Reasons to be cheerful about Croydon’s property prices in 2016

By - Monday 4th January, 2016

For a nation fixated on house prices, we don’t always understand the basics, says Robert Ward

The British are fascinated with property. Daytime television is packed with property ‘experts’ beaming into camera. Newspapers report every wrinkle in the many house price indices.

With all this advice around you would think that we would all be well informed on the subject. My view is that we are not as well informed as we should be.

To illustrate why, let’s look at some of the sources of the coverage. Estate agents, newspapers (through advertising) and others make their money through activity in the market, which is encouraged by rising prices. When prices fall, transactions drop drastically and commissions dry up.

Politicians weigh in too. An article by Tom Copley, a Labour representative on the London Assembly is typical. Mr Copley extrapolates past ‘average’ rents into the future. A made-up multiplier from Shelter (somehow it is a ‘rule’) is then used, implying a very high salary to make future rents ‘affordable’.

It’s unsustainable for rents to rise faster than wages long term, so they won’t

A statement in the article that I agree with is: “there’s no way that rents consistently rising faster than wages is sustainable in the long term”. Precisely, it’s for that reason these exaggerated projections won’t happen. So what is the point – well Mr Copley likes rent controls, and what better way to make the case than give the impression of runaway rents?

Talking prices up suits a lot of people, but not the inexperienced buyer, and who of us is experienced at buying and selling houses? The fact is that both rents and house prices are a market. Prices go up and prices go down, as my Croydon house price illustration above shows, although there has been a general upward trend greater than the Retail Price Index.

We also need to beware of language. The word ‘average’ is used, which is usually, but not always taken to be the arithmetic mean (add up all the items and divide by the number of items). Let’s use it like that.

If Bill Gates walks in, the average salary in a room rises – but most are still earning the same

I prefer to look at the median, which is the value where there is an equal number of items above and below. There can be a big difference between average and median.

To illustrate, the average wealth of a hall full of people might be a hundred thousand pounds. However, if Bill Gates walked into the room the average leaps to tens of millions of pounds. The average is skewed by one high value. The median would change very little.

Look at Croydon house prices again to see the difference. In 2014 (2015 figures are not yet available) the average was £300,000 whereas the median was £265,000.

So where’s the good news? Well, I have also included the upper and lower quartile figures, respectively the medians of the upper and lower halves of the data. This illustrates another way in which house prices are selectively presented to make someone’s point.

The average person (whatever that means) on the average salary should be able to afford the average house, right? Perhaps, but the average person is not a first time buyer. More important is whether a first time buyer can get into the market, although without first time buyers, prices come down because the market seizes up and prices will eventually fall so first time buyers can get in.

George Osborne is turning the screw on buy-to-let

A better measure for the first time buyer who is generally buying a smaller property, is the lower quartile price. In Croydon in 2014 this was £210,000. This might require a 10% deposit and a combined salary of around £44,000 at the current time. The Croydon average household income is currently £45,000. Prices have moved on in 2015 so the calculation is not current, but you get the idea.

What’s more, George Osborne has started to turn the screw on buy-to-let. The impact is hardly mentioned in the press, except to postulate that this might push rents up as buy-to-let landlords sell. Under the same logic it pushes house prices down, particularly the kind of properties favoured by first time buyers. This is hardly mentioned (see above for why).

The chancellor began by reducing the ability of high rate taxpayers to offset all their mortgage interest on buy-to-let property. Recently he added to this by imposing additional stamp duty on properties purchased to let. The chancellor did not make great play of his changes. They are likely to hit Tory voters and rising prices are not unhelpful to him too.

Risk for landlords has increased with Universal Credit paying money to tenants not landlords. Landlords’ administration has been increased by right-to-rent checks. Croydon Council has added more costs locally with their landlord licensing scheme. Being a private landlord, a low margin business anyway, gets steadily worse.

