Property ladder
Encyclopedia
The property ladder is a term widely used in the United Kingdom to describe an individual or family's lifetime progress from cheaper to more expensive housing. According to this metaphor, cheap house
s for first-time buyers
are at the bottom of the property ladder, and expensive houses are at the top. 'Getting on to the property ladder' is the process of buying one's first house, in the hope of leaving it for progressively better houses as one's salary
rises.
However, confidence in this process has been dropping as a result of the ongoing recession, the European debt crisis and job insecurities. The Guardian
reported on 28th October 2011: 'Inquiries have fallen off a cliff. Nearly a third of sales agreed are falling through due to problems securing mortgage finance at the business end of the transaction' http://www.guardian.co.uk/money/2011/oct/28/house-sales-plummet
Salaries rose slower than house prices during the first seven years of the 21st century, as a result of the massive global credit bubble that enabled banks to lend higher loan to income multiples and loan to values. This created an artificial demand in housing and also stimulated the economy with money borrowed from the future, effectively reducing unemployment, producing large tax receipts for the government that they were happy to spend and creating a false wealth affect. This credit bubble drove a massive inflationary spike in house prices in the UK during this period, giving rise to the term 'property ladder' by those with a vested interest in rising prices who were trying to talk first-time buyers into buying a house at an inflated price. The risk on mortgages was priced lower (hence lower borrowing rates) for low loan-to-values, Therefore, people that bought before the spike in prices were able to re-mortgage at lower borrowing rates because of the credit-driven house price inflation. Over this period many people, by repeating this process several times, were able to acquire successively more expensive properties at comparatively modest borrowing costs, but at the same time the whole pack of cards was sustained by many people who were borrowing money beyond their means (mostly buy-to-letters in the last few years of the 'boom') in the belief that prices would keep rising and their interest rates would be lower on re-mortgaging. The process was also assisted by a favourable taxation system, a national culture of owner-occupation and a Government policy of obliging local councils to sell their housing stock to tenants at a discount. The bubble burst in 2007 and most estimates agree that house prices will correct downwards by 50% in real terms over the course of a decade. When this occurs, it will be doubtful that anyone will still be using the term 'property ladder'.
With low wage inflation and the high price of houses in the United Kingdom
in the late 1990s and early 2000s, younger people had difficulty buying places to live. Under standard economic theory, this should have led to fall in demand
and a cooling of prices; however, this did not happen for several reasons among them demographics, The entry of more investors into the market and rising prices leading to panic buying as purchasing decisions were brought forward.
Absent inappropriately low real interest rates, the cost of a mortgage should remain the same over the years. In the absence of career advancement, this erodes the concept of a property ladder, as there are no factors to erode the debt (other than slowly paying down the principal over time).
The term property ladder is also partly responsible for the artificial house price bubble in the UK as people generally are under the illusion that buying property was a safe business that does not require any deeper thoughts about whether it is a wise idea from an economical point of view. In fact, to many people in the UK the term of the property ladder could be used to describe a way "downwards". More and more people need to sell their property for less than they have initially bought it for and buy a smaller property. To them, the ladder leads to more and more debts while the size and value of the property is declining.
As Tracy Kellett, discussing the affordability of housing in the United Kingdom
(including London and the South-East), observed in The Guardian
in October 2011: 'Transaction levels are through the floor. Estate agent's have not been able to sell their overpriced stock (and each one of these costs them money) and vendors have often ended up taking a much lower offer six months down the line after their property sat around becoming stale and thus unattractive to the market'.http://www.guardian.co.uk/money/2011/oct/24/selling-home-time-running-out
House
A house is a building or structure that has the ability to be occupied for dwelling by human beings or other creatures. The term house includes many kinds of different dwellings ranging from rudimentary huts of nomadic tribes to free standing individual structures...
s for first-time buyers
First time buyer
A first-time buyer is a term used in the British and Irish property markets, and in other countries, for a potential house buyer who has not previously owned a property....
are at the bottom of the property ladder, and expensive houses are at the top. 'Getting on to the property ladder' is the process of buying one's first house, in the hope of leaving it for progressively better houses as one's salary
Salary
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....
rises.
