29 Sept 2009

Mind The Gap - in the logic

Today sees the launch of a pro-housebuilding lobby document called Mind The Gap. It’s authors are David Pretty, once MD at Barratt, and Paul Hackett, acting head of the Smith Institute, a left leaning think tank set up in honour of John Smith.

It’s a concise 30 page review of the UK housing scene, well thought out and covering most of the topical areas for discussion. Including a paragraph promoting self build:

The Government could also offer more support (perhaps in the form of tax breaks and subsidised land) to the self-build market, which is much less developed than in earlier decades or in Northern Europe. The average loan-to-value ratio for self-builders is low and there are few defaults, which should make the sector attractive to lenders. Self-build production has steadily risen, according to unofficial estimates, to around 10% of the UK housing market, with the strongest growth in rural areas. Although the recession has reduced activity, organisations like the National Self Build Association believe that, with the right mix of incentives, production of self-build could be increased to over 40,000 homes (mostly detached).

There is also an insightful little table showing Government housing initiatives since 2008. I don’t know why I find this stuff fascinating, but it is, and it’s great to see it all in one place. There are ten initiatives here, all designed to prop up the housing market and at least six of them are specifically aimed at keeping house prices high, or at least to stop them falling through the floor.

●National Affordable Housing Programme –£8.4billion to increase the supply of all affordable homes (2008-11).
●Housing Pledge –£1.5billion to support existing programmes, including £350million to buy unsold stock and £400million brought forward for affordable housing.
●Kickstart –£1.06billion package to deliver 22,000 homes over two years, of which 8,600 will be directly supported affordable homes. 270 bids shortlisted.
●Community Infrastructure Fund –£100million for the Thames Gateway and £200million for the Growth Areas and Growth Points to support housing developments.
●HomeBuy Direct –£300million shared-equity scheme to help first-time buyers purchase their newly built properties.
●Housing Private Finance Initiative (Round 6) – £1.7billion PFI credits for ten councils to deliver 4,500 new or improved council homes as well as 1,600 new affordable rented homes.
●Housing Market Renewal Pathfinder Areas – £35million extra funding.
●Eco-towns – four new settlements to provide 10,000 new homes by 2016, of which 30% are to be affordable homes.
●Mortgage support –includes the £44million Homeowners Mortgage
Support scheme and the £280million Mortgage Rescue Scheme.
●Stamp Duty holiday –on properties costing less than £175,000 (until the end of 2009).

The Gap in question in the title is the old chestnut of rising demand versus falling supply. It’s funny how 95% of the analysis goes into the supply side and only 5% into the demand. That’s because the demand figures are so flakey that no one dare really look into them. All they really do is to project past trends into the future; because we have lots more single households forming and lots of immigration over the past twenty years, it is just assumed that this will carry on. It’s all so very Soviet: five, or in this case, 15 year plans for population growth and household formation.

Where this disconnects from reality is that we have a little problem with carbon emissions and resource depletion. Common sense tells us that one of the prime ways to solve this problem is to stop adding to it and start repairing what we already have. And to admit that we cannot go on building endless new homes until everyone lives in one on their own, or half of Eastern Europe has moved to the UK.

If we want to make houses more affordable, then it’s time we started taxing the profits people make on them. But let’s give up this pretence that the answer lies in having another building boom.

The foreword of the report states: Few would now argue that the prospect of a large and growing shortfall in housing supply can be ignored any longer. To look away is not a realistic option. The evidence of a widening gap between housing production and demand is undeniable.

Well, I hereby nail my colours to the mast and say I am one of the few. I think that what has happened to the housing market in the past two years makes a mockery of these statements. If there really was a large and growing shortfall in housing supply, then it would be impossible for house prices to drop. Yet drop they have. I would say that this is evidence that demand for housing has very little to do with production levels, and an awful lot to do with possible investment returns.


  1. With regard to the last paragraph of this post, the problem that has occurred in the last two years has little reflection on the demand for new housing, but much more to do with the crisis that has enveloped the global financial markets. The near collapse of the system has meant, in the context of the housing market, that there has been next to no finance available either for potential homeowners to buy houses or for developers to build houses. It has also come with the probable dawning realisation that the continued growth in house prices was unsustainable with a considerable mismatch between prices and levels of average income which was meaning that many people were having to use up too much of their income to pay for their housing costs. I have worked in housebuilding for over 25 years and for 23 of those years I, along with others in the industry, have been asking government, both central and local to wake up to the fact that the crisis in the undersupply of stock was growing each and every year, and it has only been in the past 2-3 years that finally the penny has started to drop. It is sheer coincidence that this recognition also came about with the start of the economic downturn. But of course, the housing problem and house price increases had come about as a consequence of the shortage which people and perhaps banks had to resort to ways and means to be able to try to achieve an ability to pay by devising some very risky strategies to bring people on board.

  2. Sorry, Anonymous, but you just don't get it. You (along with almost everyone else) are putting the cart before the horse. There is NO housing shortage, and there never has been, anymore than there is a road shortage or a supermarket shortage. We have 25 million homes and 65 million people: it's up to us to decide how we divide this up, but just jumping up and down and saying there is a housing shortage will no longer do. Rising house prices are not evidence of a housing shortage, any more than rising share prices are evidence of a share shortage. Rather house prices rose as a result of all that feverish speculation, propped up by banks making ever sillier loans to keep it all stoked up.

  3. I agree with Matt, There is a difference between the requirement for housing (the number of dwellings required to put a roof over everyone's head) and the demand for housing (the number of dwellings required so everyone can have as many dwellings as they like).

    If there are 25m homes and 65m people the average household size would only be around 2.5 people per dwelling. This is fairly small and indicates that we probably have enough dwellings in the country although there may be an issue with the distribution of dwellings.

    A though experiment:

    Two identical countries, UKA and UKB. Same population, same demographics, same social norms etc.

    In UKA there is a property tax of 10% the value of a property per year.

    In UKB the government gives the property owner a grant of 10% the property value per year.

    As you can imagine, in UKA the demand for housing is around the level of the requirement and houses are built at a steady rate to account for demographic changes and population growth. Property prices are kept low as nobody will bid high prices for a property as this pushes up the tax. People accept that owning a house is a necessary expense like gas bills or paying for parking.

    Over the border, in UKB, although the requirement for housing is the same, the demand for housing is huge and insatiable. Properties are built at a furious rate and people are happy to take out huge loans to buy any property as it is a "guaranteed investment". Some people don't bother with pensions, they just take out huge loans and buy several tiny flats that have been thrown up somewhere, not even bothering to see the flats. This huge demand for properties pushes up prices but nobody minds, in fact they celebrate the rises because the higher the prices, the bigger the yearly returns.

    Of course this is just a thought experiment. It's obvious that nowhere in the real world could give out 10% per year returns to anyone simply because they happened to own a house. Such a place can only exist in fantasy land......

  4. I too think Mark is pretty much spot on. It's hard to see where all these people with money to spend but no house are going to come from.

    Some of the estimates of 'housing need' seem to have been based on surveys asking the "Would you like to own your own house?" type questions. That's fine in a 'lifestyle aspirations' sort of way but is not particularly realistic, but then, perhaps it was never really meant to be.

    The difficulty with discussing housebuilding in the UK is that it's about so much more than places to live. Whole 'industries' depend on it: financial services, insurance, regulation and certification, taxation, as well as quite a few quangos, think tanks, conference organisers...... ad nauseam.

    So no, I don't think we need many more houses, but I am sure we are going to get them anyway.