Many people are asking if we are experiencing a bubble in house prices in London. The problem with bubbles in asset prices is that they are only normally identified to everyone’s satisfaction after they have burst. In the run up to the bursting of the dotcom bubble at the end of the last century, many were arguing that share valuations that proved ultimately to be irrational froth, were justified on the basis that new technology had created a ‘new normal’. The Internet was seen by these people as an innovation that had created a step change into a new advanced phase of our economic progress. What actually happened at the end of 1999 was a general collapse in dotcom stocks that led to a fall in equity markets across the globe from which it took years for them to recover. The Dow Jones Industrial Average, for example, did not get back to the level it reached in December 1999 until almost the end of 2006.
Here’s my own contribution to the catalogue of London housing market anecdotes. At Christmas, I was talking to my Brother-in-law about the London property market. I said that I thought that our modest 3 bedroom Victorian terraced house in Lee a million. When I said this, I had in mind some time in the middle of this year. He was shocked, comparinGreen, South East London, was probably worth around £450,000, judging by the asking prices for similar houses in the area that were on the market. I said I thought it wouldn’t be long before its value passed halfg as he was this value to house prices in Falmouth where he lives. However, it’s what happened next that is the really shocking thing.
Early in the New Year, a house in our road that is smaller than ours, was put on the market for £500,000. Shortly afterwards two houses very similar to ours in the next street were put on the market for £600,000 each. Both were sold quickly. A month or so ago, a house around the corner from ours that was much smaller also went on the market for £600,000 and was sold. Two 3 bedroom Victorian terraces nearby have just come onto the market. For one, the estate agent is asking for offers over £700,000 and the other has a guide price of £750,000. Could it be possible that my house could have increased in value by maybe as much as £250,000, or over 50%, in about 5 months? Could such a market reasonably avoid being described as ‘overheating’? There certainly seems to be plenty of willing buyers out there, judging by the short period of time property remains on the market and the number of estate agent letters we get through our letterbox, asking if we are thinking of selling.
So it came as no surprise to me when I read that:
New figures show that there has been a 59% increase in working people claiming housing benefit since 2010.
George Eaton writing in the NewStatesman went on to say that, based on new research by the House of Commons library, the additional 386,265 working people claiming housing benefit, had added an extra £4.8bn to this particular welfare bill, pushing the total cost to the taxpayer to over £24.3bn. Remember this is not an additional cost generated by the unemployed or the supposedly work-shy and feckless. Rather, it is working people who are generating increasing welfare claims. And these figures are for the country as a whole, not just London.
These figures have to be clear evidence that pay is not rising in line with rising rents, especially in the private rented sector. Who can be surprised at this if property prices, which determine rents, are rising so rapidly?
Housing benefit is a demand led budget, or part of the government’s annually managed expenditure (AME), to use the official parlance. This means that it is not subject to any cap or restraint. The Treasury will just automatically fund the claims that are made, whatever they add up to. One wonders how big the bill will need to be, (£30bn a year, £40bn?), especially when the increase is being driven by claims made by people in work, before sensible people, regardless of political affiliation, will say something must be wrong with the system. Let’s hope this time comes soon and when it does, that there will be general agreement that part of the solution will be to build more Council housing.
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