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Housing Strategy

The Elephant in the Room

Last year Prime Minister David Cameron stated that the government wanted to take long-term decisions that create a stronger and fairer society for our children but what does this actually mean? Do we really want an expanded rental sector and what are the resulting costs for those disadvantaged and the taxpayer?


Brian Hall, founder, The Model Works

We are now half way through the coalition government’s term and over a year on from its publication of Laying the Foundations: Housing Strategy for England. It is interesting to undertake a forensic analysis of why this strategy is failing to address the underlying problems in the homebuilding and homebuying sectors and what can be done to get the initiative back on track. The health of the property sector is critical. Dwellings constitute 63% of the UK’s total net worth. The sector puts roofs over our heads and is a major employer.

A FINE BALANCE Historically, property has also contributed to our personal wealth. Over ten years, prior to the credit crunch, property prices tripled. But the market has now stalled and prices have yet to return to sensible levels of affordability. The IMF says that UK property prices are overvalued by

15% - a potential correction of £642bn. But such a correction would force millions into negative equity and undermine the banking sector. However, according to the government’s own figures, over-inflated property prices were 6.7 times median earnings in 2011 (I don’t believe this ratio has changed much since), compared with just 3.4 times in the mid 1990s. Left unchecked, these affordability issues will continue to cripple the market. So affordability and uncertainty about

property prices is the elephant in the room.

I would argue that a housing strategy to protect asset values will be very different from one to get the homebuilding and homebuying sectors moving. As the government is avoiding the issue, its initiatives are compromised from the outset.

For example, the government talks about releasing land to enable 100,000 new properties to be built, but homebuilders are already land-banking enough land to allow 250,000 new properties to be built. The real problem is finding buyers.

Homebuilders that purchased land at the peak are now holding out, particularly


as the government is not making its intentions clear about affordability. The market has stalled. Knight Frank is predicting that some regions will require until 2021 for house prices to recover to 2007 levels and this is against a backdrop of ultra-low interest rates. Citi is predicting that these will remain at 0.5% until 2017.

KNOCK ON EFFECTS The new build indemnity scheme aims to encourage first-time buyers back into the market but the target is only 100,000 purchases spread over three years. Over the same period some 2.5 million young people will turn 18 and most will want to buy their own homes one day. But even 100,000 purchases appears optimistic. The data is patchy. However, towards the end of 2012 the House Building Federation suggested that only 2,500 individuals had reserved homes via the scheme since its launch in March and this is probably because the uncertainties on affordability have not been resolved. So this leaves promoting social and private renting. The big question is do we really want an expanded rental sector and what are the resulting costs for those disadvantaged and the taxpayer? In my

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