Transcript Housing markets and public policy: what the future might hold?

The UK Housing Market: will it
ever be the same again?
Christine Whitehead,
LSE and CCHPR, University of Cambridge
2012 – How is the System Coping
Housing Studies Association Annual Conference,
York, April 18 – 20, 2012
Are we witnessing fundamental
structural change in the housing market?
• Current crisis follows many others in the post
war period – so is this simply another round?
• In which case current situation can be explained
by over-adjustment in both directions – which
will return to underlying fundamentals over time.
It is simply taking longer to adjust?
• Two distinct issues: (i) is this a ‘new normal’
where structural change means the future will
not be like the past and (ii) will the future be
more or less volatile?
Why is the UK system so volatile?
Stylised ‘facts’
• Income elasticity around 1;
• Price elasticity measure less robust – issues of quality
etc – but certainly negative and less than income
elasticity; But issues re impact of change and rate of
change in price v transactions;
• Credit constrained pre-1980s and post 2008;
• Supply adjusts very slowly – annual adjustment less than
1/2% of stock – through net new building and additions
to existing stock;
• Long run supply elasticity very low by international
standards;
• So prices inherently volatile and possible assymetry in
supply responsiveness.
Basic 1st year diagram
Historic development of prices in the UK
• Early 1970s – incomes/demographics/tax changes –
very rapid real house price rises and rapidly increasing
inflation. Then stagnation; house prices down 40% in
real terms; no nominal reductions;
• Late 1970s; early 1980s – volatility based on macro
economic variation;
• Late 1980s/early 1990s – income and expectations
growth/tax changes/ demographics – very rapid real
house price rises and inflation. Then stagnation;
property market crash; inflation down and house price
falls in real and money terms; slow adjustment to some
sort of equilibrium; mid 1990s – mid 2000s decade of
growth;
• Supply growth poor even when rapid increases in
demand
Trends in new building since 1950
Changes in tenure structure
1971
1981
1991
2000
2007
2010
Owner-occupied
51
56
66
69
69
67
Private rented
19
11
9
10
12
14
--
2
3
6
9
9
Local Authorities
31
30
21
15
10
9
Total (m)
19
21
23
25
26
27
Housing Associations
Owner-occupation rates by age - UK
Rates among younger households falling since the 80s –
before the last crisis
(%)
80
60
40
20
0
1984
<25 years
1989
1994
25-29 years
1999
2004
30-34 years
2008
All households
Prices, incomes and interest rates in the UK
The latest crisis
• Post 2000, across the world rapid increases in house
prices (except Germany);
• Also rapid increases in credit but mainly among existing
owner-occupiers – so debt/asset ratio improving as
prices rose faster;
• Affordability worsening;
• New mortgage products;
• In UK and some other countries growth in private renting
• Supply adjustment variable – Ireland/Spain v
UK/Netherlands?;
• Expected adjustment to ‘soft landing’ 2006/7?;
• Then the financial crisis and a cliff?
Table 1: Most recent period of sustained increase in real house prices
in 12 OECD countries, and total real house-price increases over the
period (highest-lowest last column)
Most recent period with
increasing real house prices
Total increase in real house
prices in the period (%)
Ireland
2Q1987-3Q2006
404
The Netherlands
3Q1985-1Q2008
234
Norway
1Q1993-3Q2007
198
Denmark
2Q1993-1Q2007
174
UK
4Q1995-4Q2007
173
Spain
3Q1996-3Q2007
127
Sweden
2Q1996-4Q2007
127
France
1Q1997-4Q2007
113
Australia
1Q1996-1Q2008
109
Finland
2Q1993-4Q2007
109
New Zealand
4Q2000-3Q2007
90
United States
1Q1995-4Q2006
56
Source: OECD data. 27.11.2009
Source: OECD data. 27.11.2009
Table 2: Fall in nominal house prices from peak to late
2008 (lowest-highest column 3)
Table 2: Fall in nominal house prices from peak to late 2008 (lowest-highest column 3)
Peak (quarter)
Fall from peak to 4Q2008
Ireland
2006:Q3
-18.1 %
Denmark
2007:Q3
-10.5 %
New Zealand
2007:Q3
-9.1 %
UK
2008:Q1
-9.0 %
Norway
2007:Q4
-6.8 %
Finland
2008:Q2
-6.0 %
Australia
2008:Q1
-5.7 %
USA
2007:Q2
-4.7 %
Spain
2008:Q1
-3.9 %
France
2008:Q1
-3.7 %
Sweden
2008:Q1
-2.4 %
Netherlands
2008:Q3
-0.2 %
Source: OECD data 27.11.2009
Quarterly housing starts and
completions
Started: private
Started:All
Completed: Private
Completed: All
2 0 Q4
10
Q1
Q3
2 0 Q4
09
Q1
Q2
Q3
2 0 Q4
08
Q1
Q2
Q3
Q3
Q2
2 0 Q4
07
Q1
Q2
20
06
Q1
60,000
50,000
40,000
