so organised that it appears tantamount to a profession, what the H3ll does the job's Risk Assessment say?
Maybe one of your "contacts" could provide an answer... ;o)
Perhaps these guys better placed to comment!!!
Mortgage market sees highest number of FTBs since August
Wednesday, August 10, 2011
Published by MILLIE DYSONMortgages | 0 Comments
June saw the highest number of mortgages taken out by first-time buyers in 10 months, according to data released today by the Council of Mortgage Lenders.
There were 18,100 loans to first-time buyers, worth £2.2 billion, 24% higher by volume and 29% higher by value than in May. June's first-time buyer numbers were exactly the same as in last August, but 8% lower by volume and value than in June 2010.
Home movers took out 28,600 loans, worth £4.6 billion, in June - up from 23,800, worth £3.7 billion in May, but down from 32,800 loans, worth £5.3 billion, in June 2010.
Overall, there were 46,700 loans for house purchase, worth £6.7 billion, in June, up 22% in volume and value from May,
PeeBee - It's all part of HPCers' plans for global domination. Being the morally dubious lot that we are, we outsourced the rioting contract to child labourers...
Richard: If it WERE to be the HPC brigade who were eventually responsible for prices falling, then they wouldn't be "nutters" after all - would they?
So thats it, its not social unrest, thugs, or criminals, its the HPC nutters getting prices down, explains it all.
I suspect that London bucking trend and holding up the national figures is over.
From here on the land registry will be showing a healthy falls right across the country, which will help accelerate the return to reality.
@RnR
Judging by message boards such as MSE its having a big effect on locals planning to buy a place in the capital let alone foreigners.
Several people about to exchange are talking about pulling out.
I wonder what impact images of London ablaze has had on foreigners planning buy a place in the UK's capital?
If the scum on the streets continue to smash up our cities at this rate everything will be cheap enough soon anyway, if they don't burn it down.
Its just not British, time to stand firm, put the bankers in the front line, they stopped the world, can they not stop a bit of scum and make them stay indoors.
@Fun Boy Agent
Free land to build our own would certainly capture my imagination, can't see it happening though :-(
I don't think houses need to fall below their replacement costs in order to be attractive, just to fall in line with more normal relationship to wages. Given that the average home in the UK is approx 75 square metres, and that construction costs are approx £1k per square metre, that would give an average rebuild cost of £75K, which seems too cheap. In our situation (South West), we'd consider a nice 3 bed semi for £120K-ish reasonable.
We're living in an information age, with more information than ever before availble to view before making decisions. I think that, now the mania surrounding housing is subsiding, people are thinking objectively about how much things cost, researching why and questioning it.
Could it not be said that If prices were not at an all time low...then the transactions would be.......as FBA points out EA's live on trasactions not prices!
@cheesepuff, unemployed people can't afford houses, regardless of how low the price goes. That would not make an ounce of difference.
Prices are at a five year low in some areas, transactions are not. It is the economy not the prices.
Link to the latest RICS Report.
London is singled out as being the only place where prices are still rising (thankfully they avoided using the word 'hotspot').
Many of the comments are still calling for people to be given the chance to taken on very significant amounts of debt, whilst the elephant in the room of high prices gets less attention.
http://www.rics.org/site/download_feed.aspx?fileID=10174&fileExtension=PDF
I find the most optimistic comments are those at the very end, from Northern Ireland, where prices have already come down significantly.
Not sure who I offended enough to make them want to post using my pseudonym, (and write amusing dribble I might add) it made me laugh anyway...
I still scratch my head, I cant help thinking how far prices need to come down. Are they expected to come down below rebuild cost as a selling price?
What if government started giving out plots of FREE LAND to FTB's to build their own? would that work? Or would the final 'price' still be to high? Just curious !!
It is a fair question.
I have said this before, and will say it over and over. I don't mind if prices go down or up, I am an agent, I count transactions going through. The initial asking price is a part of that process as agents compete for business.
PS. I am not Wardy, and I miss Wardy's comments
I have a mortgage agreement for £180k (could afford more but am comfortable at this level) that is valid until November however I have serious doubts that I'll be able to spend it.
