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Mortgage lending and housing supply go hand in hand14 June, 2011
Andrew Ellson wrote a piece in the Times last weekend criticising mortgage lenders and house-builders for considering a way to enable more first time buyers to get a foot on the property ladder.
His analysis was based on the view that house prices are too high in general and need to fall across the board. Mr Ellson failed, however, to offer any solution as to how house prices could be reduced in a sustainable way and no timescale over which to do it. But I will come back to that.
Mr Ellson begins by suggesting that builders should be marketing their new homes at half their current price, but states that they don’t because they “got recklessly caught up in the property boom and hugely overpaid for the stock of land that they own.”
This is a contradictory statement. Land is bought and sold in a market; house builders will try and buy land for the lowest possible price they can get while land-owners – entirely ignored by Mr Ellson– will try and sell for the highest possible price. The statement also does not recognise that house-builders sell their homes in a market too – and their sales are around 10% of the total market meaning they’re price takers rather than price setters.
While it may be correct to suggest that in an ideal world companies would have seen the crash coming, not a lot of people in any part of the economy did until it was too late. In addition, builders are beholden to an uncertain and lengthy planning process before they can build houses. To maintain jobs and capacity, they need to continue to bring land through the planning system to meet demand. It was never a case that as land prices rose developers could just sit it out for a few years.
Mr Ellson goes on to make another interesting point: “Let’s not forget that house builders are private companies, not charities or extensions of the Government, and, as such, they are interested only in maintaining prices and profits – not in producing the volume of homes that society may need.”
The inference is obvious – house builders have a vested interest in keeping supply down to maintain prices. The assumption must be that as house prices rise so does the profit margin of developers. In fact, as house prices rise the price developers pay for land rises and, vitally, the money demanded by local authorities rises too.
Ironically, given house-builders are private companies as Mr Ellson points out, (local) government not only establishes where the land market can operate – by rationing planning permissions, the release of developable land and therefore rationing housing supply through “development control” -but they also impose indirect taxation on new home owners by asking for money for - amongst many other things - education, health, infrastructure and public space. It is questionable whether builders (and therefore their customers) – whose raison d'etre is building and selling houses - should be paying towards health and education facilities for the general population but up and down the country developers are providing hundreds of millions of pounds for services previously paid for from general taxation.
Local government in planning terms is seeking to control the land and housing market and has come to have a perverse and significant financial incentive to do so in ways that do not necessarily enable peoples’ housing requirements and aspirations to be met. Politicians risk wanting to keep house prices high while at the same time appeasing those voters opposed to development in their areas. Who exactly has the vested interest?
On a related point, one can assume that Mr Ellson agrees with the majority of people in thinking the country needs many more homes. The question then remains who does he expect to build the homes we need – and how? The HBF has long argued that we already have a housing shortage approaching 1 million homes – and that we need to be building 300,000 homes every year. House builders want to grow their businesses. It is the regulatory context in which they operate that has prevented them doing so.
Discussions between developers and lenders are not new. Unsurprisingly they talk to each other all the time. No-one in either industry would find it helpful to see a return to irresponsible lending to first time buyers. But what we have currently is heavily reduced lending to first time buyers (half the number in 2010 compared with 2006) which is equally damaging to the housing market and to all those in home-ownership.
It is always helpful to consider why house prices were so high - huge demand coupled with systemic undersupply – and how young families can get a foot on the ladder – responsible and realistic mortgage lending.
As an industry we would have no problem with house prices remaining broadly stable and so seeing a long-term improvement in affordability for purchasers. This requires a planning system that frees home builders to construct the houses the country needs and an honest assessment of – and reduction in - the level of taxation on development levied by government.
Then, while we’re building the homes these and future generations need, we’ll also be creating jobs, economic growth and investment across the country.