Rebuilding the Housing Market

by Ken Gibb

The media reported today a new survey by the Halifax that indicated most young people think they will now never own a home. This kind of story is readily set alongside the housing bubble worries associated with the Treasury’s plan for supporting the mortgage market and continuing concerns about the lack of new housing supply, be it affordable and market provision. Despite a few more positive recent market indicators, the general prognosis remains challenging.

The rigidity that prevents market recovery (a term one needs to carefully define) stems from three broad sets of market issues. Mortgage lending remains entangled in the capital rebuilding exercise post-GFC and while Government supported loans will inflate lending, historically high deposits and tight terms and conditions put purchase beyond many of those potential first time buyers identified in the Halifax survey. Housing supply has been hammered by the down turn and volumes are at historically low levels. That lack of market confidence in turn undermines planning agreements like S106 planning agreements (S75 in Scotland) and also probably the willingness of developers to spread their products to the cheaper end of the market.

Supply, demand and funding interact but do so dysfunctionally. Supply will grow if confidence is enhanced but that may require generally rising prices and that will only freeze out the generation rent still further until the lending market’s circumstances move strongly in their favour. And, as economists like Geoff Meen have repeatedly pointed out, the small scale of supply additions (even in the best years) makes such a small contribution to the overall housing stock, that extra building will not dent house price growth except in the very long run.

This is why the debate is again running about the politics of how to make it generally acceptable to pursue lower house prices. Lower entry costs with or without much easier loan pricing is a sine qua non for restarting entry into home ownership. There is, however, something paradoxical in all this. We need to lower house prices to make them affordable to entrants (the outsiders) but those entrants are driven by the same asset speculative motives (as well of course those other home-owning ideals we know so well) in order to capture subsequent (untaxed) capital gains from rising prices thereafter. Meanwhile, existing homeowners (the insiders) are the loudest supporters of conditions that raise the house price level and their specific housing values. Is anyone really talking about permanently lowering prices relative to incomes?

I think ideally that Government should aim for house prices in the long term to grow at the same rate as general inflation – a neutralizing of the relative price of the asset. House price stability and reducing the amplitude of cyclical volatility should be a macro goal of the first rank.  We need automatic stabilizers to dampen the housing market. Co-ordinated monetary, fiscal, housing and planning policy levers will also be required. Pie in the sky? Perhaps, but the economic costs of the status quo are very high, let alone the social costs. Where are the productivity gains from implicitly or explicitly sustaining housing market volatility and by so doing reducing mobility, hampering the labour market and, contributing to relative local housing shortages? A useful test of new housing policy, a form of rule consistency, would be to question whether any proposed policy innovation contributes to house price stability. It is not too hard to think of recent announcements that palpably do not do so.

Meanwhile, this is all grist to the mill of the private rented sector, the one dynamic part of the housing system in recent years. While most of the policy debate here is understandably focused around regulation, registration and the housing benefit sector – we still remain woefully under-informed about the sector. This is as true if we are looking at Buy To Let lending (below the UK level), how local markets function, about new landlords and their tenants, or the wider market rental sector and its sensitivity to policy change? How robust, for instance, was the basis by which Government expected the HB reform of the private rented sector to lead to behavioural responses in the form of landlords cutting rents? One hopes that this will improve as the economic scale of the growing sector increases the pay-off for more monitoring and empirical evidence building.

What we have is a patchwork quilt of market rental information, less on local rental investment, still less information on tenant household composition and no real sense of how the different tenures push and pull on each other through respective cross-price elasticities (i.e. how the price of one sector affects the demand or indeed supply of another tenure). With a large, growing and often rather invisible market rental sector in our cities and towns, it is imperative for the management of local housing systems and for good housing planning that there is investment in effective monitoring.

Of course, these two issues: ‘normalising’ the owner-occupied market and understanding what is going on inside the rental market – are not unconnected. At the same time, austere times do not help in terms of supporting local housing planning and its research function. But with such scarce resources, the case for better evidenced decision-making is all the stronger. Rebuilding the housing market will require a renewed appreciation of tenure interdependence and the capacity to measure, monitor and understand the local market implications that often lie beneath the visible spectrum.