The Guardian has a fascinating piece on house prices which deserves to be read and studied in detail. In London in 2013 the median house price had reached 300,000 while the median salary was 24,600. House prices are 12.2 x salary. That means it is in practice impossible for working people, without inherited wealth, to buy a house.
But the point is, that it should be equally impossible to rent a house. Landlords look for a rental return of approximately 6% of rental value. So that would put median rent in London at around 18,000 pa, which is a realistic figure. But nobody on a salary of 24,600 before tax can pay 18,000 pa in rent. So we should be at a stage where it is impossible for Londoners who have not inherited homes to live there at all.
Very little of the apparent gravity-defying power of the London property market is due to foreign buyers. Their major effect is very much concentrated on the top end of the market. Very few wealthy foreign buyers are purchasing semis in Plumstead or Acton. For prices to be this distorted from the potential of local buyers to pay would require literally hundreds of thousands of foreign purchasers in all segments of the market. They just do not exist.
No what is causing this incredible distortion is the conjunction of buy to let and state housing benefit. The state pays out 18 billion pounds a year in housing benefit, and the vast majority of that goes straight into the pockets of private landlords in the South East of England. State housing benefit underpins the entire system.
Now the brilliance of the trick is that, as it is labeled a benefit, the left fight to keep housing benefit as though it benefited poor people. In fact this is a great illusion. It does nothing of the sort. What would truly benefit poor people is lower rent or affordable homes. Housing benefit goes straight into the pockets of the landlord class.
The landlord class of course encompasses the political class, many of whom (including Cherie Blair, famously) are also landlords. As housing benefit is paid for from general taxation, the entire system is a massive transfer of wealth from the poor to the rich, and above all from the North and West to the South and East. The landlord class benefit not only from the taxpayer giving them enormous rents, but from the possession of artificially inflated property on which they can raise further money for more speculation.
The problem is national but is much worse in London and the South East of England. The reason that IDS has not made a serious assault on housing benefit is that it puts money straight into the pockets of most of his Tory chums. The largest benefit recipients in the UK are the great landlords.
The policy mix to tackle this must include building much more council housing, but must also include a phasing out of the payment of state housing benefit to private landlords. Let me put this simply – given a 6% rental return, pumping in 18 billion pounds of state money a year to rents adds 288 billion pounds to property values. Let me say that again because it is very, very important but not that easy to follow.
Given a 6% rental return, pumping in 18 billion pounds of state money to rents adds 288 billion pounds to property values. That explains how you reach the apparently impossible situation of median property at twelve times median income.
The landlord class will endeavour to ensure that any phasing out of such benefit causes maximum dislocation pain to tenants. But correcting the situation is an economic necessity. Ultimately property values have to halve, and rents too. That will provide pain to not just the landlord class but the entire Ponzi economy that Blair built. The ratio of property prices to income almost trebled in the Blair/Brown years, and is the aspect of their economic charlatanry which still overhangs us.
Seen from Edinburgh, another reason to escape to Independence as quickly as possible. The problem is not nearly so acute in Scotland. In England the situation can continue for a while. The Conservative government is delighted with this massive transfer of money to the rich. But once interest rates start to rise, it will bring a crash of gigantic proportions.