Why we only *seem* financially better off than in the 1970s

[Andrew_McP]

The following link is to a lecture by Elizabeth Warren, a Professor of Law at Harvard, about the financial changes affecting the American middle class over the last generation. The lecture is based on the USA, but is -- I am absolutely certain -- almost completely applicable to the UK as well.

It's an hour long, but the first half hour covers most of the interesting statistics. I heartily recommend it to anyone -- and there do seem to be quite a few around here -- who takes a serious interest in current global economic uncertainty, and why it might be happening.

http://www.youtube.com/watch?v=akVL7QY0S8A
(First five minutes or so is introduction, you can skip that)

If you want a fairly basic summary... housing, healthcare, and car-related costs have all risen *massively* for the average family. For healthcare in the UK you could read 'taxes' because we pay tax instead of healthcare insurance. Car costs for an individual car have gone down, but now, with two working adults a necessity, two cars are almost essential (especially in the USA) to allow childcare and work to be combined. And of course we all know about the rise in housing costs, where low interest rates have been used to disguise massive price rises which require more and more of the family income.

Anyway, Elizabeth Warren explains it all much better than I do, and I think there are far worse ways to spend an hour than listening to her do so.

Andrew McP

 

[Sankari]

And of course we all know about the rise in housing costs, where low interest rates have been used to disguise massive price rises which require more and more of the family income.

I don't understand this statement.

The interest rate on a mortgage is set by the bank (influenced to some extent by market forces) while the price of a property is set by the vendor (influenced to some extent by market forces).

Since the bank and the vendor are two distinct entities with two separate agendas and are therefore not in cahoots with each other, in what way does the low interest rate "disguise" the price of the house - whether massive or otherwise?

Who, exactly, is using "low interest rates" to "disguise massive price rises"? It can't be the bank, because the bank doesn't control the price of the house. It can't be the vendor, becuase the vendor doesn't control the interest rate.

So again: who is using "low interest rates" to "disguise massive price rises"?

 

[Andrew_McP]

I don't understand this statement.

Which is why asset bubbles occur and re-occur throughout economic history. I strongly suggest you watch the video, because in a way this discussion is a distraction. We're arguing about the mechanics rather than the statistical fact.

Still, here goes. The bank's job is to lend you as much they think you can pay back. As much as possible. They have no other goal at all, because that's they're the business they're in. We (collectively) want better standards of living and have been prepared, it would seem, to borrow more and more in order to reach above what we could afford Of sustainably.

Now, by selling on debt, rather than keeping it on their books, banks etc were free to lend out even more money at even more competitive rates, fuelling that sustainability. The easy availability of this superficially cheap credit meant that there was more credit card and mortgage money in people's pockets to be used in a competitive housing market where things like school catchment have a big effect on prices. That pushed up prices relentlessly, even in areas where house prices had no business rising.

Because this was allowed to continue, in part because big banks could borrow in Japan at 1% and lend in the UK/USA at 4-5%, more and more of people's income has had to go into basic housing costs. So where in the 70s one person's income could keep a family going, now you need two people.

The scary part is that this means there is far less slack in a family's finances now. In the 70's at times of difficulty the wife (usually) could go out and get a job to help out. Now that's the norm. And what if someone's ill or dies or needs to care for a parent, or has a young child? So more of that kind of cost gets offloaded onto the taxpayer in terms of nurseries, care homes, nursing, or benefits to top up family income. That means higher overall taxation, placing more strain on the family finances.

Catch 22. We have never (statistically) been better off in terms of household income. And yet we're still worse off, with less financial wriggle room. Hence the credit crunch as more and more people (starting in the USA as the worst example) can't cope. That sends shivers throughout the whole of the debt pyramid, most of which was built up over the last 10 years of so.

I'm not sure I've explained that well, but maybe somewhere in there there's enough logic to build an overall picture from.

Andrew McP

PS Perhaps by using the word 'disguise' I gave the wrong impression. I should say I mean that in a self-delusional way rather than a conspiratorial way. Statistically everyone has been happy to pretend rising house prices aren't a problem. As long as they go up, who cares? But by underlying the hidden reasons why affordability was -- superficially -- not a problem, we've painted ourselves into a corner in terms of overall family budgeting.

It's important to remember that it's only those who've started on the housing 'ladder' (an outdated term if ever there was one) in the last few years who are really at the bleeding edge of this problem. Most people will have started out before then and will have varying amounts of buffering to protect them from dips in household income.

