A broken housing market

Depending who you ask depends on whether there is or isn’t a crisis for UK housing. I see it that research has been conducted which highlights housing completions should be around 250,000 per annum (based on the current growth of the UK population). The Government has set themselves a target of 200,000 per annum (up to 2020). You will notice the difference – so how do we solve this situation?

There are potential solutions and none really jump out to me. You could take a real hard line and reverse QE or even stop Help to Buy in an attempt to pop the bubble but years of cheap and easy credit availability (albeit at reduced and sensible levels) have literally fuelled a long term fire.

The ultimate problem is nothing more than a problem of supply and demand. It's true, supply and demand has a significant influence on prices. When markets are functioning properly, that is. But we don't have a properly-functioning market for housing in the UK. What we have is an asset-price bubble and state interference which is based on politics and not economics. In a bubble, the normal laws of economics go out of the window.

During the recession one clear thing happened. We had a supply and demand problem. New household creation continued to rise strongly relative to the building of new homes. So prices rose, right? Wrong. Prices fell on average by 20% across the UK fuelled by debt being harder to acquire and the perception that a property was a good investment were dashed.

So is the current bubble nothing more than a fire fuelled by cheap and easy money coupled with property speculation. The market then retained low interest rates and allowed debt to be acquired cheaper followed by the Government implementing Help to Buy and general QE – all this lead to property becoming an investment again and the supply and demand point meant that prices simply went up.

This is not an immigration problem as many people suggest. It is a supply and demand problem coupled with a housing market that doesn’t function. The current housing supply barely meets new demand let alone demand that is sat waiting from the past.

• So why not increase interest rates? This would make houses less affordable reducing the demand but a larger mortgage means people have less to spend, therefore impacting on the economy and less people can get mortgages short-medium term as mortgages become too expensive. It’s all one big mess.
• Another answer would be to flood the market with supply – but we can’t even build what we need let alone more – there is simply not enough construction workers. So let’s encourage apprenticeships – it has started but a lot more needs to happen and should happen via the tax system.
• Towns and villages across the country are surrounded by brownfield sites – incentives from the Government to build here (rather than green sites) will help and ultimately support regeneration of some areas of the country; and
• the final point will be to change the powers of planning officers – I’m not a huge fan of centralised government but I’m inclined to say let’s have a central planning authority that can look at the needs of the country and apply a common approach to planning applications.

I wish I could give a definitive answer on what can and can’t be done. Some people say there is no problem in the first place and that over time it will correct itself. The latter to me lacks credentials and therefore action needs to be taken. To me the first step has been taken by the Government setting up an advisory panel involving some industry heavyweights but the solution comes from a holistic approach involving all stakeholders.

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

 

Enjoy the rest of the weekend

Lee