David Dundas: What to do about the UK housing market?

David Dundas is a Lichfield City Councillor, Managing Director of Lion Industries and an active member of CPF. He has a science degree from St Andrews and an early career as a field service engineer in the oil industry that finally took him to Brussels, where he worked for Texaco Europe.  He stayed on in Belgium for 22 years, working for several American companies including Dow Corning in their Energy department, and for a time, was a consultant to the European Commission on toxic waste disposal.

The house building industry is undoubtedly in crisis; workers are being laid off, which is dragging the economy into recession.  The government has run out of good ideas and is fiddling about with bad ones like the eco-towns and now the suspension of stamp duty.  So how can we restore confidence in the housing market and bring it back on track?  Just pouring money into the banks is an expensive way and on its own is unlikely to produce a significant improvement, because it is not sufficient on its own to address the problem of confidence.

Most housing developers have either stopped, or are stopping building new homes.  As building workers are often sub-contractors, it has been easy for  developers to terminate their work.  Whilst many tradesmen have found other work in the short term, in activities such as refurbishment and house extensions, there is a limit to the amount of this kind of work available, so construction workers are going to find themselves progressively out of work, placing a further strain on the economy, as unemployment rises.

Whilst the media gets excited about house owners with negative equity, this misses the point because they are only small proportion of all mortgagees, so  this is not the major threat to the nation.  Banks will not repossess, if borrowers continue to repay their mortgage;  the far greater threat comes from those who lose their jobs and therefore cannot pay the mortgage.  It will be the construction workers who will first dominate this group.

We therefore urgently need to restore confidence in the housing market and kick-start house building;  I believe that there is an opportunity to do it.  With the cost of housing becoming an ever increasing multiple of people’s earnings, it is increasingly difficult for first time buyers to get started on the housing ladder.  Shared ownership between a housing association and a first time buyer is a good way to get them started;  it allows them the opportunity to build up a capital base which they can then use in their second house purchase.  Building for shared ownership is the key.

The present government has committed to fund the construction of affordable housing through the housing associations (via the Housing Corporation), of which shared ownership is a part.  A major issue for Conservatives is whether we should continue to fund the housing associations?  I believe that the present housing associations are a far cry from the subsidised council houses of 30 years ago, which were let for uneconomic rents.  For the purpose of this discussion, I have assumed that a Conservative government would continue to fund the housing associations.

There appears to a consensus that affordable housing should be 30 - 35% of  total dwellings in a major development, to avoid creating low cost housing ghettos.  And new affordable housing needs to be purchased by the housing associations, for otherwise it would probably cease to be affordable when resold.

Whilst the housing associations appear to have the means to purchase any affordable housing built, the problem is that the balance of say 65% also needs to be built to maintain the integrity of the development.  Unless developers have the confidence that a good proportion of the houses that they build can be sold, they will not build, so how can we give them a sufficient boost to their confidence, to go ahead with the developments that they have been planning for a long time?

I suggest that the government should underwrite, through the local housing associations, the purchase of new affordable housing as it is completed, with the proviso that it represents no more than 35% of the total build.  The qualifications for joint ownership will need to be relaxed, because at present it is restricted to people having low incomes, whereas there are many other first time buyers who do not have a capital base, who would be glad to take up a joint ownership.

A guaranteed sale of a significant proportion of the houses would give many developers the confidence to start a new development;  after all, most have shareholders looking for results, so no building is not an option.  The cost of such underwriting would not require any new funding, as this has already been budgeted.  It would give an opportunity for more first-time buyers to get on the housing ladder and keep construction workers usefully employed in building the houses that we need.  Whilst this is not the magic formula that will kick-start the economy, it could be a major factor that helps turns it around.