However that's to ignore the *massive* amounts of remortgaging that's been done to buy new kitchens, cars, holidays, or whatever... all of which will be history or worn out by the time the money borrowed to pay for them is paid off. That means far more people are vulnerable to income changes now.

PPS I didn't mean to write an essay.

 

[***F1ZZY***]

So again: who is using "low interest rates" to "disguise massive price rises"?

Yeah, I kinda agree that the two are not really linked. Maybe the Bank of England has some control to keep interest rates low enough in order to make houses affordable (I think that's what OP meant) and to avoid the dramatic change in prices as seen in the late 80's and 15% mortgage rates.

I guess the worst that could be said of mortgage lenders is that they have strategically altered their lending policies (lower % deposits and higher income multipliers) in order to keep first time buyers getting on the property ladder. This, however, was almost a necessity due to the increasing house prices but artificially keeps "pumping" the system. It goes as far as they can take it before becoming a risk for buyers and lenders alike.

Recent mortage takers could be teetering on the edge of negative equity and a risk of mortgage rates increasing. However, massive and rapid changes in property value (both up and down) and very high rates are hopefully a thing of the past. With all this panic of late I would guess that actually things will change very little in terms of both the house prices and also the mortgage rate for maybe a couple of years (don't quote me on this please)

 

[Andrew_McP]

With my debatable choice of words I seem to have distracted you guys from the original post. I assure you it's worth a look if you ever hope to understand the world we're in now.

Andrew McP

 

[Sankari]

*snip*

PS Perhaps by using the word 'disguise' I gave the wrong impression. I should say I mean that in a self-delusional way rather than a conspiratorial way. Statistically everyone has been happy to pretend rising house prices aren't a problem. As long as they go up, who cares? But by underlying the hidden reasons why affordability was -- superficially -- not a problem, we've painted ourselves into a corner in terms of overall family budgeting.

It's important to remember that it's only those who've started on the housing 'ladder' (an outdated term if ever there was one) in the last few years who are really at the bleeding edge of this problem. Most people will have started out before then and will have varying amounts of buffering to protect them from dips in household income.

However that's to ignore the *massive* amounts of remortgaging that's been done to buy new kitchens, cars, holidays, or whatever... all of which will be history or worn out by the time the money borrowed to pay for them is paid off. That means far more people are vulnerable to income changes now.

PPS I didn't mean to write an essay.

OK, so what you really mean is that the consumer distracts himself from the genuine scale of his debt by focusing on the low interest rate that he gets from the bank, instead of keeping his eye on the capital he owes. Correct?

If that's what you're saying, I agree; people are foolish to keep borrowing against their mortgages instead of trying to pay off more of the principle. It's sheer madness.

 

[Sankari]

With my debatable choice of words I seem to have distracted you guys from the original post. I assure you it's worth a look if you ever hope to understand the world we're in now.

Andrew McP

I already understand "the world we're in now"; I'm a landlord. My wife and I have a house in the UK and two investment properties in Australia (with approximately 50% equity in one, and 25% equity in the other).

Yes, house prices are going up - and that's good news for us, because it means that our three properties are gaining value. But we have never remortgaged any of our houses, and have no intention of doing so.

Why? Because (a) the current equity is already worth much more than the potential credit we could draw, and (b) by borrowing against the mortgage, we would not only create a new debt, but reduce our ability to repay it by devaluing one of our most valuable assets. Insanity!

I don't understand why more people don't realise this. Or perhaps they do, and just don't care.

 

[wassap]

I havent looked at the link above yet but.......

Average Joe is better off today imo, we have way more ameneties, i know many folk who drive new cars,go on 3 holidays abroad a year, eat out 1-2 times a week, go out and get lashed at the weekend etc etc.We have greater opportunities available to us now too.Does the American model apply here anyway?

 

[Sankari]

I havent looked at the link above yet but.......

Average Joe is better off today imo, we have way more ameneties, i know many folk who drive new cars,go on 3 holidays abroad a year, eat out 1-2 times a week, go out and get lashed at the weekend etc etc.We have greater opportunities available to us now too.

Swings and roundabouts. Basic living costs have come down a lot, while the purchase of a house is now beyond the means of many people. IMHO the factor which has had the greatest effect on affordability is not the cost of goods and services, but the financial habits of the population (as discussed in previous posts; see above).

Does the American model apply here anyway?

The basic principles - inflation; rising property prices, etc. - yes. But the specifics - rise in health costs, etc. - no. The US and UK are a world apart, not least because our respective tax systems are so different.