30,000
20,000
10,000
0
Impact on Consumers
• Initial effect worsening expectations and little access to
credit for consumers or developers
• More general recession – lower levels of activity;
increased unemployment; but mainly short time/wage
reductions
• Impact on existing owner-occupiers much less than
expected – lower interest rates allowed repayments to
remain affordable; refinancing market worked relatively
well; no incentive to take homes into possession
• Potential owners far higher deposit and far more
stringent credit histories required; uncertainty about
future house prices – and future jobs; – so question as to
the relative impact of demand and supply of funds
• Currently thought to be at least one million ‘missing’
owner-occupiers but increasing importance of private
rented accommodation
Continuing problems of affordability
in the market place
• House prices rising faster than earnings and
incomes at least until 2008 and probably again
since 2010 in some parts of the country
• Affordability ratios have improved for those who
have managed to access home ownership – but
many excluded by deposit requirements as well
as by uncertainties
• Rents have been rising faster than inflation and
indeed incomes - especially in London
• So continuing affordability and access problems
• Increased sharing, living at home, overcrowding
etc.
Increasing pressures on private renting
•
•
•
•
•
•
•
•
One million plus missing home owners
Migration
Investment demand – including international
Rents have been increasing rapidly, especially in London
but beginning to stabilise?
And reductions in demand at bottom end of market from
from Local housing Allowance cutbacks?
Lack of Buy to Let funding – but improving
No signs of significant institutional investment
Quality of management in particular still an issue
Declining role of social housing?
• Affordable rents regime – 170,000 additional
units by 2015?
• Zero capital grants thereafter?
• Where is the money coming from post 2015?
• Equity finance and the attraction of social
housing to institutional investors
• For how long will Housing Benefit take the
strain?
• The impact of the Right to Buy
Tenure change since early 1990s: England
Why no worse?
•
•
•
•
•
•
Lack of supply overhang;
Expectations of continued inelasticity of supply;
Variable rate mortgages;
Relatively few first time buyers;
Devaluation of £ and political stability;
So the fundamentals that economists hate – inelasticity
of supply; mortgage risks with consumer;
intergenerational inequalities; lack of international
competitiveness have all helped stabilise the system –
but not to improve fundamentals of either demand,
access or supply.
Looking to the future
• Household projections suggest maybe 230,000
additional households per annum in England
• Big increases in elderly and lone parent households
• The vacancy rate in the existing stock is low by
international standards, especially in London – though
more could be done to match households to dwellings
and so reduce overcrowding
• Estimates of housing demand and need suggest around
250,00 dwellings are required, if standards are to be
maintained
• But no evidence that, even were the market to improve,
anything like this number of dwellings could be
produced.
2008-Based Projections of Households in England to 2026
2006
2016
2026
(thousands)
Couple households
Lone parent
households
Other multi-person
households
Male one-person
households
Female one-person
households
All households
11,394
11,727
12,060
1,607
2,035
2,495
1,318
1,287
1,268
3,100
3,944
4,787
3,924
4,614
5,407
21,344
23,608
26,016
Source: 2008-based projection tables made available by DCLG
Components of Change of the Housing Stock in England
2006 – 07
2007 – 08
2008 – 09
2009 – 10
Average
(rounded,
thousands)
New build
completions
Net
conversions
Net change
of use
Net other
gains
Demolitions
Net
additional
dwellings
193,080
200,300
157,630
124,200
169
7,600
9,020
8,640
6,230
8
20,150
17,640
16,640
13,600
17
460
1,020
270
970
1
22,290
20,500
16,590
16,330
19
198,770
207,370
166,570
128,680
175
Source: Department for Communities and Local Government, Live Table 120
Barriers to Development: the Way
Forward
• Short term: availability of funds for developers and purchasers –
both for owner-occupation and for private renting; uncertainty about
the future
• Longer term – loss of capacity in development industry; nature of the
industry; planning and land availability; need for equity investment in
housing; is there really demand?
