Lack of housing, not credit, is root of property problem

A closer look at year-on-year figures shows that the market is still some way from another crash, despite Help to Buy fears

Farquhar Road, a leafy address in Birmingham's Edgbaston suburb, has homes selling for north of £1.5m. In Glasgow's West End a five-bedroom Victorian terrace can command a seven-figure price tag, while there are hundreds of streets in London where a family will struggle to secure a purchase without £2m to spend.

It seems to confirm that Britain is experiencing a house price boom that will, in a couple of years, lead to another spectacular crash.

Already opposition politicians and housing experts have warned of the dire consequences of the government's speculators' charter, otherwise known as Help to Buy. The scheme gets round the need for a 20% deposit by offering a taxpayer-funded 20% top-up loan in combination with a buyer's 5% deposit and 75% mortgage.

Combined with the Bank of England's funding for lending scheme (FLS), critics argue that it provides yet another sugar rush for a market that is already enjoying a good deal of stimulation.

Some economists put the average price rise this year, and next, at a combined 15%. Others have pencilled in more than that. And in the top property hotspots, prices seem to be rising almost every week. As a topic of dinner party conversation, the vaulting price of a half-decent flat or house is back at the top of the menu.

Recent evidence also points skywards. The Council of Mortgage Lenders (CML) said last week there was a marked pick up in mortgage advances in May, adding that surveys show the housing market is moving out of first gear. Property website Rightmove revealed on Monday that "all regions are up year-on-year for the first time in nearly three years contributing to the positive national picture".

Yet a closer look at the figures shows the UK is still some way from another crash. There are many ways to judge house price inflation. If we use the Bank of England measure that marries the Halifax and Nationwide indices, the fall in average values since the 2007 peak is 15%. So the expected rise in prices between now and 2015 will only take us back to the previous peak.

More importantly, the number of people buying today at the newly inflated prices is small compared with the peak, which means if prices fall, only a few people will get in trouble.

A look at the number of transactions adds support to this view. The CML has pencilled in 950,000 transactions in 2013/14 compared with 1.6m in 2007. Repossessions, which are another measure of trouble ahead, are roughly static at around 35,000 a year and the CML expects a small rise to 37,000 next year.

The supply of new homes, or lack of it, is particularly important in keeping prices high. Building remains at levels last seen in the 1920s. The construction data for May showed output down almost 5% on the previous year, with private and social house building hardest hit.

Private builders reported a surge in profits last week and pointed to Help to Buy and the FLS as key drivers of the buying spree. But they are adding to the housing stock at a snail's pace. Far from sensing a market that can withstand thousands more homes at top prices, they are drip-feeding them into what they perceive to be a relatively fragile situation.

Then there are the housing associations. There are plans for them to increase their programmes, though not while austerity is the order of the day. A lack of social housing heaps more pressure on an already over-stretched private home market, pushing up rents and prices further in a way that economists find, in the short term and in the narrowest gauge of supply and demand, entirely justifiable.

So at a time when banks are restricted from offering the kinds of crazy loans available before the crash and are better capitalised to deal with unforeseen shocks (and the supply of new homes is atrociously small), there is a certain amount of justification for this price level. High prices, a small number of transactions and restricted supply have many social, political and economic consequences, but are not a reason to panic about a possible crash.

No wonder George Osborne told MPs last week: "The purpose of [Help to Buy] is to repair an impaired mortgage market that is clearly not functioning properly. I don't think the situation at the moment looks like an asset price bubble."

The problem is that we seem to be at a crossroads where the UK either continues its lost decade of low growth, low wages and severe restrictions on the supply of credit, or we allow a consumer boom built on the credit available through Help to Buy, the FLS and looser ties on bank lending to rescue the economy.

Rob Wood, an economist at the private German bank Berenberg, watched the previous boom from his position as an analyst inside the Bank of England. He is concerned about the outlook beyond 2015 when house price rises will take the UK average to new highs. If that occurs without any noticeable degree of wage growth or cut in unemployment, then we will be back in bubble territory.

"House prices thus reach the heart of Britain's current policy paradox," Wood said. "Loose monetary policy works by boosting asset prices and encouraging households and firms to spend now and save later. That boost can prevent depression. But it can only delay the inevitable adjustments of saving, spending and house prices.

"To keep the economy alive today, policy has to do the opposite of what is needed to keep it alive tomorrow. The positive way this plays out is that UK adjustment is less painful in the future. Eurozone austerity is due to ease off next year and the US will be through the fiscal cliff. With a stronger world, UK adjustment could be less difficult in the future".

Wood says relying on other countries to bail out the UK is a risky strategy when the best way to avoid a house price bubble is to build more homes. In fact, he would embark on a wide range of infrastructure projects to bring down unemployment and stabilise house prices.

But the British disease could be embedded to the extent that a bubble is inevitable without more far-reaching reforms to a tax system that already encourages speculation in property.

Former Bank of England adviser Kate Barker wrote a report for Gordon Brown that said Britain needed around 400,000 extra homes a year to keep house price rises in line with general inflation of 2%. That seems like a pipe dream when the government refuses to back public house builders with cash, relying instead on the private sector.

Consumer lobby group PricedOut agrees with the CML and most housing groups that Help to Buy will do little to ensure that more house-building happens over the longer term. It says: "Boosting buyers' access to credit simply allows house-builders to raise their sale prices to match. This means bigger profits for developers, but even higher house prices for struggling first-time buyers to contend with."

Only public housing built on publicly owned land, of which there is still plenty, especially in the hands of the Ministry of Defence and local authorities, can save the day.


Phillip Inman

The GuardianTramp

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