The current house hunting routine can be summarised as below:
1. See interesting house.
2. Have a sniff around online.
3. Discover that the asking price is £5k above what they bought for in 2007.
4. No longer interested.
5. Keep shovelling money into that savings account.
Put the asking prices down 20% and it would be a 'normal' market. Put the price down 30% and it would be the fastest market for many years.
Unemployment is still relatively low, so the only thing slowing down the market is incorrectly priced stock. We all know it.
All those London agents complaining about lack of instructions are going to be in for a pleasant surprise over the next few weeks / months. I had been wondering what the catalyst was going to be to bring London prices back down to earth. I thought it might be an appreciating £ or a new 'wealth tax' on super homes. But I never thought it would come to this though ...
Sorry Mr Fortescue-Smyth, that wasn't me, I was at work.
That must have been the other FTB in the country that can afford anything half decent ;)
Anyway, Great post - your analysis of FTB's is spot on.
Like I said I know of 5 other FTB's (honestly. - I wasn't sure if that was what made you laugh out loud, but its true (1 school friend, 1 cousin, 2 uni friends, 1 work colleague, and me)), definately more savvy than 4 years ago.
As I've covered before I was looking seriously and made several offers. But it is increasingly clear that house prices have a long way to come off. You would have to be mad to buy now, defer for a year or two while EA's and vendors slowly face up to reality.
Just read 'Would be FTB' who posted while I was writing and laughed out loud. You weren't round my office on Saturday morning looking at 3-bed semis, by any chance?
Like the poster below, we're also looking to to buy our first home. We have a sizeable deposit, 25% based on asking prices for a 3 bed semi in the village that we currently rent in, and wouldn't have much trouble securing a mortgage for the remainder, household income is above average for the area, so we currently have the means. We're not buying at current prices though.
There are multiple reasons for this, the economic situation, the added flexibility of renting, should the job market here take a turn for the worst, and relocation is a necessity, and most of all that prices are simply too high. Even if prices just drift down 5% per year for a few years, we've saved money by renting. I also rather like being debt free.
Once the sums make sense, we'll go for it, but there is a long way to go, before they do. Given that we appear to be staring down the barrel of banking crisis Mk2, and there seems to be limited public support for another bankster bailout, there's even less reason for committing yourself to a debt millstone at present.
'70% of would-be first-time buyers think property is over-priced in their areas'.
I am certainly getting a fair number of savvy-sounding potential FTBs who are looking but are clearly not in buying mode - mainly to get a feel for the area I think.
I'm always pleasant to them - they might well turn serious some day - and I like to chat to them. Overwhelmingly, they see prices as too high. Significantly too high.
It's not a despairing situation for them (as it might have been in 2007 for those anxious not to miss the boat). Rather, the last thing on their minds is to blow their precious deposit on the wrong property at the wrong time.
Of course you still get the stereotypical henpecked bloke and pushy partner who just wants to jump in head first (often Bank of Mum & Dad funded). But I'm seeing an increasing amount of sophistication in young (indeed, often not so young) buyers. They don't see rent as dead money, the opposite in fact as houses in many areas have been falling faster than rent paid.
They are happy to wait - they know that prices certainly aren't going up, and that if they do wait their deposit will be bigger, at a minimum. Most feel that prices are pretty sure to keep coming down. And they really are in no rush.
What can we learn from this? Well I've said it before here. The savvy seller (and the savvy agent) follows the market down, offering good value just a notch ahead of the competition. The only reliable way to sell in this market is to appear to be in bargain territori to buyers, many of whom have all the time in the world, FTBs or not.
In the sheer amount of denial from colleagues on here, I can only assume that they are either loaded to the gunwales with BTLs, or up to their necks in negative equity (or both). Either way, this lack of objectivity/willingness to accept reality really does their claims to professionalism no good at all.
We are looking to buy our first house, but we simply won't bother for now. We are one of the lucky few who can actually get a mortgage - up to £150,000 in fact, which would easily buy us a 3 bed semi with a garden.
