The story of Goldilocks and the UK housing market
In his latest blog, Professor Glen Bramley, Director of IHURER, reflects on claims that the British housing market is finally ‘hotting-up’ and whether this is a bad thing.
When is the porridge just right? We still seem to be having some difficulty in the woods here, stirring the pot of the ‘Goldilocks economy’ that is the British housing market. After the best part of six years of almost unremitting cold porridge, apart from a rather puzzling pseudo-recovery in 2009, the British housing market came out into the sunshine of a record summer and was suddenly pronounced to be booming, or at any rate taking off. Apart from checking my old economic history notes on the ‘sunspot’ theory of economic cycles, I feel the need to sift some sense out of the flurry of excited comment recent housing market data have generated.
Much as I love the Real Estate industry, who employ or support the studies of many of our students, we have to discount some market up-talking from that quarter on the basis that ‘they would say that, wouldn’t they’. Similarly the reaction of some in the political class, who have departed for their surprisingly long vacations ( a vanished concept in my part of academia) with the comforting thought that the 2015 General Election is as good as won (or lost) on the basis of these indicators.
There have actually been some very sensible comments in the financial and leader pages, but what is interesting is the near-consensus that the dangers, beyond the short term, outweigh the benefits . These dangers include that of an accelerating speculative boom, renewed over-indebtedness, worse affordability for home-buyers crowded out by ‘buy-to-let’ investors, and a failure of the real economy to invest in real industries that produce goods the world will buy from us and so enable us to enjoy our comfortable living standards in the long term. There is certainly some evidence from experience for this characterisation of the British over-obsession with the housing market, but at the same time it is important to ask the critics: what should the government do?
In the unlikely event that I were George Osborne, I would feel generally miffed by these carping comments. For most of the last 6 years we have had a housing system in deep depression, with new supply half or less of what it should be, and the number of first time buyers able to get a mortgage and a home likewise suppressed. A necessary condition for unfreezing this situation, and tackling both these problems and the wider problems of recession and lack of demand in the economy, is clearly to increase the level of mortgage lending while keeping its costs down and relaxing conditions on lending back towards some reasonable normality (which in the UK for the last 30 years has been the expectation that you can get a mortgage for a high proportion of the purchase price). The Treasury have finally managed to come up with a combination of measures (Funding for Lending, Help to Buy) which together with Father Christmas in the guise of Mark Carney newly installed at the Bank of England adopting a pro-growth forward commitment stance on interest rates, has finally done the trick. But don’t forget how long it took them to get to this point.
The potential problems which this approach may bring, on which the critics focus, have yet to come to realisation, and may not do so for some time, except perhaps in London. I don’t think the evidence is conclusive as yet that there is no comfortable middle ground of sunlit alpine meadow where we may enjoy our porridge a little. Some lessons have been learned on mortgage regulation for example, so I am assuming a rigorous approach to income assessment and repayment capability will be enforced, unlike the situation in 2004-07. There is a great backlog of discouraged supply as well as demand, and wide regions of the country where demand remains weak. People talk loosely of a speculative boom in the mid-2000s, but the evidence for a purely speculative mania (based on price rise expectations) is weak, except perhaps in Northern Ireland – what was ‘abormal’ was the lax lending of the mid-2000s in terms of mortgage-to-income ratios and the scrutiny of income evidence. But the experience of that period also points to the importance of low and stable interest rates, and the expectation of their continued low level; in that respect Mr Carney’s pronouncement may well have fuelled a stronger revival.
The development of a large Buy-to-Let sector is also a reinforcing factor here. As good news for borrowers is bad news for savers, mainly people of a certain age like myself, it is not surprising that the level of Buy-to-Let activity is ramping up again, as this clearly offers better returns than bank deposits or bonds at the moment.. This is perceived as unfair competition by first time buyers, who point to the tax relief on mortgages which BTL landlords can claim, and the fact that they are not subject to the same limits on lending related to repayment ability that face first home-owners.
So with Mr Carney’s magic they have managed to fix the demand side. Well done. The supply side remains much more difficult, and in my view robust pro-supply measures are not in place. The fundamental problem number 1 is that, in the parts of the country where we should be building a lot more housing (the south, basically), people don’t like it, don’t see enough compensating benefits, and use their local political power through a ‘localised’ planning system to block it (see my previous blog post here). Problem number 2 is that most land for housing development is privately owned and neither the owners nor the developers have a strong motive to push it forward for development quickly. Problem number 3 is that we have a general policy of fiscal austerity and reduced public borrowing, as well as a general predilection for ‘market’ vs ‘state’ solutions. Therefore we do not do the obvious direct supply-promoting actions of actually building social rented or subsidised intermediate tenure housing, on a larger scale. Nor do we do the potentially even more effective ‘direct land development agency’ role, akin to the postwar new towns, using public powers and resources to bring land forward for development and selling it under license to builders who actually want to build (this year and next year) to create homes that people could afford.
Without these kinds of measures, the critics are right that just boosting demand will end up pushing up prices. Therefore, Mr Osborne, perhaps you should be looking at measures which might stop demand getting out of hand. This leads to discussion of taxation measures, such as stamp duty, mansion tax, reform of Council Tax, capital gains tax . But not of course before the next Election!
London is as always a special case. In central London there is a housing market which follows a logic and a price level of its own – although it plays some part in leading the market of the surrounding areas, it is driven by factors outside of the UK domestic housing scene. Britain’s welcoming/lax tax and regulatory regime for rich foreigners, backed by its political stability, legal framework, and dense infrastructure of schools and cultural resources, has made London a target for expatriate demand from a wide range of countries that are a less stable and comfortable haven for wealth. Personally I would try to make our tax and regulatory regime less friendly to such people, just as I would adopt a much more robust approach to tax avoidance and tax havens (not to mention bankers’ bonuses). Beyond that, if you don’t like the housing implications, that only super-rich people can live in central London, then you should be strong supporters of ‘affordable housing’ policies, including s.106 and the continued maintenance of a large social and affordable housing sector in London. This would and should be seen as housing for a wide socio-economic range including many working households, not just for the poor.
 See Larry Elliott ‘Housing market is emerging from long hibernation‘. Guardian 08/08/13; Philip Inman ‘Help to Buy scheme boosts sales of new build by 27%‘, Guardian 09/08/13; Hilary Osborne ‘Buy-to-Let fuels house price boom‘, Guardian, 09/08/13; Alf Young ‘Boom-sayers are still in a bubble‘, Scotsman, 10/08/13.