The housing sector is lurching into bubble territory and stock is insufficient to meet demand. What can be done about it? Simon Wilson reports.
Who worries about UK house prices?
Everyone from the Bank of England to the OECD think tank to every homeowner in the country who can’t quite see how their children will be able to buy a place to live in one day.
Other than individuals with a direct interest in ever-increasing house prices – estate agents, developers, professional buy-to-let landlords – it’s notably hard to find anyone who is unreservedly chipper about the return of double-digit house price inflation. (And that’s not just in London: average house prices in Britain surged by 10% in the year to March.)
What does the Bank of England say?
It’s not panicking. After all, in inflation-adjusted terms, house prices nationally remain 16% below their peak. But the Bank is sounding edgy.
Sir John Cunliffe, the new deputy governor, last week warned that rising house prices were the biggest threat to the stability of Britain’s financial system, and said it would be “dangerous” to ignore the price surge of the past year.
His comments came a day after Spencer Dale, who is about to take over as the Bank’s executive director for financial stability, said Britain should be “nervous” about its booming housing market, and suggested that the Bank has the power to target London specifically if it believed the bubble there needed deflating.
In its starkest warning yet about the risk to the British economy from an emerging house-price bubble, the OECD this week suggested that the moment to deploy those powers has arrived.
What can the Bank do?
Essentially it can attempt to choke off demand. Traditionally, of course, that’s done by putting up interest rates. But under new laws passed by the current government, the Bank’s Prudential Regulation Authority has “macro-prudential” powers to limit banks’ freedom to lend to house buyers if it thinks the market is becoming unsustainable.
It could do that by introducing higher capital requirements or low maximum loan-to-value ratios for mortgages, for example. In effect, it would be intervening in the market to ration credit.
Will it work?
It’s not guaranteed: after all, attempting to control demand for something often has the unintended consequence of distorting markets. This is the main argument against rent controls, even of the limited, well-intentioned form – three-year rental contracts with capped rent increases – proposed last week by Ed Miliband as a way of offering greater protection to tenants.
The danger here is that such controls deter private landlords from entering the market and end up pushing up rents, rather than controlling them.
Internationally, there is recent evidence that cooling measures have had some success in both Sweden and Singapore; the latter appears successfully to have dampened speculative buying by introducing much bigger minimum deposits for second mortgages.
What about the supply side?
Many would argue that the only way the UK is ever going to free itself from its addiction to ever-rising house prices – with all the economic instability, social dislocation and growing inequalities that such an addiction fosters – is not to control demand, but to increase supply.
As Lord Simon Wolfson again pointed out this week, the idea that Britain is an over-developed country running out of space is a myth. Currently, just 8% of the land is taken up by buildings.
If we increased this by one percentage point to 9%, it would release 808 square miles – more than enough to cure the housing shortage. There is some evidence that the current government’s modest efforts to boost building (the National Planning Policy Framework of 2012 introduced a presumption in favour of “sustainable development”) have had some effect.
What’s happened?
A recent report from construction analysts Glenigan found that 9% more planning applications have been approved in the past year than before the Framework took effect, and that more larger residential schemes are being built. In addition, Help to Buy has probably helped building a bit (especially in the cities of northern England) by making it easier for house builders to shift their stock.
But even on the Treasury’s rose-tinted figures, the programme will only help boost Britain’s housing stock by 120,000 houses by 2020. To keep up with demand, England alone needs to increase its supply of houses by 230,000 a year (more than twice the number completed last year).
For now, politicians of all stripes are unwilling to grasp the underlying issue: freeing up planning policies that constrain building on the edge of existing cities. On that thorny subject – the need to build on a tiny fraction of this green and pleasant land – the debate will be long and bitter, and is only just beginning.
The right to build
The government’s latest supply-side wheeze is to encourage more of us to build our own homes. Less than 10% of the new houses built in Britain each year are self-builds, compared to 60% in France and Germany.
Under a new Right to Buy scheme launched this week by planning minister Nick Boles, councils will be obliged to sell unused land to local residents who want to build their own homes.
Despite launching the scheme at a Grand Designs Live exhibition, Boles said that the popular TV programme had distorted Britons’ view of self-building by making it seem that it is only for wealthy “retired people, or people who want to build an amazing house out of yoghurt or goat hair”. In fact, it’s an affordable option that can get you “the same house for much less money”.