The property market. It’s part of the trinity of dinner party conversation topics – alongside the weather and the children’s school (fees or catchment area) – and is a bit of a national obsession. We have gone from a nation of shopkeepers to a nation of small scale property speculators, with an act once rare – buying your own home – now considered so normal that any short term difficulty in achieving this aim is deemed a national problem. The Housing Minister makes pronouncements on desired price growth (none), the right-leaning press passes judgement (thumbs down), the Mayor of London follows suit, and the argument arrives at ConservativeHome. In our property owning democracy everyone has a view, but all too often it is based on only half the story.
It all started when Grant Shapps as Housing Minister invoked the wrath of the Daily Mail among others by suggesting a "It is in everyone's interest to have stable house prices for a long time, because the only way we can make sure housing is more affordable for future generations is not to have these crazy housing booms. We can't go on as a nation thinking that housing is something too expensive for regular people." He added that “We can’t go on thinking that your home is your investment, your retirement plan”. This was backed on ConservativeHome by Tim Collins of the Home Builders Federation. I have a problem with this view however for several reasons.
(1) Housing is affordable
Critics of the property market like to claim housing is no longer affordable and point out data such as this from the Council of Mortgage Lenders which shows that – over the last 50 years – property value as a multiple of salary has increased. Indeed it has, greatly. People today on average spend a far higher percentage of their income on housing costs – rent or mortgage – than in the past, but that doesn’t make housing unaffordable.
Firstly, many of the complaints exist because what is deemed ‘unaffordable’ is often really just ‘unrealistic’ – whether due to location or size – and away from the trendy hot spots there are cheaper properties. You only have to watch Location, Location, Location to be told it’s all about compromise as house hunters seek perfection at a bargain price in a single postal code or handful of streets. It’s a simple fact of life that some things are unaffordable to some people, but that doesn’t mean all things are. Finding a place needing renovation, buying a stepping stone property for the time being, and moving to another area, are all options.
And secondly, people in the UK in comparison to those elsewhere in the EU do not spend a particularly large proportion of income on housing costs. The Dutch, in particular, spend considerably more of their post-tax income on rent or mortgage payments, but other countries do also. This suggests that if forced to, people will prioritise housing over other consumption. Although the percentage of income spent on housing is near record levels, records set in 2007 I believe, you must take into account the fact other prices have fallen. Clothes, electronics, holidays, cars and everything else have fallen in comparison to our incomes, leaving more income for housing. Property – which is limited in supply by its very nature – is thus obviously going to be more inflationary than consumer goods which generally aren’t, whether you accept it or not. We have to accept that property has become less affordable, other things more affordable.
(2) Lower prices reduces supply, rising prices increases it
If we passed a law stating all apartments in Mayfair must sell for £50,000, does that mean we’d all be able to buy one? Of course not. Supply would dry up, and what would come onto the market could only be allocated by some other mechanism such as “needs based assessment”, lottery or corruption. Price is the free market mechanism, and the only one that encourages new supply. Rising prices are needed to give confidence to property developers – who I differentiate here from house builders who profit by building on their extensive green field land banks purchased often years before – to make regeneration of urban areas viable commercially. Indeed developers often need rising prices to make the sums add up and to get the confidence of lenders to even buy the land.
Talk of reducing costs through less regulation is fine if you want to build on green fields, but to regenerate our inner cities we need prices to be rising and the outlook strong. Like a stone dropped in a mill pond rising prices in one area ripple out, lifting previously poorer neighbouring areas as investors and property developers flock in. As these units come onto the market they will give some stabilisation to prices from increased supply, but we need a good outlook to make brown field and urban regeneration viable.
(3) First time buyers don’t need lower prices
Of course they’d like them, but the price isn’t the issue (with the exception of those wanting it all). The real issue is banks demanding a large deposit, in some cases as much as 25%. Saving this up whilst paying rent is obviously hard. Banks however are demanding these huge deposits due to fears about the housing market, and falling or stagnant prices will worsen these fears. It's counter-intuitive but rising prices will make it easier to buy property as lenders will have more confidence that the property is still worth what they loaned if they repossess it. Once prices start to rise, over time, competition between lenders for customers will force banks to work with lower deposits.
(4) Bribing councils is a bad idea
The New Homes Bonus, a means of making development attractive to local councils, is little more than a bribe – if we’re being honest – and will have bad consequences. By making it worth their while, councils – particularly in cash strapped times – will see giving the green light to development as a kind of ‘Get Out of Jail Free’ card. When the money runs out, they’ll go again, and again, ad infinitum. By making no distinction between good development such as regeneration and bad development such as building on green fields, the New Homes Bonus will be a recipe for urban sprawl as that’s what is most profitable for home builders (indeed with some prices it’s all that’s viable). That’s assuming it works. Home builders already have large land banks without plans to develop them, sites with planning consent aren’t selling, half constructed housing estates lie silent, and unless prices start to rise there will be no change (see 2). What is needed is for developments to be made more profitable. Rising prices, and perhaps a cut in Capital Gains Tax for developments on brown field sites.
