As the recession begins to bite, the housing market has, so far, borne the brunt of the fallout, and with Spring here, it lies in a virtual state of paralysis. In 2007, few people would have predicted this almighty crash, even in the housing industry, where the warning signs should have been apparent. The mistakes stem from a generally accepted view that a lack of supply, or an increase in demand, was driving up house prices.
The Government’s Barker Report looked exclusively at supply to reach its conclusions, and the Prime Minister followed these to announce arbitrary central targets for house-building. For our part, we considered demand, along with factors like the increase of family breakdown and migration – which we have policies to address.
Our approach, at least, was not entirely wrong. There has been a woeful level of house-building over the last decade and demand has increased. There can be no doubt that we need more housing stock, as both main political parties agree on that, while fundamentally disagreeing on how to get there. There was, however, another factor – the availability of credit and irresponsible lending.
125% mortgages at seven or eight times salary were on offer and self-certification was widespread. This lax credit – encouraged by Gordon Brown’s transfer of power to the Bank of England – coupled with an increasing public view of housing as a wealth creator overheated the market, with prices rising by 10% per year, and the subsequent collapse has been rapid and unforgiving.
House prices have fallen by around 20% since 1997. There are plenty of studies which predict that there could be a further fall. The FSA’s financial outlook acknowledges that traded options prices suggest that the total fall in house prices could be as much as 35%, peak-to-trough. A Numis Securities report even talks of the possibility of an over-correction, leading to further falls of 40-55%. This may be overly pessimistic, but as the recession hits and unemployment and repossessions rise, prices are being forced down.
The effect of this collapse of house prices is obvious – if they fall by another 15% ,as the FSA predicts, then one in four homeowners will be in negative equity on their primary home. There have been anomalies in these falls, most notably the slight increases reported in the value of family homes, undoubtedly as a direct result of the Government’s density targets which led to a shortage of larger houses built in favour of flats.
Everyone is suffering. But there are plenty of people out there who want to own their own home – 88% of the general population favour owner-occupancy, according to a recent YouGov survey – who currently do not. Demand is high, and first-time buyers – previously completely priced out of the market – are watching as prices come into view. The problem, of course, is that just as house prices look likely to over-correct, mortgage providers have swung too far away from lending money and insisting on extra large deposits.
Having watched as housing became unaffordable – and misdiagnosed the problem – it is crucial that the Government works with lenders to make mortgages realistic and affordable. Self-certification and high salary multiples will not be missed, but lending to young people with a sensible deposit and a stable income (as far as is possible in a recession), who can service a mortgage is vital if the market is to turn around. The housing market relies on first-time buyers, and there were plenty waiting for the bust that the Prime Minister promised would not occur. Now it is here, they can help the churn in the housing market and boost prices, as long as they can get access to finance.
There are other steps that can help: scrapping Stamp Duty for first-time buyers on properties up to £250,000, so that nine out of ten buyers pay nothing; and getting rid of the bureaucratic home information packs that stop sellers from putting their house on the market speculatively. In wider terms, the Conservative Party’s policy of trusting and empowering communities to build the homes that they need for future generations, while scrapping the Government’s density targets, will ensure that the right type of homes are built in the right places.
These are longer term changes for a Conservative Government to implement. Before then, mortgage lending must be increased. The Government’s injection of cash to banks needs to be followed up with real work to ensure that as much of this as possible is squeezed into the mortgage market, particularly for first-time buyers. With young people back in the market to own their homes, the market can recover and could even lead us out of this recession. n
