Recently, the front pages headlines have been littered with mounting concerns that the UK market is overheating as a result of Help to Buy. Should alarm bells be ringing, or is it just the sort of typical tabloid sensationalism we as a country seem to perversely enjoy?
The small victory that should be taken from all of this is that it is pleasing to finally see private housing issues being debated. However, they are the wrong issues.
Controversy over the impact of Help to Buy has eclipsed the fundamental problem, which remains unresolved; we just aren’t building enough houses. Each year around 230,000 are needed to satisfy demand. Last year just 110,000 were built.
The housing market is a highly dysfunctional; it lacks synchronicity as demand and supply are poorly co-ordinated. Current policy is doing nothing but adding to this cauldron of chaos, and everyone is involved. Treasury delivered Help to Buy and the Bank of England brought about Funding for Lending. Both policies have boosted demand.
Now, with fears of a bubble, the public is calling for action to cool the market. Two sugars and one salt please! The chancellor has rejected the headlines, and the Bank of England’s new governor Mark Carney is ‘keeping an eye on it’.
In July, house price inflation according to the ONS was 3.3 per cent on an annual basis. CPI inflation notched 2.7 per cent in the same month, giving a real increase of just 0.6 per cent. So is the market-over heating? Well, the simple answer is no.
Source: Office for National Statistics
More important are the serious structural issues that exist.
First, the market is geographically fractured. The London market is over-inflated as a result of excess demand and speculative investment from outside the UK. In July, central London house prices were 10 per cent higher than last year and 25 per cent above pre-recession peak.
As for the rest of the country, despite recent positive growth, it is still shaking off the effects of the 2008 crisis.
Source: Bank of England
Help to Buy has kick-started the market, but is it a demand side solution to a supply side problem? Housing supply has been problematic for some time now, but, it’s not exactly clear what the solution is, simply because the problem is hard to identify.
Some argue that rising land values shift incentives away from house building, while the major builders claim that planning issues and ‘excessive’ regulatory costs are limiting their capacity to significantly increase volumes.
Source: National House-Building Council
Since Help to Buy started supply has increased and the latest NHBC indicate that starts are at four year highs.
Starts have topped 13,000 in two of the last three months, but there is still a long way to go. Now that supply is creeping up, policy makers need to go back to the drawing board, to devise a medium to long term solution, beyond the current policies, to make housing supply more responsive to changes in demand.
Eyes should be on a solution to get the market operating in a more natural way and to ultimately deliver the 230,000 per year needed to satisfy demand in the long term.