But we don't want to. Job security is our primary concern, but house prices appear to be falling so we can keep saving, and probably afford a better place in the near future.
Renting also offers flexibility, which is good in case we need to move for any reason.
I have 5 friends who are also looking to buy, all of us looking over the Spring, 5 of us had an Agreement in Principal, the other one didn't, but none of us have bought yet. The reasons I mention above are mostly why, - houses just aren't very good value for money.
I doubt any of us will have bought a house this time next year because of this. That's 5 well positioned FTB's and 1 who would probably get a mortgage too. Reduce your prices and we might be interested, but in the mean time why would we bother?
Bank shares are collapsing this week and last - it looks as if we are in the early weeks of a second global banking crisis.
In the US the Bank of America, Citigroup and Morgan Stanley look to be in trouble. In France it is Societe Generale and here Lloyds is in a mess. They all lend to each other and are dependent on each other for loans in the billions.
Falling bank shares means the banks are worth less which means, by law, they have to lend less as they have to increase their cash reserves to off-set their lower share value. They LEGALLY have to take action to increase their cash reserves and the only way they can do that is by:
1. Reducing lending on mortgages, car loans, ordinary loans, etc, dramatically.
2. Putting up interest rates on the above already outstanding loans.
That is the reality of the situation. Nothing that any estate agent, surveyor or housepricecrash person on here says can change that.
Since the last banking crisis, when lending for houses dried up almost completely, the rules have been changed globally on how much cash reserves each bank has to have. The rules are now much tougher on the banks.
So it looks like we are in the first few days of a second global banking crisis which will inevitably result in banks lending less mortgages - only an idiot estate agent or surveyor or housepricecrash person will think that the housing market will not be affected.
Time to batten down the hatches?
“If a vendor wants a certain price, why should he/she reduce just to make whingers like you happy when there are buyers out there who are prepared to pay the "right price" in the vendors eyes. “
Actually that’s a really smart argument from a really clever man. I like it so much I am going to open a cafe. It will offer sandwiches at £25 each.
If anyone says that overpriced I will simply point out that is the price I want, and I am not going to lower them for whingers for whom the sandwich is out of their price range. /sarcasm
Oh dear, the idiot still does not get it. The right price is what someone else is willing to pay. It does not matter if its sandwiches at £25, or a house at 2007 levels, the simple fact is, if it does not sell it is not correctly priced. The sandwich shop offering them at £25 will never sell any, it does not matter if someone can borrow £25 or not. The house at 2007 levels will not sell, it does not matter if someone can borrow the money or not.
How many ways do I have to tell this fool that if a house that has sat on the market for months and not sold is self evidently not correctly priced.
Actually who cares, still gona be circa 650K transactions this year, thats plenty to make money. Ends
Good on the FTB's I say. Why would they want to bail out some mug who paid far too much during the boom years?
Far better for them to save and wait for vendors to price realistically.
If they're clever the deposit will be sitting with NS&I or similar and growing faster than inflation while houseprices tumble in real terms.
While houses are selling: substitute 'overpriced' with 'out of their price range'.
Once they stop selling: substitute 'out of their price range' with 'overpriced'
The market dictates the legitimate price.
>> If lending regulations were more leniant, there was more >> job certainty etc it would be a guarantee that transactions >> would increase, even with current asking prices. You can't >> deny that.
if you believe that house prices will go up 20% pa and wages 0-4% pa forever you are mistaken ...
back in the real world the laws of financial bubbles are in full swing ... like in US, Ireland and Spain ... just a question of time ...
@ RANTANDRAVE, yes and the only reason "70% of first time buyers think property is overpriced in their area" is because of the media and people like you who constantly go on about it.
Substitute "overpriced" for "out of their price range".
I disagree, there would be a huge increase in the amount of lamborghinis sold if there was an affordable mortgage for one. That is the culture we are in.
Haha, really. So does that mean that all the lamborghinis in the show homes that aren't sold are overpriced as well?
Properties don't sell, even when at the right price. If a vendor wants a certain price, why should he/she reduce just to make whingers like you happy when there are buyers out there who are prepared to pay the "right price" in the vendors eyes.
