New foundations: can Gordon Brown put an end to the boom-and-bust cycle that blights Britain's housing market?
Copyright 2004 The Financial Times Limited
Financial Times
March 1, 2004, Monday
Ed Crooks
Brighouse, the former milltown in West Yorkshire, is not everyone's idea of a little piece of heaven on earth. Yet according to Halifax, the mortgage lender, it was the hottest of Britain's property hot spots last year, with the average house price rising by 65 per cent.
"A typical starter home, a terraced house that would have been Pounds 45,000-Pounds 50,000 a couple of years ago, is now Pounds 100,000; and that's way beyond many first-time buyers' reach in this area," says Paul Keighley of Bramleys, a local estate agent.
It is a national phenomenon: in the south-east and London, affordability is even worse than in Yorkshire. And this week's report from Nationwide of a 3.1 per cent rise in the average house price in February was a sign that it is still getting worse.
It is time, the Treasury has decided, to put a brake on the runaway train. Around the time of the Budget, on March 17, it will be setting out ideas for preventing the wild ride of boom and bust that has characterised Britain's housing market for decades. The reviews by David Miles of Imperial College London, into long-term fixed-rate mortgages, and by Kate Barker of the Bank of England's monetary policy committee, into the supply of new housing, will follow up their interim reports from December with recommendations for action. If implemented, their reforms could make a profound difference to the way the British buy their homes. Some of their ideas, particularly Ms Barker's, are likely to jab at the rawest nerves in British politics. It will be a test of the government's courage, as it thinks about a third term in power, how many of their recommendations it is prepared to put into practice.
For homeowners, sitting by the fire counting the pounds being racked up on the value of their houses every minute, it may not seem as if much is wrong with Britain's housing market. But that cosy impression is misleading: the housing market is a big problem for the economy in a variety of different ways.
For policymakers at the Bank of England and the Treasury it is a perennial problem because of its large and unpredictable impact on the economy. The Bank's monetary policy committee, expecting a slowdown in consumer spending to keep inflation on target, will not be reassured by the latest resurgence in house prices.
The housing market also creates structural failures in the economy, such as the loss of labour mobility caused by people unable to move into high-priced areas.
And, perhaps most importantly, it is an enormous social problem. The number of people who cannot afford to buy a home is growing and in England last year there were nearly 800,000 households whose properties were officially unfit to live in, according to Shelter, the housing charity. Prof Miles' recommendations to the Treasury are the less ambitious of the two. He has identified what he calls a "puzzle": the lack of long-term fixed rate mortgages in the British market. Their near absence is surprising because of their popularity elsewhere, in the US for example, and because they can offer a good deal in terms of both interest rates and protection against a steep rise in short-term rates.
Prof Miles, however, has rejected claims - inspired by the difference between the deals offered to new borrowers and rates charged to existing customers - that he has uncovered a "rip-off" in the market.
The eventual package of measures resulting from his work is likely to combine regulatory reform, to make it easier for mortgage providers to fund their long-term fixed rate lending, and education and disclosure requirements to encourage borrowers to think more rationally about the financial commitments they are taking on.
Prof Miles' views have made waves in the industry but are unlikely to ignite much political disagreement.
Ms Barker, on the other hand, is playing with fire. The early indications - her report is not yet finished - are that she will present a menu of policy options, rather than setting down recommendations carved in stone.
Her brief was to examine the lack of housing supply and explain why it reacts only weakly to a rise in prices. In 2001, a boom year for the housing market, the rate of housebuilding in Britain was the lowest since the second world war. There has since been a very modest upturn: the industry expects about 170,000 completions this year, compared with 168,000 last year. That is still far short of the 220,000-230,000 new households looking for accommodation each year.
Conventional wisdom is that housebuilding cannot have a significant impact on house prices when only one in eight of the homes changing hands each year has been newly built.
Gavin Cameron of the University of Oxford disagrees. "If you could double the size of the supply response, it could have a really big damping effect on prices," he says. "During an upswing, prices are signalling that there is excess demand; and by doubling the supply response you halve the time that there is excess demand."
