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George Osborne’s recent Mansion House speech had a few rabbits in the hat supposedly designed to address “the challenges of the housing market”. Firstly, he has decided to give the Bank of England new powers over mortgages including the size of mortgage loans as a share of family income or the value of the house. He says
“In other words, if the Bank of England thinks some borrowers are being offered excessive amounts of debt, they can limit the proportion of high loan to income mortgages each bank can lend, or even ban all new lending above a specific loan to income ratio. And if they really think a dangerous house bubble is developing, they will be able to impose similar caps on loan to value ratios as they do in places like Hong Kong. It’s important that decisions to use these powerful tools are made independently of politics by the Bank of England.”
The idea that such decisions are not political is as illusory as the original decision of Gordon Brown to give the Bank the power to set interest rates. The advantage for Osborne is, of course, that any mistakes can be identified as those of the Bank rather than his.
How these powers are applied will be worked out by the Bank and the Treasury though Osborne said that legislation would be introduced before the end of this Parliament. In any case the impact of this policy will not have worked its way through by the time of the General Election.
“Priced out of the market”
Osborne admitted that this proposal would not deal with the problem of young people being ‘priced out of the market’.
“…it does not address the social problem of how we stop young families being priced out of the housing market altogether. That requires a third pillar to our housing strategy, alongside the clear analysis and new financial weapons. We need to see a lot more homes being built in Britain. The growing demand for housing has to be met by growing supply.”
This brings us to the second rabbit in the hat.
“Councils will be required to put local development orders on over 90% of brownfield sites that are suitable for housing. This urban planning revolution will mean that in effect development sites will be pre-approved – local authorities will be able to specify the type of housing, not whether there is housing. And it will mean planning permission for up to 200,000 new homes, while at the same time protecting our green spaces.”
Yet ‘development orders’ will not resolve the problem of the lack of new house building. Injunctions on the need to build more, repeated year on year, have done nothing to increase house building in any significant numbers. After all their initiatives only 112,630 homes were built in England in year four of this government.
What Osborne cannot even conceive of is that the housing market is incapable of resolving the housing crisis. Private builders will only build homes they think they can sell. Given the fact that there is a gulf between house prices and earnings (even Osborne has to admit that “average loan to income ratios have risen to new highs”) and the level of mortgages granted is way below that at the time of the housing boom before the crash, private builders will not build on the scale that is needed.
Osborne said in his Mansion House speech that the only way to get house prices down was to build more homes “so supply better matches demand”. However, with house building dominated by commodity production those who cannot afford a mortgage are not included in the equation ‘demand’ and ‘supply’. Under the ‘free market’ demand is only measured by the ability to buy.
Osborne does mention ‘social housing’ in passing, but makes an assertion which is economical with the truth. “We’ve got the biggest programme of new social housing in a generation…” he says. In each of the first two years of the coalition government there were more than 35,000 ‘social rent’ homes produced. However, the funding for these was the previous government’s National Affordable Homes programme. The various coalition housing ministers have triumphantly talked of “delivering 170,000 affordable homes”, but neglected to mention that 80,000 of these were part of the previous government’s programme.
When the coalition government’s own “Affordable Homes programme” kicked in (with a 60% cut in subsidy) there was a decline to 14,388 new ‘social rent’ homes in 2012-13 and only 7,759 in 2013-14. Even if you add in the “affordable rent” (6,856 in 2012-13 and 19,320 in 2013-14) the overall figure is still lower than in 2009-10.
Too many people chasing too few homes
The problem of house prices outstripping inflation and earnings growth cannot be resolved whilst there is a surfeit of people chasing too few homes, be they for rent or sale. It is not uncommon now for would-be homeowners to bid above the asking price. Indeed estate agents are now organising viewings to determine the highest bidder. It’s “a sellers ‘market”.
The government cannot make private builders build if they chose not to. The only way that house prices are likely to come down is if the ‘surplus’ of would-be house owners decreases. The only way that that is likely to happen is if there is a significant increase in available ‘social housing’ which takes some house hunters out of the market. Yet government policy leads in the opposite direction.
