Our great housing problem
Tony Ward is chief executive of Clayton Euro Risk
Two valuable nuggets of information came out recently regarding the state of the housing market.
First, both Halifax and Nationwide suggested that the shortage of homes coming onto the market was helping to keep house prices high. Accepting that the lack of homes for sale was supporting house prices, Nationwide’s Robert Gardner said: “We continue to expect prices to rise by 2% over 2017 as a whole.”
Second, the Royal Institution of Chartered Surveyors (Rics) said that estate agents were reporting enquiries from new buyers to be sluggish and had fewer properties on their books than at any time over the last 40 years. The estate agents echoed the belief that lack of supply was fuelling the rise in house prices.
Not really any surprises here. I’ve always argued that, as long as demand for housing outstrips supply, any long-term house price drop is unlikely. However, there certainly are problems as evidenced by the housing market’s dysfunctional behaviour. Britons are buying and selling houses less frequently than they once did. Official numbers suggest that the rate of residential transactions this year is set to be the lowest since 2013. Britons have fallen out of love with moving home.
The causes of our current predicament are manyfold. The long-term decline of housing construction is one factor. Restrictive planning policies don’t help house builders and some 50,000 fewer new-builds came to market each year compared with the 1980s. Another influence is the rising burden of stamp duty. The Economist reports that, in the last decade, the average amount of stamp duty charged per residential transaction has risen by 30% in real terms – albeit recent changes have lightened the load for some. This requirement to pay a substantial sum upfront makes a move unpalatable for many. A recent paper by Christian Hilber of the London School of Economics suggests that stamp duty reduces the rate of home moving by about a fifth.
Regular readers of my blogs will be all too familiar with my feelings about stamp duty and my campaign for reform.
Arguably the most significant reason for the slump in sales, however, is the squeezed living standard of many Britons. Various property analysts have made the point that people can only climb the property ladder if they have money to pay for estate agents’ fees and a deposit. Since the 1980s, the growth of real household disposable income has fallen from about 3% annually to 1%, with things worsening since the Brexit vote as higher inflation erodes wages. With the household savings rate reaching its lowest level since records began, it is hardly surprising that people don’t have the spare cash necessary to pull themselves up the housing ladder. Today’s average deposit for first-time buyers is roughly equivalent to the average annual salary.
A consequence of this, of course, is inefficient use of housing stock. One-in-three Britons has two or more spare rooms yet overcrowding is increasing. Where is the incentive for the older generation to downsize and make room for younger families? Unfortunately, nothing suggests that the rate of housing transactions will rise in the short-term. The government’s recent white paper on housing lacked any real substance and failed to address the need to incentivise people to downsize. Brexit won’t help.
So what’s to be done? Back to the same manifesto of points I keep reiterating in this blog. First, make the planning process more efficient: second, give housebuilders a shorter timespan in which to complete house builds; third, change onerous and unfair stamp duty taxation and fourth, provide attractive alternatives for the older generation to down size. I see Legal & General has taken its first step into the retirement housing market by acquiring an existing operator with ambitions to build 3,000 homes for older people in the next five years. L&G estimates there are 3.3 million people in the UK who would like to downsize – but only 7,000 specialist homes for older people were built last year.
More radical thinking like this is required.