Just because you don't want to pay a certain price doesn't mean everybody else won't either. Yes, there are over priced properties, but (in my opinion, so don't get all wound up over it) that is not the reason for the lack of ftb's. If lending regulations were more leniant, there was more job certainty etc it would be a guarantee that transactions would increase, even with current asking prices. You can't deny that.
If you're going to come back with another insult and sh*t response that makes no sense. Please don't bother. I'm glad you can't afford a house because it's one less dick head for estate agents to deal with.
let's assume that you are an FTB and you can get a mortgage to buy a Lamborghini for £150k. would you buy it? no, because it is a waste of money for you.
and in the same way it is similar for FTBs. without capital gains there is no reason to buy an overpriced shoe box now
especially when the rent is lower than the mortgage, prices can go only down and IR can go only up ...
Children calm down, why do these posts always have to end up with squabbling? Why can't everyone post their view on the subject matter without a backlash?
Let's go back to funny friday, even if Fun Boy Agents jokes are a tad lame, it's better than bickering.
There seem to be a lot of assumptions here that FTBs would borrow any money they could, if it was made available to them, just so they could get on the housing ladder. As in the post I quoted earlier, that attitude only makes sense in a booming market where people expect future capital gains to pay off much of their debts. We are, in my opinion, a long way past that point.
However, the article makes a very clear distinction:
"The stand-off in these regions identified by Rightmove may not be about affordability but attitude. An astonishing 70% of would-be first-time buyers think property is over-priced in their areas."
Given the economic news going on at the moment, I can't see many people lining up to take on very serious amounts of debt right now, even if it was offered to them. The carrot of low interest rates doesn't offer much when they can only go up. There's too much concern about job security, cutbacks, inflation eroding disposable income etc.
Thinking through Ray's point (thanks for taking the time to read that Ray - I would have cut it but it would lose some of its message): How do you stop the current sentiment? How do you keep the demand high enough to sell the 99, when fear is replacing greed. Sentiment tends to snowball which is why markets rarely remain stable or flat. Indeed, all markets are of course irrational. Even now it looks like a major economic shock is coming due to a report that has a $2 trillion accounting error!
“So what dictates the "right price" for a property, you??”
Oh dear the idiot is confused. Time for some very basic concepts. The right price for something is what someone will pay. When 70% of properties do not sell that is because 70% of properties are overpriced and have to come down. It’s actually very simple when you think about it.
For clarity’s sake I used to go by the name Wardy, until I had a hissy fit and said I would never post again. I did not want to look like a hypocritical prat so I now post under this name.
The reason I am so aggressive to people who suggest prices might fall is because I am up to my neck in a mortgage for a place I can’t afford since my little agency is struggling and I am in real danger of losing both my agency and my home. Sometimes I cry myself to sleep.
Is the confusion between asking prices and selling prices too much of a grey concept for some to grasp.
To all those HPC'ers
So prices must fall? ok !! to what?
What is the intrinsic value of a house? The value of the land and the cost to build it?? (and demolish the one in situ).
What about location, condition, schools, jobs, transport links, etc?
Do you want people to start selling for and asking for less than an intrinsic value for the market to get going again?
I do not understand the thinking.
What, if all houses were £45,000??? The fact is houses are worth more than that and this is proven by the fact that houses are still selling.
And if all lamborghinis were £2,000, everybody would have one? What is you point. I don't think you have quite grasped the basics of business.
It is clearly you who is the idiot as the poster below states, you are angry because you can't have what you want. How about working hard, and then earning enough to pay for the house you want??
My guess is, you are a first time buyer, whom spends most of their time trolling through rightmove, laughing at all the houses which you think are "overpriced" and then goes to HPC to tell all your mates about it. What a w**ker.
CTW - unless of course prices haven't fallen enough to help FTBs now that silly lending has disappeared.
With IRs at 0.5% there's little reason for sellers to accept lower offers though. Slow grind down of both prices and transactions from here in my opinion...
Do foreigners snapping up London pads count as FTBs? It's an interesting question.
