Using a different measure of inflation could raise value by 13pc
What effect will the programme of mass house building proposed this week by Sajid Javid, the Communities Secretary, have on house prices?
Any kind of precise answer is impossible, of course. But let’s have a try at outlining a few broad principles.
First, let’s look at the political background. I think it’s becoming increasingly accepted that part of the reason for the Conservatives’ failure to win a majority was that millions of young people feel that they will never own a home.
If you think the benefits of a property-owning democracy are out of reach, and you are simultaneously saddled with large student debts, there is every chance that you will vote for the Labour promise of solutions to both, no matter that they are based on fantasy economics.
So we can expect that the Conservatives will bite the bullet and try to make homes more available to young buyers.
Now this will sound like a statement of the obvious, but if you want to change the hearts also find that the transfer value of their pension is more sensitive to fluctuations in interest rates, investment returns and inflation.
By law, final salary pensions must rise in line with prices. The rules are hideously complex but the key point is that if inflation is expected to be higher, transfer values will increase. Hymans said the 50 yearold’s transfer value would rise by 28pc if assumptions changed and minds of enough ugh young people in this way to shift ft the electoral landscape, you willill have to enable large numbers of those currently locked out of the housing market to buy. And the only way to do this is to supply homes that at are substantially cheaper than those se available on the market at the moment. ment.
After all, governmentsnments have already done everythingrything in their power to enable house buyers to borrow cheaplyy with various schemes. Making cheap credit available and leaning ning on the banks to lend has reached the limits of its usefulness.lness.
In fact, the policycy is counterproductive ve because, if supply y is broadly static, boostingosting demand by puttingng homes within reach via cheap loans simply serveses to push prices even higher,er, making them unaffordable e once again to the people le you had intended to help.
So we can assume me that the Tories will, if theyy share this diagnosis of their heir vulnerabilities andnd take the action that follows ws from it, indeed try to embark bark on a programme of largergescale building of cheap homes.
Now I don’t see how this could d
Create affordable housing, or avoid a banking crisis – can this mess be sorted?
to reflect a rise in inflation expectations of one percentage point a year.
Depending on the scheme’s rules, your pension will increase in line with either the consumer prices index (CPI) measure of inflation or the retail prices index (RPI), normally around one percentage point higher. In some cases schemes are allowed to switch index and many have to cut costs. In our example, if the saver had his pension linked to RPI the transfer value would be about 13pc higher than if CPI was used. be done without affectingaffecti the value of existing properties. If you made the homes aimed at youngsters different in some w way, such as smaller or prefabricated,prefabr the intended buyers wouldw shun them because theythe would know that they would be harder to sell and moremor likely to depreciate thantha the other properties in thet area. You would also face even evenmo more fierce opposition fromf existing residents thanth can already be expected. My argumentargu is leading to the conclusionconclus that house prices in Britain are poisedpoise to fall appreciably.appreciably But there’s a problem: the solvencyso of millions of households,hous and of several largelarg and vitally important banks,ba depends on house pricespr avoiding such a crash.cras Which unstoppable force wouldwo give way first? TheT Tories’ bid for self-preservationself thoughthou recovering theirthei appeal to the ever-growingeve ranksra of the housing havenots? Or the economic Final salary pensions pay an income until death. Consequently, the longer the scheme expects its members to live, the more it has to assume it will pay out. If a cure for a major disease were discovered and pushed the average lifespan up by a year, this would raise the average transfer value by roughly 3pc, said Hymans.
Most schemes provide a “dependant’s pension” that continues to be paid after the original member dies. Transfer values are based on the assumption imperative to avoid another banking crisis? In other words, high house prices are terrible and low house prices would be disastrous. Is there a way out of this terrible mess?
I think the best we can hope for is that moderate inflation, combined with house prices that are either static or in gentle decline in nominal terms, slowly erodes the real value of property.
This way, homes would gradually become more affordable (as long as wages kept pace with prices) and banks would be in the clear because the “asset” figures on their balance sheet wouldn’t decline significantly.
The price would almost certainly be a continuation of the rock-bottom rates of interest currently paid to savers as the Bank of England refrained from the measure it would normally use to rein in inflation, namely higher rates.
The housing crisis among the young is one aspect of our horribly distorted economy: artificially constrained housing supply, along with exceptionally cheap money, has caused this vital asset to become unaffordable.
Older people, meanwhile, suffer from the latter distortion because savings pots that would once have produced a decent income now yield next to nothing. For them, years of inflation will only worsen the pain. that everyone in the scheme is married and take no account of the member’s actual status.
Deborah Cooper of Mercer, the actuarial firm, said that meant single people could find that a transfer represented better value than remaining in the scheme.
Each scheme sets a “normal retirement age”. If our saver’s scheme had a normal retirement age of 60 the transfer value would be around 24pc higher than if it was 65. This reflects the longer time the scheme would expect to be paying out. Trustees have discretion to apply “fair value” to pension transfers. This means that if the company behind the scheme is in financial difficulties or the scheme has a large funding deficit, transfer values can be reduced. Transfers worth £30,000 or more are not permitted without proof that the member has seen a financial adviser. While this doesn’t affect the transfer value directly, the cost of advice will reduce the final amount.
Sajid Javid, the Communities Secretary, needs to do more than encouraging cheap credit