EXCLUSIVE: Understanding the housing market
With millions adversely affected, the cost of not fixing our housing problem is likely to exceed £1 trillion. But this is the tip of an iceberg, when one considers the likely increased demand in state benefits. To resolve the problem we must recognise its root causes.
Policymakers and stakeholders need to understand the problem better and there must be more fact-based, public discussion on the problem’s long-term consequences.
Treating the Symptoms
Unfortunately, stakeholders concentrate on issues that affect them rather than the health of the market. Builders focus on acquisition of land and planning constraints, while lenders focus on acquisition of funding and compliance issues. Builders and lenders have switched to servicing buy-to-let and builders are selling off-plan, overseas. All this makes things worse by consuming properties and finance, increasing demand and pushing up prices.
Resolving short-term stakeholder issues will not address the housing problem. Neither will costly initiatives like Help to Buy, which treats the symptomatic delays and exclusion from homeownership, rather than the root causes. It involves government in the market and exposes the taxpayer to risks. For these reasons it is not a viable long term solution.
Defining the Dysfunction
The housing market is dysfunctional because it is failing in its primary purpose, which is to help customers buy their own homes. Stakeholders have forgotten that the market exists to serve homebuyers, not them. The stakeholders have a monopoly on data and opinion and they are rarely challenged. To resolve the housing problem this must change.
The solution will undoubtedly include returning property to sensible levels of affordability.
When Kate Barker published her Review of Housing Supply, 10 years ago, the first time buyer gross house price to earnings ratio was 4.4. This was considered too high back then. The average had been 2.7 over the previous ten years. Today the ratio is 4.9 and rising.
However, if fixing the property problem requires a property price correction, we can expect resistance from stakeholders currently being rewarded by the dysfunctional market
Resistance to Change
Many homeowners have benefited from rising property prices and would not want their capital gains reversed. Some bought at the peak of the market or have remortgaged and now rely on low rates. A property price correction would push many into negative equity. This creates a conflict of interest for the government, particularly as it is encouraging first time buyers to buy into an over-price market using the Help to Buy scheme.
The buy-to-let sector is expanding fast, as landlords profit from the exclusion of millions from homeownership caused by the dysfunctional market. Their profitability is dependent on property price inflation. Many highly geared landlords are expanding their portfolios with interest-only loans and so becoming vulnerable to a property price correction.
Builders and lenders will also resist change. They function, well enough, in the dysfunctional market and will argue against actions that disadvantages them in the short-term, even if the outcome is a healthy market that resolves its primary purpose in the long-term.
Previous governments have benefited from the perception that homeowners, who make up the majority, have been getting richer as property prices have risen. A government that addresses the affordability issue now will face a negative response. They will also have to grapple with the impact of a property price correction on the banking sector.
However, resolving the housing problem is vital and tough decisions have to be made.
Implementing a programme of change over time will enable the costs to be discounted over a longer period. Implementing a programme of change in the short period before the next election in May 2015 is impracticable. However, much could be done in advance of the election to prepare for a programme of change immediately following the election.
Then, acting quickly will be vital as pension savers will have freedom over how they use their pension funds from April 2015. Many will choose to invest in property and this could cause an asset price bubble in an already over-priced market. As affordability is a major contributor to the housing problem this must be discouraged immediately following the election.
Property in the UK is worth £4.4 trillion and yet we have no regularly reported indicators of the market’s health. To understand the market better we need better information.
The market is awash with data, but much of it is incomplete, inaccurate and biased and it communicates the world view of stakeholders. To make sense of the market we need complete, accurate and unbiased data from a single, independent, data aggregator.
Policymakers require continually updated, customer-oriented indicators that define exactly what is going on and highlight the costs, benefits and risks of taking combinations of corrective action to fix the housing problem, via a collaborative programme of change.