Don’t expect a rapid change: rapid changes are unhelpful which is why George Osborne has moved slowly, but expect to see buy-to-let starting to reduce in favour of owner occupation. That may not on its own mean much on prices, but if you are a first time buyer with a deposit then it isn’t unhelpful.

Robert Ward

Robert Ward

Engineer and project manager specialised in helping businesses make better strategic decisions and improve safety, quality and effectiveness. Conservative Party Councillor representing Selsdon and Addington Village on Croydon Council. He tweets as @moguloilman.

More Posts

  • Y Bachgen

    I agree, ceteris paribus that house price inflation should reduce. However, there are two factors that Mr Ward fails to acknowledge: housing stock is limited and will continue to be in the face of paultry house-building, and, in the face of this of shortage (supply and demand!), people are willing to consume more of their post-tax income on housing costs as a % of median earnings has also risen quickly and possibly at a faster rate (difficult to be definitive here given the source of the chart isn’t show).

    Yes the Chancellor has taken some populist measures to stop buy-to-let but, again, the article fails to point out that he’s also provided the biggest stimulus to house price increases: letting pensioners cash in their pension. We know (albeit anecdotally at this stage) that many are using this tax-free pot to buy houses. I very much doubt that the (relatively) small additional stamp duty levy will have much impact on these cash buyers.

    Finally, the only way to reduce house price inflation – and I mean house – is to increase the number of builds inside London. Given the limited amount of green space, perhaps we could start by issuing CPOs on those environmental disasters (aka golf courses) to build houses on?

    ps there’s only be one drop in that graph by the way: 2008 to 2009… What happens if you go back to something like 1992? I suspect there’d be one other dip…

    • Robert Ward

      Thank you for your comment. There is some I agree with.

      There are certainly many factors at play, one of which was allowing pensioners to access their pensions savings, some of which will have been put into buy-to-let housing. I cannot find statistics on this so have no idea how important, or not, this may be. I suspect it is over-stated and given the chancellor’s direction, it will start to leave the market. I also agree the Stamp Duty is not a huge hit, but one wouldn’t expect it to be, this is about slow changes to see what happens.

      Where I think I disagree is on demand. The demand is not just people wanting (bigger) houses, it is people wanting houses and willing to take the risk and incur the costs of a mortgage plus their ability to borrow. As interests rates start to rise this ability will decline, which will also make saving in the likes of ISAs more attractive to those pensioners. Both exert downward pressure.

      There is also the demand from elsewhere. A Chinese billionnaire may see London property as a good thing to have, which may inflate property in Mayfair and Chelsea. I don’t see that spilling over to Croydon.

      Truth is neither of us knows the future and some people are paid a lot of money to predict future house prices and still get it wrong.

      On past dips, there have been others, less if you take money of the day prices, more if you take real terms. I myself have lost money more than once on moving house.

      Apologies for not providing the source. It is the Office for National Statistics.

  • David

    There’s always two sides to the question of affordability; supply and demand. As London booms and it’s population grows by 100,000 people or so people every year, there’s an almost limitless pool of demand. Rightly or wrongly, prices in London aren’t simply set by what people living in London can afford to pay, but by people right across the world. For someone who’s lived in London for a long time, that’s pretty tough to stomach.

    I think it’s impossible to take Croydon out of it’s London context and it’s rise as a global city over the last 10 or so years. The average person who bought in London 10 years ago was in all likelihood considerably poorer than the average person who buying today. A decade ago perhaps your slightly better-off than average first time buyer bought in Balham, Tooting or Ealing – today it’s more likely to be Streatham, Norbury or Central Croydon.

    Who buys where has a marked impact on the look and feel of London – sometimes for the better and sometimes for the worse.

  • Anne Giles

    I am quite sure that our household income is well under £44,000 and I certainly no longer have to pay any tax. I find it unusual that a single person would buy a house anyway. A house would be too large. A couple yes, particularly if they plan to have children. When I was single I had a studio flat and then a two bedroomed one, one room being rented out so that I could afford the mortgage. Once I got married, he sold his flat and I sold mine, so that a house could be bought.