However, confidence in this process has been dropping as a result of the ongoing recession, the European debt crisis and job insecurities. The Guardian
The Guardian
The Guardian, formerly known as The Manchester Guardian , is a British national daily newspaper in the Berliner format...
reported on 28th October 2011: 'Inquiries have fallen off a cliff. Nearly a third of sales agreed are falling through due to problems securing mortgage finance at the business end of the transaction' http://www.guardian.co.uk/money/2011/oct/28/house-sales-plummet
Salaries rose slower than house prices during the first seven years of the 21st century, as a result of the massive global credit bubble that enabled banks to lend higher loan to income multiples and loan to values. This created an artificial demand in housing and also stimulated the economy with money borrowed from the future, effectively reducing unemployment, producing large tax receipts for the government that they were happy to spend and creating a false wealth affect. This credit bubble drove a massive inflationary spike in house prices in the UK during this period, giving rise to the term 'property ladder' by those with a vested interest in rising prices who were trying to talk first-time buyers into buying a house at an inflated price. The risk on mortgages was priced lower (hence lower borrowing rates) for low loan-to-values, Therefore, people that bought before the spike in prices were able to re-mortgage at lower borrowing rates because of the credit-driven house price inflation. Over this period many people, by repeating this process several times, were able to acquire successively more expensive properties at comparatively modest borrowing costs, but at the same time the whole pack of cards was sustained by many people who were borrowing money beyond their means (mostly buy-to-letters in the last few years of the 'boom') in the belief that prices would keep rising and their interest rates would be lower on re-mortgaging. The process was also assisted by a favourable taxation system, a national culture of owner-occupation and a Government policy of obliging local councils to sell their housing stock to tenants at a discount. The bubble burst in 2007 and most estimates agree that house prices will correct downwards by 50% in real terms over the course of a decade. When this occurs, it will be doubtful that anyone will still be using the term 'property ladder'.
With low wage inflation and the high price of houses in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
in the late 1990s and early 2000s, younger people had difficulty buying places to live. Under standard economic theory, this should have led to fall in demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
and a cooling of prices; however, this did not happen for several reasons among them demographics, The entry of more investors into the market and rising prices leading to panic buying as purchasing decisions were brought forward.
Absent inappropriately low real interest rates, the cost of a mortgage should remain the same over the years. In the absence of career advancement, this erodes the concept of a property ladder, as there are no factors to erode the debt (other than slowly paying down the principal over time).
The term property ladder is also partly responsible for the artificial house price bubble in the UK as people generally are under the illusion that buying property was a safe business that does not require any deeper thoughts about whether it is a wise idea from an economical point of view. In fact, to many people in the UK the term of the property ladder could be used to describe a way "downwards". More and more people need to sell their property for less than they have initially bought it for and buy a smaller property. To them, the ladder leads to more and more debts while the size and value of the property is declining.
As Tracy Kellett, discussing the affordability of housing in the United Kingdom
Affordability of housing in the United Kingdom
The affordability of housing in the United Kingdom deteriorated significantly from the late 1990s onwards, with house prices rising faster than earnings and the average age of first-time homebuyers increasing...
(including London and the South-East), observed in The Guardian
The Guardian
The Guardian, formerly known as The Manchester Guardian , is a British national daily newspaper in the Berliner format...
in October 2011: 'Transaction levels are through the floor. Estate agent's have not been able to sell their overpriced stock (and each one of these costs them money) and vendors have often ended up taking a much lower offer six months down the line after their property sat around becoming stale and thus unattractive to the market'.http://www.guardian.co.uk/money/2011/oct/24/selling-home-time-running-out
See also
- Real estate bubbleReal estate bubbleA real estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets...
- British property bubble
- United States housing bubbleUnited States housing bubbleThe United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...
- Priced OutPriced OutThe is a non-profit organisation campaigning for government action on British residential property market prices. have and are preventing many more from being able to trade up, prompting the formation of this campaign....
- HousePriceCrash