@rantnrave
Sorry for the delay in reacting, it took a while to read! ;>)
What if the car maker (FTB house builder) reduced output to 99?. There is a theory that if the demand is there you then keep the desire alive and you can increase your price at the same time as making more profit from less output. It is not my own theory and there are bound to be 'objections' - we shall see?
P.S. A main problem is still lack of reasonable availability of finance to those who can 'step up to the plate' (how topical is that!) because the demand is still there for property and not everyone is persuaded that now is not the time to buy - everyone is entitled to different opinions and have different circumstances.
Again, just a thought.
I'm an idtiot?! Lol.
So what dictates the "right price" for a property, you??
I have no wishes for prices to continue to rise. I'm not bothered either way because I know there is nothing I can do about it, let alone get offended and start insulting people.
The comparison to a lamborghini is ridiculous. They are £150,000 because people are prepared to pay that much. Not everybody can afford them but it is not a god given right to have one either. You make no valid point what so ever.
Same for a house. Some houses are still selling for what they were on the market for in 2007, others aren't. And then buyers like you moan because you can't afford what you want.
All three of the major indices show average prices have fallen over the last 12 months.
And now this report shows the number of FTB-s has also fallen over the last 12 months.
Of course, there is one rather interesting exception to these falling FTB numbers that the report highlights....
London FTB-s have increased in number in the last year, now at 41.6% of the market. While prices there have risen.
Proof once again that falling prices do not help more FTB-s to buy houses..
If you are planning a year ahead, plant rice.
If you are planning 10 years ahead, plant trees.
If you are planning for a lifetime, build a sanitation system or you could find yourself up to your knees in it.
Gloria - pricing at 2005 levels looks optimistic where I am (West Mids).
From Nationwide's data:
Av UK House Price Q2 2011: £163,049
Av UK House Price (in real terms) Q2 2003: £162,604
I think the people becoming much more debt averse as a result of having a much lower standard of living. However there will be no crash just a long drawn out correction.
Jock I have that conversation every day. I tell vendor if they want their silly valuation they may just get very lucky to find the one buyer who can and will pay it but these people who both can and will overpay are disappearing rapidly, and snaring one is a real shot in the dark. More likely if they insist on overpricing they will sit on the market forever as they lose their golden two weeks of opportunity.
What do I consider to be overpricing you ask? In my area right now overpricing is expecting to get 2007 levels. You need to sell at 2005 levels and I do not expect that to hold up long.
“It has nothing to do with house prices, it has everything to do with the tighter lending requirements.”
The £150,000 price tag on a Lamborghini has nothing to do me me not being able to afford one as well. /sarcasm
You idiot. If the prices are too high then they cannot afford the debt either. If that house was £45,000 then he might be able to get a 10% deposit. Your dream of never ending house price inflation is in ruin. Face it.
It's actually not that hard to get a mortgage at the moment provided you can be bothered to save for a few years to raise the deposit. A significant change from pre-crunch but fair enough really.
The "problem" is that there is a collapsing pyramid scheme and asking prices are still in fantasy land.
The only properties that are vaguely sensibly priced are probate type sales. Most others are obviously priced to clear existing debts rather than to sell and are to being avoided.
If you want to sell more houses then price them to do so.
“Just who in the world owns all this debt??? I know china owns a lot of America's but who does the UK owe it to?”
The creditor nations are largely the far eastern and Arab countries. Also places like Germany, Norway, Canada. Also Pension funds in indebted countries buy a lot of debt, as do the banks for capital reserves.
Just who in the world owns all this debt??? I know china owns a lot of America's but who does the UK owe it to?
If the whole world is in debt, where does it come from??
Realising Reality, lets say a first time buyer house is £100,000 in my neck of the woods. A first time buyer needs at least an £10,000 deposit to buy it which he can't afford.
Lets say that property reduced to £80,000 which is a sgnificant drop. The first time buyer stills needs an £8,000 deposit which he can't afford.
It has nothing to do with house prices, it has everything to do with the tighter lending requirements.