Achieving that increased supply, however, is far from easy. As Ms Barker's interim report made clear, there is a wide range of obstacles to housebuilding. Removing them would often be unpopular with the industry, the government, the public, or all three. ot all her ideas are controversial. Encouraging efficiency in the building industry through greater use of modern techniques such as off-site assembly and increased training could be good for the industry as well as for homebuyers.
Other issues are more contentious. Ms Barker has become particularly interested in social or "affordable" housing. The most significant feature of housebuilding in Britain since the 1940s is the disappearance of social housing provided by local authorities. One estimate cited by Ms Barker is that England needs an extra 39,000 homes a year, of which 31,000 would be considered "affordable".
But for the government to build those homes would mean spending money that, with the public finances under pressure and a tight spending round coming up, it does not have.
One option likely to be pursued by Gordon Brown, the chancellor, in next month's Budget is an institution along the lines of the US real estate investment trusts, to offer tax breaks to investors in property, including housing for rent. But past attempts to stimulate the private rented sector have not been a success.
An even more thorny issue is planning. Reforms of the planning system are already under way and the government has recently injected more resources. But there is a fundamental conflict between the interests of local residents, who will often not want new development in their backyard, and the interests of people who might want to live in the new houses.
The system attempts to resolve that conflict with Section 106 agreements, under which developers provide facilities for the area, such as a swimming-pool or some social housing, as a condition of being allowed to build. But the agreements are slow and inefficient to reach. Housebuilders fear that a proposal in the planning bill currently going through parliament, to make it possible for local authorities to take cash payments from developers instead will lead to an equally tortuous process of haggling.
A better way to reward local authorities for allowing development, to bring their interests more into line with the national interest, is likely to be one of Ms Barker's recommendations.
Ms Barker's ideas about land use are even more radical. Her December report included a table showing that while the public's valuation of urban parks is very high, the value placed on intensively farmed land and even urban fringe green belt is low. Yet attempting to allow more building on green belt and farmland would be politically explosive.
"Even if we were to build the homes that are needed at the densities used in the past, there's no danger of this country being concreted over, or anywhere near it," says Pierre Williams, of the House Builders Federation. "But it's difficult for politicians to overcome the public's resistance."
Some economists, such as John Muellbauer of Nuffield, College Oxford, argue that, even if the developers were given all the help with planning and land use they want, it would still not stimulate enough extra building. Housebuilding is an unusual industry in that companies are speculators in land prices as well as manufacturers of housing; and it is their success in the former that has traditionally determined their profits. As a result, the industry faces what economists call "perverse incentives". When prices are rising, most industries have an incentive to produce more; but housebuilders have an incentive to produce less, to hang on to their land and release it more profitably later.
Prof Muellbauer's solution is a tax on land through reform of the business rates system. The tax could be levied on the value of land held by all companies, including housebuilders, above a certain threshold, perhaps Pounds 10,000 a hectare, to exclude most farmland.
"If the holding cost of land is somewhat higher, builders have an incentive not to hold on to land so long, and that is going to change the supply response," he says.
There is no single villain in the housing market, and no single solution. Ms Barker's recommendations could probably make a significant difference - but only if they get the political commitment behind them.
Anne Power of the London School of Economics warns that the opposition to reform may be strong: "We need more houses. But there are very big vested interests that like high house prices, including developers and home-owners."
The question next month will be whether Mr Brown and his colleagues have the determination to try.
Housebuilders waiting for the recommendations from Kate Barker's review feel they have already absorbed a bewildering number of new policies relating to housing policy since the start of the Blair government.
Given that the housing market is dominated by the private sector, it is not surprising that the government would attempt to use publicly quoted companies to push forward social and environmental policy goals. But housebuilders have responded "in a robust and positive manner", says Pierre Williams, of the House Builders Federation.
You can email me at Gavin.Cameron@economics.ox.ac.uk
Last updated: 1 March 2004.
