SPECIAL FEATURE: H2B – Things could get messy
There has been a lot of discussion about whether the government’s Help to Buy scheme will trigger a property price bubble. What I find most worrying is the lack of consensus across the various pundits, academics and stakeholders.
While the government is pushing Help to Buy, the Bank of England is charged with ensuring such a boom does not occur. Things could get messy.
Property prices are driven by supply and demand. Tenants pay more to rent in than they would to buy and over a lifetime will be around a million pound worse off. Not surprisingly, most would like to become homeowners.
But first they must answer yes to three questions: Is it a good time to buy? Can I get a mortgage? Can I find a property?
Though property is overpriced, this added cost pales compared to the lifetime savings of homeownership. With Help to Buy, securing a high loan to value loan is once again possible, ensuring that many can now get a mortgage.
This turns the spotlight on our chronic shortage of properties and the final question, can I find a property?
There is a huge backlog of demand from those that have been excluded over the past several years and every year hundreds of thousands of additional prospective homeowners enter the market, further increasing the backlog of demand.
With the spectre of a property price bubble, some are now calling for the market to be controlled.
This reminds me of a management game called the Beer Game, which can be found online. In this, a player attempts to control supply and demand.
But every action to achieve this causes ripples of chaotic behavior through the system, requiring ever more extreme corrective actions from the player.
In the real world we have many stakeholders, each with their own agendas and objectives, including the government, land owners, builders, planners and the Department of Communities and Local Government, mortgage lenders, homeowners (who are happy to see property prices rise), first-time buyers and the Bank of England, which is now expected to control this unstable system.
The Bank of England has some big levers it can pull to bludgeon the market into submission, but this could create all sorts of unexpected consequences.
Their direct sphere of control extends to mortgage lenders but not to property developers and the supply of properties remains our underlying problem. Others stakeholders are responsible for this sector and they have big levers too.
My own view is that we need all the stakeholders to have a shared perspective and common goals and we require a consensus on how we get from where we are to where we need to be. Where we need to be is a free market.
Over-control of the home-building sector got us into this mess and over-control of the mortgage lending industry will not get us out of it.
We must avoid a property price bubble in an already over-priced market and we appear to be seeing the early signs that such a bubble is forming. So if the Bank of England has to pull some of its big levers, then so be it.
Maybe a rate rise it is just the sort of jolt the system needs and I doubt it would dampen renewed interest from first time buyers.