Advance warning of a very looooong post coming up ("Boo" they all cry). Turn away from the screen now if you don't want to see it etc etc. It is though not written by me ("Hooray" they all cry). If you can stick with it, I think this is an exceptionally well written and relatively uncomplicated explanation of why this country's economy and housing market are in the state they are. The Greater Fool principle referred to in the second half seems especially relevant. This was written back in 2004 by the way:
QUOTE (breathes in):
Over the past few years there has been an explosion of (until recently) ever cheaper money lending, at ever less-restricted levels and in ever-higher volumes. Most of this was in the form of lower interest rates and was to prop up the economy after the stock market collapse of 2000 (on the back of the tech/comms/dot-com boom). With business confidence, consumer confidence and stock market (and investment) confidence low, cheap/free money was needed to assist business and stimulate the economy. This came both as direct assistance, in the form of very cheap/free capital, and in the form of increasing the money supply to the general population (cheap loans, credit cards, etc), who could then spend the extra money on consumer products and services, creating high product demand in almost all sectors, stimulating businesses across nearly all industries. This created growing levels of employment, which in turn generated more consumer spending. Let me elaborate on this last point:
If a car maker is selling, say, 100 cars a year. This might be because only 100 people are willing or able to afford to buy his cars. If you increase the supply of money available to the general public, maybe 200 people will now be willing or able to afford to buy these cars. So the car maker is able to build and sell more cars. To build and sell more he needs to increase his number of employees, maybe double them, which he can now afford to do because demand for his cars has doubled. All of these new Car Making Employees now has paid employment, and more spending power, increasing consumer spending across all areas of the economy. Not only does the car maker directly increase employment, but every other business involved at some point in the production chain also now has increased demand, and can (and has to) increase employment: the people who make the bolts, cables, switches, and other pre-assembled components of the car also see increased demand and can increase their staff; and the people who serve them and their business now see more demand; the people who clean their premises, sell them sandwiches, carry out QA audits, maintain their computers and write software, audit their accounts; there is now higher demand for all of these products and services throughout the whole chain. The knock-on employment repercussions are enormous. And the combination of more people earning money, and people earning more money, through this increased demand filters into all aspects of these peoples lives. They have more money to spend on luxuries, eating out, holidays. And more to spend on cars.
Not only that, but everyone involved now is more eligible to borrow money, and more able to make the repayments on such loans, fuelling the base of this pyramid (sorry, mixed metaphor) with yet more cheap/free money, creating more demand, creating more employment, and creating more capability to borrow more money.
So is this the key to a miracle economy? Simply light the blue touch paper, then stand back and watch it inflate and grow? Unfortunately not. You see, genuine growth has not really occurred. Real value has not been added anywhere, genuine efficiency improvements have not been made, and genuine demand has not been created. What has actually been created is a self-fuelling, self-growing bubble that requires ever increasing amounts of debt to be taken on and an ever increasing rate in order not only to keep it growing, but just to keep it stable. As soon as the supply of new money runs dry, people willingness or ability to borrow more slows, or people's ability to service this debt diminishes, then this whole economic miracle collapses.
If only 20 of the 200 people who would have been buying these new cars from the Car Maker become unwilling or unable to purchase cars, then demand for cars has fallen by 10% (to 180). The car maker's demand has fallen 10% and he is making less money, and also no-longer requires as many workers to meet the new level of demand. So he has to reduce his number of employees. Not only that but everyone else in the production chain (people making the switches, wires, bolt, cleaning the toilets, selling the employees their lunch, doing QA audits, fixing the PCs) see demand fall as a result of this, and through lower demand and lower income has to reduce staff. The people whose industries would have been services through the luxury spending of all these employees (travel agents, restaurants, etc) all see lower demand and lower income too, and have to reduce staff levels. Some of all these employee affected, lets say 20 of them, are now unable to or unwilling to purchase new cars which they otherwise would have been able to afford if their own industry still saw it's previous levels of demand; so demand for new cars has fallen further, down another 20 to 160 per year. So more employees have to be laid off at the car factory; as do people in all other sectors of the economy. There would now be an a decreasing spiral of falling demand for products and services, which would continue to reduce employment, which in turn would continue to reduce spending. But it would also reduce borrowing, through a combination of people having less employment hence less ability to service their debts, combined with a lack of confidence in the economy ("heck, I could be made redundant tomorrow, better not take out that loan for than new Audi TT"). And so we have a recession. It is inevitable on the back of any boom.