For example, the Yanks are now paying a hell of a lot more for healthcare than they were in the 70s, while the average UK punter has not seen his NI contributions rise by a comparable amount. So the UK is way ahead of the game here. Public healthcare = win; American system = fail. This is one thing the Yanks will never get right.

 

[Andrew_McP]

I already understand "the world we're in now"; I'm a landlord.

You sound like someone who appreciates the position he's in. Of course many in your position have re-mortgaged heavily to increase their potential gains if past performance is repeated in the future. And potential losses if it's not. Which is exactly what many banks have done too, leading to the credit crunch.

Interesting times. But I still think by allowing myself to get a little opinionated in my original post I've failed to convey the message in the lecture well. I can only apologise for that.

Andrew McP

 

[wassap]

We can still buy houses, well you can in the west midlands, Im finding, we are just too picky, im just as guilty of it as my mates, my folks's generation were perfectly happy to have a crappy house as their 1st house, whereas we now want 3 bed semi in suburbia as our 1st house.

 

[Andrew_McP]

Swings and roundabouts. Basic living costs have come down a lot, while the purchase of a house is now beyond the means of many people.

The optional things (eating out, consumer goods, etc) have fallen considerably. But the 'must haves' (like housing and healthcare) have gone up greatly. Hence the two income (often subsidised by benefits in the UK) trap.

But the specifics - rise in health costs, etc. - no.

NI does not pay for the NHS. It's just an out-dated subdivision of overall taxation in the same way that alcohol duty or car tax is. As a whole we pay *much* more for our healthcare than we used to, just like the Americans. Only they pay bigger premiums, we pay more overall tax (thanks, at least partly, to the shift to two incomes per household).

However it has to be said that we do get more for our money than we used to. And our NHS -- somewhat surprisingly and despite all the bad press -- remains one of the most cost efficient ways of delivering mass healthcare in the world. So I accept that US healthcare costs have significant room for pruning compared to ours.

Andrew McP

 

[Dolph]

We can still buy houses, well you can in the west midlands, Im finding, we are just too picky, im just as guilty of it as my mates, my folks's generation were perfectly happy to have a crappy house as their 1st house, whereas we now want 3 bed semi in suburbia as our 1st house.

I've noticed this too. The housing recession of the early 90's appears to have convinced large numbers of people that getting on the housing ladder is easy, when historically it has been anything but. People aren't prepared to scrimp, save and not have the perfect home first time around, and so instead moan about prices and how they can't afford what they want and should be able to.

 

[Andrew_McP]

The housing recession of the early 90's appears to have convinced large numbers of people that getting on the housing ladder is easy, when historically it has been anything but.

I'm not going to argue about that. But the difference between now and then is that it used to be difficult for *one* average earner to get a house. Now it's difficult for *two* average earners to buy a house. The process by which that has become acceptable, and the effect that has on families and wider society is worth studying.

Andrew McP

 

[Dolph]

I'm not going to argue about that. But the difference between now and then is that it used to be difficult for *one* average earner to get a house. Now it's difficult for *two* average earners to buy a house. The process by which that has become acceptable, and the effect that has on families and wider society is worth studying.

Andrew McP

But it's equally as hard for one *family* to buy a house. The difference between having one major breadwinner and two is neither here nor there when you're looking at families, which are, ultimately, the main group of homeowners (either current, prospective or past families).

Single people have historically rarely bought houses, although that trend has changed in recent years due to the dramatic increase in family breakdown...

 

[Radiation]

We should only have to work 3.5 days a week while keeping a similar or better standard of living, i feel the current state of things does nothing but keep the majority of people in debt and there are too many questionable things to go into but im sure you all know them well enough.

One thing that bugs me, why should houses be any different from anything else we buy? Really they shouldn't cost anything more than materials, labour and a acceptable profit, paying for it over many years should be done mainly direct to the builder with no interest on top as they're making a profit already and should just have to accept getting profits back slower.

Another thing I find questionable are shares, making money off money by using companies isn't that great really because instead companies could pass the savings onto the products and services and even increase the workers pay, this should benefit everyone instead of the far smaller group doing shares.

 

[Dolph]

We should only have to work 3.5 days a week while keeping a similar or better standard of living, i feel the current state of things does nothing but keep the majority of people in debt and there are too many questionable things to go into but im sure you all know them well enough.

Why should I not be able to choose how much I work?

