The government’s housing policy has been controversial. Some applaud Help to Buy for kickstarting activity in the housing market, while others warn of potential pitfalls, especially regarding the second phase that will be implemented from January. Alex Marsh argues that more credit being poured into the housing market will only be able to deliver a modest supply response. This means increasing housing costs

Marsh, Alex

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8/14/2013Britain’s Property Problem: Demand increases are rapidlytransmitted into rising prices rather than expanded outputblogs.lse.ac.uk /politicsandpolicy/britains-property-problem/The government’s housing policy has been controversial. Some applaud Help to Buy for kickstarting activityin the housing market, while others warn of potential pitfalls, especially regarding the second phasethat will be implemented from January. Alex Marsh argues that more credit being poured into thehousing market will only be able to deliver a modest supply response. This means increasinghousing costs.This week has brought a slew of news about the UK housing market. Industry commentators aretelling us the sector has “turned a corner”: levels of market activity increased significantly in Julyalongside a sharp upturn in prices. Average prices are now near or above those reached prior to the 2007-8 crash,although experience is diverging across the regions.While some news outlets are reporting these developments in decidedly positive terms, the commentary is moremixed and critical than perhaps the government would like. As prices rise more households are shut out of the homeownership market. This in turn can have negative consequences for private rent levels. For those within reach ofhome ownership affordability is deteriorating: first time buyers are having to borrow more, when wages are largelystagnant. Loan-to-value ratios are reported to be edging up towards levels that must be deemed unwise. And all thisis happening at a time when many existing home owners are only managing to sustain their current commitmentsbecause we are experiencing an unprecedented period of very low interest rates.Many commentators are crediting the government’s Funding for Lending and Help to Buy schemes as contributingto “kickstarting” market recovery. Yet, phase one of Help to Buy is a relatively modest initiative. Funding for Lendinghas likely made more of a difference. Originally the scheme was intended to ease access to business credit, as partof the attempt to rebalance the UK economy away from investment in residential property and towards moreproductive activity. But then it was made available to Buy to Let landlords, who can take advantage of low interestrate loans to extract a significant return on the basis of rental income alone.We are in a situation where more credit is being poured into a housing market that is only able to deliver a modestsupply response. That can only mean one thing: increasing housing costs.A significant concern is that Help to Buy II has yet to arrive. It is due to be implemented in January 2014 and is amuch bigger intervention. If prices are already increasing rapidly then the last thing we need is the governmentintervening to allow significantly more marginal borrowing while underwriting much of the associated risk. That is arecipe for disaster.I know of no one beyond the government and industry representatives who thinks Help to Buy II is a good idea. Allinformed commentators – both domestic and international – see it as bad policy. It is likely to distort the marketsignificantly. Even Vince Cable has tried to distance himself from his own government’s policy. But then he is one ofthe few people at the heart of government who actually has an economics background.The key point is that if the government aimed to “kickstart” the housing market then that has arguably alreadyworked. Indeed, if anything the market might already be heading towards overheating in certain parts of the country.Help to Buy II is therefore unnecessary. Calls for its abandonment are increasing. Politically that change of directioncould be portrayed as a success of existing policy measures, rather than as a failure. And many people would see itas a case of sense prevailing. So the political costs of dropping Help to Buy II could be relatively small.The housing market in Britain is in a mess, at a number of different levels. The very fact that persistent price rises1/3can feature in any definition of market recovery is one indicator of this. In any other market this would be taken as asign of dysfunction.Several factors have contributed to this situation. A key issue is the UK housing market’s sluggish supply response,which means demand increases are rapidly transmitted into rising prices rather than expanded output. This is not anew problem. For twenty years we have known that new construction has failed to keep place with rates ofhousehold growth. And following the Global Financial Crisis we witnessed the lowest output figures for nearly acentury.Economists have a tendency to attribute this lack of supply responsiveness to a restrictive planning system.Liberalisation is therefore prescribed. It is surely the case that the planning system plays a role. But to stop theanalysis there is to offer a rather partial answer. The “planning system” is not an entirely independent agent. Itreflects the values and priorities of political actors. This can be seen following the coalition’s abolition of RegionalSpatial Strategies. Without top down pressure, many local councils took the opportunity to reduce their plannedlevels of new house building: not so much because “planners” wanted fewer homes but because that reflected localpolitical priorities and local residents’ preferences. The bigger question is why local communities are so resistant tonew development.Equally importantly, the planning system is only one part of the housing supply system. It needs to be understood inrelation to the operation of developers and the house building industry, the land market, and the way in whichdevelopment is financed.Clearly, there is a complex interaction between these components. It can be argued that the recognised problem ofland speculation by developers, for example, is a response to the vagaries of the planning system. That would implythat land release would not be a problem in the absence of planning. But that makes some strong assumptionsabout the behaviour of landowners. Experience prior to the arrival of our current planning system suggests that, inthe presence of increasing demand and growing cities, land speculation would not disappear.In addition, the housebuilding industry in the UK has a higher level of industrial concentration than most otherdeveloped countries, and concentration has increased over the last decade. The industry also has a distinctivesubcontracting structure that delivers flexibility but not necessarily quality. The small-scale builder and self-buildsectors are small: these sectors account for a more substantial proportion of output in other countries. The Coalitionhas made modest attempts to stimulate this sector of the industry, but it faces significant barriers.Finally, the interaction between the planning system, high prices, volume building to standardized templates, and theabsence of minimum space standards can conspire to means that when new construction does occur it is notalways viewed as a positive and high quality addition to a neighbourhood. That, of course, folds back into theconcerns of local residents about further development.One of the solutions to this problem could be, perhaps counterintuitively, for new build to occur on larger scales. Thatwould allow developments to be appropriately masterplanned – with sufficient allowance for public spaces andamenities – so that sympathetic, well-designed and high-quality construction can allay residents’ fears aboutallowing new development locally.But to achieve this sort of outcome requires political bravery at local level, and for a different balance of power in theplanning process. The seemingly intractable difficulty of overcoming local resistance to new development is onereason why a new era of new towns has been discussed as a potential solution to the housing supply problem.The problem of supply underpins the housing problem. Yet, very little has been done to tackle it. Without broad-based structural change we are destined to continue to experience the sort of volatile housing market cycles that weare only too familiar with. But the political costs of attempting reform suggest that it is unlikely any time soon.Note:  This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the2/3London School of Economics. About the authorAlex Marsh is Professor of Public Policy at the School for Policy Studies, University of Bristol. He teaches on theMasters in Public Policy in the areas of the economics of public policy, public management and organisations. Hisresearch is primarily in the field of housing policy, regulation and housing markets in England. Much of his work hasfocused on social and private renting. He is a former Managing Editor of the journal Housing Studies. Between2006-2010 he was a Visiting Academic Consultant to the Public Law Team at the Law Commission, where hecontributed to consultation papers on the regulation of private renting and remedies against public bodies. He iscurrently continuing his work on regulation in the private rented sector and undertaking work on housing marketdecision-making from the perspective of behavioural economics. His blog can be found at www.alexsarchives.org3/3

Britain’s Property Problem: Demand increases are rapidly transmitted into rising prices rather than expanded output

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