But can the boom/growth be sustained? Can we just not keep printing more money at ever cheaper rates and keep fuelling the growth of the economy with it?
No.
Producing an increasing supply of money has two side effects:
1. It devalues the money. If everyone has £10, and then someone prints more bank notes, and gives each person a further £10, we all have now £20. Are we all twice as wealthy? No. All that actually happens is that the value of that money halves. Things that would have cost us £10 would now cost £20. This is because money (a currency) is simply a representation of wealth. A method of transferring wealth between people, and storing wealth for use at a future time. It is a representation of peoples labours, of commodities (metals, oil, etc), and of finished products. If we double the supply of money does the number of man-hours it takes to build a Ford Mondeo halve? No. Does the amount of metal and plastics used in the construction of the Mondeo halve? No. Therefore the amount of wealth available through increasing money supply does not increase, you are simply reducing the value of each unit of currency. It's like taking a cake with 8 slices, then deciding to slice it again into 16 pieces. You now have twice as many pieces of cake, but you have no more cake than you had when you started. This whole process is called inflation, and is an automatic (but often delayed) consequence in all situations where the money supply is increased (for example, though higher amounts of lending or through cheaper lending).
2. As well as inflation, increasing the supply of money has another consequence. Inflation is caused, as mentioned above, by more money chasing a limited supply of consumer good and services, pushing up the price of those good and services, devaluing the currency and causing people's labour to be worth a higher nominal amount in order to be able t continue to afford good and services. However, not all of the additional money goes into consumer spending. Some of it naturally finds its way into assets (for example Property). This creates an interesting effect. There is suddenly more demand for that asset, creating an upwards movement in its price. For example:
If previously there were 20 houses and 20 people wishes to buy them then there would be relative price equilibrium. However if demand increased to 30 people wanting to buy the houses, then only the 20 wealthiest (or most fortuitous) people could now afford to buy them, pushing the average amount someone is able to spend on each house up, increasing the price, (and leaving the remaining 10 people to start, and become addicted to a certain web forum).
Prices of the asset (property) are now seen to be rising. And as such are seen to be a good investment. Luckily the supply of cheap/free money is higher than it had previously been, so more people are able to borrow more money to pay higher prices for property, which itself creates more demand for property, pushing prices up still further.
Property is now seen as a solid investment, and has been showing solid returns through the capital gains of rising prices. More investors pile in to property, pushing the prices still high. The property people buy (or try to buy) the more demand they create, the high prices go, the more money they make! It appears to be a can't lose situation. Not only that, but the supply of borrowed money is ever growing, as the investor can now borrow money secured against the ever growing capital value of his earlier property purchases to raise the fund to purchase more property, creating more demand, pushing prices up further, and creating even more equity in which to borrow against to secure more property purchases. People who already own property become, as far as they can tell, wealthy beyond their wildest dreams, while people who do not yet own property will find that prices are far to high to be able to afford property, or will take ever more desperate measure to 'get onto the ladder' before rising prices leave them behind.
Several delusions occur at this point:
Firstly people will believe we are in a 'New Paradigm'. That prices are sustainably higher, that price rises can continue (or at least present prices can be maintained, locking in their profits), simply because prices have risen so far for so long. They will also believe a new paradigm exists in interest rates, and that borrowed money will be cheap for ever. Neither of these beliefs is actually true.
Secondly, people will see that demand for property has grown massively. This, as explained above, means that the demand will be far higher than supply, continually pushing prices up to astronomical levels. However, most people will misinterpret this excess of demand as a lack of supply. They will become convinced that there is a very acute shortage of property, and that there is nowhere near enough to go around. Strangely they will no have concern about the consequence of, or look for or see evidence of, the consequences of their perceived lack of supply (e.g. Large numbers of people forced to camp out on the streets). Instead they will simply use it to justify to themselves that a lack of supply justifies and protects the inflated value of their property. This is of course a delusion.
