For the first time in British history, a generation currently aged between 20 and 30 has entered servitude. They will work hard their whole lives, and by the time they retire, they will be homeless with a derisory pension.
Many people are writing about the housing crisis that faces most of the UK without fully describing it or articulating a comprehensive solution that resolves the crisis in its entirety.
This crisis constitutes three distinct parts:
- The queues for social housing have reached such levels that people can spend over a decade privately renting whilst waiting for social housing and still get nothing.
- The valuations of properties when expressed as a multiple of earnings have reached levels higher than any time in the last 300 years of data. These valuations have forced people who would normally purchase a property to rent. This issue is no longer impacting people just at the lower end of the income scale, people who are working in what are regarded as traditional middle income jobs are now effectively trapped renting a property.
- People who pay half or more of their income on rent throughout their lives will save up no real assets and will become homeless the moment they stop earning a regular salary. These same people are also all locked into defined contribution pensions that lend much of their pension contributions to the government – for which there is no realistic prospect of being paid back in real terms.
The solution to point 1 on social housing is simply to follow core UKIP policies of leaving the EU, regaining control of our borders, controlling immigration and changing the allocation priorities of social housing to favour local people.
However the solution to points 2 and 3, such that average people can once again purchase their own property is complicated. One first has to delve into why properties are so unaffordable and why there are so many rental properties. This crisis first surfaced in London, however it has now spread to most cities in Britain.
Most political commentators parrot that the solution is to build more properties failing to mention that we don’t have millions of people living on the street because they cannot find somewhere to live. Rather we have millions of people renting properties that not that long ago they would have been able to purchase.
Historically, individual or institutional investors didn’t tend to place much if any of their money into buy-to-let properties as the rates of returns were larger on much simpler investment options, such as treasury bonds, annuities, corporate bonds or deposit accounts.
Since 2009, central bank base rates in the USA, Euro zone and UK have all been close to zero. This in turn has driven down the yields for bonds and the interest for all types of bank accounts.
The Bank for International Settlements (central bank to the central banks) recently reported that central banks have a bias for lower than required interest rates. The only solution to this is to remove a small group of selected individuals from the loop and take away the power to set base rate. The alternative would be a market-set rate.
A market-set rate would avoid the reluctance and indeed influence of a small group of people to set the base rate resulting in a more efficient market-set rate.
A market-set rate would in effect be a 3-month Libor, with a few tweaks. Since the large scale fraud perpetuated on Libor rate-setting by a small number of people, the way Libor is calculated would need to first move to a rate based on actual transactions executed by banks. This would, over the course of time, likely lead to a higher interest rate, however. This is often stated as being a negative outcome by almost all commentators on the news. Many of these same commentators are highly indebted themselves or own multiple properties, thus have strong vested interests to leave base rates at close to zero.
As interest rates rise, property values would fall and those saving for deposits would see their savings increase. These two effects would make properties more affordable for millions of people. In a higher-interest world, there will be some losers – those with excessive debt-to-income ratios – but the winners will far outnumber them by many millions.
Such a process would also open up many opportunities for business investment and would assist in starting a new economic cycle, resulting in significantly more transactions taking place – currently property values maybe at all-time highs but property transactions are at all-time lows.