Today the coalition government is implementing a suite of policies that promotes the further decline of Council housing through ‘right to buy’ (RTB) and the substitution of ‘affordable rent’ for Council rent where new build takes place with grant from the Homes and Communities Agency. The introduction of an increased discount for RTB led to an increase of sales in England from less than 3,000 in 2010 to 11,238 in 2013-14. The reduction of the qualifying period for RTB from 5 years to 3 years will almost certainly increase the number of homes sold, reducing the available stock for those on the Housing list.
104,000 Council homes less under the coalition
Over their four years in office the coalition government has overseen 22,578 RTB sales of local authority homes in England. Over the same period there were 5,300 Council homes built but 12,062 demolished. Council housing stock, on their watch, has declined by 104,000. The coalition government is overseeing the slow decline of Council housing with the prospect of that decline speeding up. It bars Councils from building their own stock with ‘social rent’, at least with HCA money, and promotes the driving up of rents in Council homes towards market levels. It bans Councils from charging Council rents for any homes built to replace RTB sales. It is opposed to giving any subsidy towards building Council housing with Council rents. What little subsidy it does provide is used to promote converting Council homes to “affordable rent”.
No market solutions
So long as commodity production dominates housing then the crisis of insufficient house building and prices beyond the means of much of the population, will continue unabated. There are no market solutions to this crisis. There never have been. Look at historical house building statistics (DCLG Table 209: Permanent dwellings completed by tenure and country) and you can see exactly why this is the case.
In England the government estimates that in order to provide for the number of new households which emerge annually, 232,000 new homes a year are needed. Before the housing crash the high point for housebuilding in England was 170,610 (2007-8). The following year it plummeted to 140,990 and in the final year of the New Labour government it fell to 119,910. In each of the four years of the coalition government it has failed to reach that figure. What was the private sector’s contribution? In 2007-08 it was 147,170, falling to 113,800 the following year and 93,030 in the last year of New Labour. Under the coalition government the private sector has failed to reach the 90,000 mark in its first 4 years.
In the last 30 years the private sector only broke the 150,000 mark in a 3 year period beginning with 1987-88. Prior to that you would have to go back to the late ’60’s and early ’70s to see a higher figure. This is why we can say with some certainty that the market will not build anywhere near the scale required. When house building was above 200,000 a year it was only because of the high level of Council house building. Under Tory governments prior to that of Thatcher there were no less than 100,000 Council homes built every year. It was only under her that it collapsed below that, eventually falling away to 17,000 before her MPs threw her out. Under Major it fell below the 10,000 mark and ended at 1,700. Under New Labour it declined to a few hundred as all investment was directed towards the Housing Association sector.
Whilst mortgages should not be given at at multiples of earnings which are risky for the borrower, especially with so few secure jobs available, the intervention of the Bank of England in the mortgage market will add another factor tending to dampen activity. The more rigorous criteria introduced as a result of the Mortgage Market Review have already produced a decline in mortgages granted. Of course, mortgages should not be given to people who cannot really afford them. But these factors underline the probability that current policies will not produce anywhere near the level of homes needed without national government subsidy for local authorities to start building Council housing on a significant scale.
The current housing minister Kris Hopkins declared said that Labour bequeathed to the coalition government a housing market which was “a smoking ruin”. Yet the fact is that in their first four years in office there have been less homes built than in the last year of New Labour at the very bottom of the crash. The government’s own statistics puncture their propaganda. For all the smug self-assurance of Osborne his government’s housing policy has not only failed to produce a ‘step change’ in house building, it has worsened the crisis.
Extracts from DCLG Live Table 209 for England – permanent dwellings completed
|Financial Year||All Dwellings||Private Enterprise||Local Authority||Housing Associations|
June 21st 2014
690,000 in 2013 compared with 1,138,000 in 2006.