So, as you can see, the three most common arguments for sustainably high property prices are not founded, those being: A new paradigm of low interest rates a new paradigm of high employment and a severe shortage of property supply.
What you actually have in the above scenario is what is termed a 'Bubble'. Prices have risen because of an increased demand caused largely by the belief that prices will rise further. When this extra demand actually causes prices to rise, people take this as justification for the rises (attributing it to the three reasons above) causing more people to invest in property, pushing the prices up further. The increased supply of cheaper borrowed money facilitates the desire of people to put more money into property. However, the price rises cannot be attributed to any underlying fundamentals, they have only occurred because of the belief that prices will rise further. This is why it is called a bubble, because inflates but contains no substance; the value of the property has not risen, only the price; the pricing levels are completely hollow and unfounded. This is also known as 'The Greater Fool Principle', i.e. a fool buys something not because it's price reflects it's value, but because he believes that someone even more foolish than he will buy it off him at a higher price at a later time (and so you get a whole chain of greater fools).
However, eventually you get a 'Greatest Fool'. Eventually the economics will not support the ever higher levels of money lending required to buy the property, and/or sentiment will change and there will not be enough new fools to take the baton. This will cause a sudden drop in demand. And a drop in demand will lead to price rises grinding to a halt. As soon as price rises grind to a halt then, as people do not see prices rising any more they see there is no reason to buy property as an investment as you cannot make profit from it. Buyers who wish to buy a property to occupy for themselves also reduce their level of demand as suddenly, with no more price rises, there is no perceived to buy now at any cost, through any means, or be priced out forever.
This drop off in demand is relatively sudden and brutal, and estate agents are suddenly left with an increasing supply of property and almost no buyers (most are at this point priced out, and those that are no are still no-longer willing to purchase because prices are not rising).
As supply increases, through lack of buyers the level of supply will begin to be higher than demand. This, in all markets causes prices to fall. This is because if, say, you have 10 identical properties for sale, but only one buyer, it will be the seller who prices his property the lowest who will achieve the sale. This will set a 'below average', or 'below market value' price for that property, and set a new market level. Anyone now wishing to sell a similar property will need to reduce their price accordingly to meet this new market level in order to attract the scarce buyers.
Now prices are seen to be falling, and at an ever increasing rate, investors try to offload their investments to realise their profits, which simply create more supply, and reduces prices further.
On top of all this, lenders now see falling house prices, which means that the value of the asset they are securing lending on is falling, creating higher risk, so they reign in their lending, lending less money and on stricter criteria. This reduced the supply of new money to the market, reducing demand (at all price levels) reducing prices further.
Prices will then continue to fall until they have fallen below the pint at which the boom started. Once prices have bottomed at this level, only then are enough buyers will or able to afford to buy property in sufficient numbers to bring demand levels back in line with supply levels and allow prices to begin to stabilise.
The era of Cloud Cuckoo Land economics is drawing to a close. The end game is insight.
It is becoming increasing clear that the amount of debt in the western world is simply unsustainable and the refusal of politicians to tackle the problem rather than trying to simply defer it have failed spectacularly. There are no doubt those on here you still think that politicians are in charge and can simply choose to have low interest rates, choose not to cut spending and choose not to inflate all our disposable incomes away, or better yet, they think that increases in the prices of energy and food and taxes will be automatically matched by equal sized rises in wages. The reality is we are now in for a 10 year plus depression or a massive collapse. Either way once you take away the idea that house prices go up every year they look spectacularly overvalued. No vaguely sensible FTB’er is going to put that much debt around their necks right now, and the sooner vendors realise that the sooner the market can actually move.
Most would agree, there is a direct correlation between the number of first-time buyers buying, and the level of prices of first-time buyer houses or flats.
That clearly indicates that if the price of such accommodation is not set relative to the buying power of first-time buyers, this trouble is set to continue.
There's noting more to be said.
This idea of getting FTBs to somehow earn more or borrow more is a complete nonsense, economically speaking.