The past few days has prompted a lot of hype surrounding the UK housing market which in turn has led to no end of pontificating as to the future of home ownership in the UK and quite what to do about it.
It all started with the National Housing Federation’s Housing Market Analysis for July 2011.
The main headline initially jumped upon by the press is that home ownership numbers will fall back to mid ‘80s levels if the market is left as it is – prices will rise significantly over the next few years, and the cost of renting will be astronomical.
Subsequently, much of this has been blamed on the lack of new builds – something housing minister Grant Shapps was quick to acknowledge with "we have not been building enough homes", but insisted the government was "in the process of reversing that through massive planning reform" and a "massive programme" involving the release of thousands of acres of public land to build new homes. (Obviously not content with his own ideas about how to fix the UK property market – Mr Shapps appears to have taken to organising the “housing massive” to do some thinking with him – see more of Grant Shapps great ideas here).
Following this bright idea to slacken planning regulation from Mr Shapps rumblings can now be heard from the green belt brigade, along the lines of too many houses, eyesores, not on my doorstep etc. In fairness the pro green belt argument does have a very good point – the ideals of the original green belt laws should be upheld.
The reality in all of this and something I have commented on before has largely been overlooked: the volume of new homes being built at any point (other than after the war) has little to do with house prices being low or their affordability.
As we can see here on the chart from the NHBF, as house prices started to fall so did the number of new builds being started. It’s simple business nous – why produce more of something if the end product is going to be worth substantially less than when you started, and possibly even cost you as a producer to sell it?
In the real world no one in their right mind will increase production of something in which the market is waning, both on price and volume of sales. Remember Betamax Video? Even VHS? You can still record and watch tv now – you just do it in a different way (digitally or dvd/Blueray).
The evolution in the digital arena has advanced significantly in the past few years, they all do a similar thing, just the later versions do it better, quicker and cheaper (relatively). The concept of recording video still exists, but demand for higher quality and lower pricing meant something had to give – so the industry evolved and how we watch digital media now has changed forever. The same evolution needs to take place with the mortgage markets and how the banks work.
For the new build market to have any impact on current housing affordability the volume of properties that would need to be built is incomprehensible. Shapps is quoted as having said “We are releasing enough government land to build Leicester twice over across the country”
This might indeed work if you demolished neighbouring Nottingham and Peterborough and built all the new homes there – I don’t doubt for an instant that house prices in Leicester itself would likely come down. However, spreading that volume of development across the UK as a whole? It’s the equivalent of me trying to turn the Thames red with a single drop of food dye.
The bottom line that everyone appears to have missed, from Shapps and his housing massive, right down to the press is the housing market is not what’s at fault – the lending and monetary system are. The way in which the banks value property and how they judge what something is worth over the long term is what needs to change. Changing the amount of property on the market is not feasible to do on a large enough scale.
Excessive and uncontrolled lending is what caused the problem – and it’s exactly what needs fixing to get the market back to some kind of normality.
The banks are lending on low rates that they cannot afford, into a market they have proven they don’t understand, against a market that has too much artificial support to prevent it from crashing. Adding more property by releasing government owned land and subsidising developers just isn’t going to work.
Unfortunately it would appear the way out of this conundrum is not an easy one to swallow. Shapps might bellow loudly that “interest rates are lower than the rest of Europe”, and the “Halifax says that property is more affordable than ever” but the reality is, Mr Shapps, that much of Northern Europe has less debt, and their housing markets are more stable with less negative equity. As for the Halifax and their vested interest in such statements – I too would agree with their statements IF I use only figures that suit me.
Perhaps if the right honourable Mr Shapps spent a little less time thinking and talking (because neither appears to be doing his career any good, and both seem to do nothing other than make him look a fool) and spent some time finding out the best way to restructure and regulate the mortgage market to remove the stranglehold the banks and mortgage providers have on house prices, the UK might actually get somewhere financially instead of wondering when the bailiffs are coming to repossess their houses.