• Government strategy includes: restructuring housing support
through affordable rents regime and welfare reform – but no
changes in tax policy to reduce benefits to owner-occupiers or to
support institutional funding for prs;
• Government growth and output agenda: planning reform; contracts
for 170,000 new affordable homes by 2015; 100,000 homes on
public land; 100,000 95% mortgages; 100,00 additional homes from
Right to Buy and 100 plus more initiatives.
New Building: Current Local Government
Finance and Planning System
• Under existing system little or no tax benefit to local
authority from enabling more housing – business rate
unaffected; tiny, dampened, change in grant from
population increase
• But real costs to the authority and the community in
terms of physical and social infrastructure and loss of
amenity
• ‘Insiders’ benefit from constrained supply; ‘Insiders’ have
vote
• Neighbours of new development lose out most
• S106 a partial recompense. Tensions between
affordable housing and public realm/infrastructure
• ‘Localism’ agenda – presumption in favour of
development within local framework; neighbourhood
initiatives; New Homes Bonus
The National Planning Policy
Framework
• Announced at the end of March for immediate
implementation
• ‘Getting rid of 1000 pages of regulation’
• Freedom to determine local plans – but must meet
identified housing requirements
• If no agreed plan then developments in line with national
guidance allowed
• General presumption in favour of sustainable
development
• Neighbourhood initiatives in favour of development;
• But many continuing constraints – brownfield first; urban
open space; greenbelt; design etc etc
The New Homes Bonus
• £200m 2011/12; £250m p.a 2012-15; rest from
Formula Grant
• Based on net new additions – 160,000+ 2010/11
• Per unit payment equal to the national average
for the relevant council tax band for 6 years
(around £650)
• Enhancement for affordable homes of £350 p.a
(including ‘affordable rent’ homes)
• Bringing empty homes into use and traveller
sites also benefit
New Homes Bonus: Incentives
• Hypothecated funding – but can use bonus as the LA
wishes
• Larger grant for larger homes
• Easiest for greenfield/large sites
• Net additions not new build - so negative impact on
regeneration?
• Reducing Nimbyism? - how are benefits to be linked to
those who suffer from the development
• Relationship to Community Infrastructure Levy – where
money must be used for infrastructure – possibility of
neighbourhood funding
• And is the scale of the payment adequate?
The Current Housing Market
• Transactions/mortgage lending levels remain low
although rising slowly
• House prices have risen to the point where average is
around 6% below peak
• Major differences between houses and flats; between
areas and regions
• Some investment demand from overseas – but mainly
existing owner-occupiers
• A possible increase in new build activity from very low
levels
• No real sign of self sustaining improvement but view
that bottom has been reached and double dip unlikely
• And are house prices at a reasonable equilibrium?
Unprecedented uncertainties?
• More reports than houses?
• It’s the economy stupid – the world economy/the UK economy? –
still in top 5 but a decade of low/zero growth
• Housing market currently dependent on funding availability but also
confidence. Possibility that prices way out of equilibrium – or in line
with (bad) fundamentals? A backlog of those who want to move and
could afford to do so.
• Policy - rhetoric over reality? Anyway little traction? Asking for
house price stability; shift away from grant to demand side
subsidies; integrating tenures; lower welfare benefits; and more
flexible responses to problems. But already shifting ground.
• And what is the longer term role of social housing – and of income
related support?
• Do these add up?
Where Next?
• Optimistic scenario: funding increases slowly; improved
affordability and products enable lower risk purchases;
local authorities support investment; slow adjustment
back to levels of output of mid-2000s
• Pessimistic scenario: funding remains weak; reduced
government support for both supply and demand
undermines supply and rents; interest rates rise; lower
investment/lower demand
• But as and when economy improves, demand increases
faster than supply; localism constrains new supply; prices
rise and the cycle recommences
• Even so, problems in the housing market more an
outcome of the macro-economy than the cause of macroeconomic problems?
So: will the market return to normal?
• If macro-economy leads the housing market then
progress towards whatever normal will be slow
• And given supply almost certainly slow to respond any
growth will be accompanied by even greater house price
volatility
• Owner-occupation aspirations remain high - and policy
will continue to support owner-occupation as cheaper for
individuals and government?
• But a generation going to find it very difficult to enter –
role of intermediate tenures?
• Moving towards an integrated rented sector – with HAs
getting more directly involved in market provision
• But the fundamental remains – how to increase supply to
meet the continued expansion of population and
households
• So more of the same rather than fundamental change?