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A question of demand and supply

paulwelch

July 8, 2014

Godfrey Blight is a director at Crown Mortgage Management

Markets are driven by demand and supply. There is no doubt that when there is plentiful supply prices are low, but when famine hits prices are high. This has been the environment across all industries throughout time.

Like me you probably suffer from the reverse market cycle. Whenever you try to sell something it is always available in droves, but when you come to buy, you got it, prices through the roof because of lack of supply!

As property prices race ahead, according to Nationwide prices were up 11.1 % year on year, with London leading the way, concern regarding over heating are being expressed by some of our politicians. Some government owned banks are now trimming criteria on lending and now a stark warning from the European Commission.

But what is leading to this price rise in the property market? It is not that these precious constructions of bricks and mortar are appreciating in value steadily because of real economic growth. We have too many buyers and too few properties to buy. Increase the supply and the prices will go down. But how?

Relaxing the “tax” that is stamp duty has been asked for from many quarters but to date fell on deaf ears – that would no doubt bring more properties on to the market.

It is estimated that there are thousands properties in the UK that are standing empty. Some are prime locations held for investment; others not so prime falling into disrepair. There must be some solution here where the powers that be can regenerate in some areas, release in others space to take up some of the excess demand.

We could get more people building or extending their properties. There has been a lot of talk about relaxing planning consents and encouraging the development of new accommodation on a more local scale.  But experience will tell that whatever noises are made at government or influencer level when it comes down to it the local planning authorities are a rule unto themselves and the principal of it is fine but does not always convert to our door step.

So if we can’t create new tax breaks for sellers, doing something with empty properties or sorting out planning regulations the answer must be to build more properties!   

The county’s major house builders have spent so long down in the dumps; there is no finance and so no demand. This year like the decades previously we will be told of the need to build at a couple of hundred thousand new properties to meet the demand and every year we fall well short on the supply side.

In recent years we have seen a number of government backed incentives to stimulate the housing market aimed disproportionately at the new homes sector. We need to start building to get us out of recession! You will notice the billboards around the country marketing the ‘Help to Buy’ scheme are funded more by house builders than banks or estate agents or other interested parties.

So could we build more? I believe so, skill shortages have been blamed but we have previously been more efficient with a smaller population in the post war years building record numbers of new properties way before we could tap into the European market for cost efficient labour. Perhaps the answer lies more in protecting the “value” of the product? It suits the developers to control supply as it will constantly push up the demand for their product. Improves cash flow, efficiencies, reduces costs and ultimately profits – driven by that demand v supply ratio remaining heavy on the demand side and not finding equilibrium.

So what is the incentive to build more to meet the excess demand if all it does is ultimately drive prices down? Most markets are imperfect but I do believe in the new build sector supply could be substantially increased if there was a will for this, but I’m not sure there is.

So as consumers we have to face a “tax” if we want to improve the supply, should we not look to enforce similar penalties on house builders sitting on land banks and not building more properties immediately. Could this be seen as controlling supply to maximise profits rather than meeting the demand side of the equation are thereby easing prices for us? 


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