One thing that bugs me, why should houses be any different from anything else we buy? Really they shouldn't cost anything more than materials, labour and a acceptable profit, paying for it over many years should be done mainly direct to the builder with no interest on top as they're making a profit already and should just have to accept getting profits back slower.

It's a little thing called supply and demand, we have a finite amount of land, a finite amount of housing, and lots of people want it. Therefore prices rise until supply and demand are balanced.

Why should the market be restricted? What benefits would it provide?

Another thing I find questionable are shares, making money off money by using companies isn't that great really because instead companies could pass the savings onto the products and services and even increase the workers pay, this should benefit everyone instead of the far smaller group doing shares.

Do you have a problem with people working hard, taking risks and being successful because of it? Would you prefer everyone to be given a set amount of money by the state each month irrespective of their training/skill/determination?

 

[Sankari]

The optional things (eating out, consumer goods, etc) have fallen considerably. But the 'must haves' (like housing and healthcare) have gone up greatly. Hence the two income (often subsidised by benefits in the UK) trap.

Yep. And wohoo made an excellent point about people these days trying to run before they can walk by aiming for houses they can't really afford instead of starting small and slowly working their way up. This, too, is a symptom of the credit-fueled society; people have become too accustomed to having whatever they want whenever they want it. They're not prepared to put in the hard work over a number of years and gradually climb up the property ladder at an affordable pace; they want a nice house now.

NI does not pay for the NHS. It's just an out-dated subdivision of overall taxation in the same way that alcohol duty or car tax is. As a whole we pay *much* more for our healthcare than we used to, just like the Americans. Only they pay bigger premiums, we pay more overall tax (thanks, at least partly, to the shift to two incomes per household).

However it has to be said that we do get more for our money than we used to. And our NHS -- somewhat surprisingly and despite all the bad press -- remains one of the most cost efficient ways of delivering mass healthcare in the world. So I accept that US healthcare costs have significant room for pruning compared to ours.

Andrew McP

OK, it doesn't fund the NHS entirely. But a small percentage is taken from NI payments to assist NHS funding:

Gordon Brown has announced the first increase in direct taxation since he became chancellor five years ago.

In a big political gamble, he will use a 1p in the pound hike in National Insurance contributions to pay for the UK's biggest ever increase in health service funding.

The increase on both employer and employee NI contributions will go towards a £40bn rise in NHS spending over five years.
​

Beeb.

National Insurance contributions are paid into the various classes of National Insurance AFTER deduction of monies specifically allocated to the National Health Service. However a small percentage is transferred from the fund to the NHS from certain of the smaller sub-classes. Thus the NHS is partially funded from NI contributions but not from the NI Fund.
​

Wiki.

 

[Andrew_McP]

But it's equally as hard for one *family* to buy a house.

I think you're deliberately avoiding the point. In the 70's only one *earner* was needed to support a family. Now it takes two, meaning the family unit is weaker and less flexible in many different ways. That leads to the kind of fractured, over-stressed society we have now, and the main beneficiaries have been those providing the (unsustainable) debt which fuels modern life. Not the people taking on that debt, even if on the surface their lives seem to be better because they have more stuff.

I would -- with respect -- urge you to stop reeling out the usual Dolph line and take a look at the link I posted when you can. If you have concrete arguments against that lecture I'll be glad to hear them. Otherwise we're (both) in danger of turning this thread into a clone of every other recent thread which mentions house prices.

Andrew McP

 

[Radiation]

Why should I not be able to choose how much I work?

Where did i say that should be the limit?

It's a little thing called supply and demand, we have a finite amount of land, a finite amount of housing, and lots of people want it. Therefore prices rise until supply and demand are balanced.

Why should the market be restricted? What benefits would it provide?

Supply and demand doesn't mean prices should get so stupidly unaffardable that most people can't buy or just have to go into lots of debt, especially considering a home is a basic need in life, then of course possibly putting the whole system into a mess later on?

Regardless of the limited supply prices should stay within an acceptable margin and if that means all the houses are taken then so be it, whats the difference? Either people are limited by the amount of choice, or limited by their wallet which has other repercussions, i know which one i would pick.

Do you have a problem with people working hard, taking risks and being successful because of it? Would you prefer everyone to be given a set amount of money by the state each month irrespective of their training/skill/determination?

No where did i say that? This wouldn't stop such people being successful but it wouldn't make it quite so easy for them once they are, i would prefer exactly what i said where companies pass the savings onto everyone. I don't see how you came up with this second quite irrelevant question though.