Stopping house price growth isn't as easy as we think

publication date: Jun 16, 2014
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

How can house price growth be better managed?

The latest round of ‘ideas’ of holding back price growth are to raise interest rates earlier than planned and to reduce lending to the ‘old’ 3.5x incomes.

From my perspective if you need these tools to hold back prices, then the housing market is failing. What’s worse is there are so many people buying with cash, or large amounts of it, which won’t work either.

Both of these policies show that politicians – and those that manage the economy - are:-

  1. Not understanding what’s happening in the current market

  2. Unaware of the consequences they will inflict

Firstly, we have spent far too much time, in my view, chatting about the impact on prices of ‘Help to Buy’ which accounts for 37,000 purchases in a 1 million purchase market. And it’s only now people are admitting this isn’t the cause.

Hardly anyone has talked about the real impact on prices: 5-6 years of pent up demand from people who would have bought between 2007 and 2012. Personally, I think the 50% of people who didn’t buy throughout this period that normally would buy, which, by the way, equates to 2,500,000 potentially coming back into the market in 2013/4 is the real cause of rapid rises rather than 37,000 help to buy purchasers.

So, taking that pent up demand is what is driving prices upwards, mainly because people who would have bought in 2007, 2008, 2009 etc didn’t and as a result have had many more years to save to buy for the first or second time, can afford high cash deposits and higher prices.

Although the ‘higher prices’ quoted in reports look scary ‘year on year’ in reality they aren’t that high compared to the past. We know from the recent LSL property price report, house price inflation has only beaten inflation itself, on average, in London and the South since 2005.

In most regions, property prices are down in real terms (ie taking into account inflation) rather than higher.

If politicians understood that it was pent up demand and lots of cash causing the current price rises, they would realise the idea of interest rate rises and curbing lending would just hit the wrong people in the market, namely first time buyers.

Now if no-one buys at the ‘bottom of the chain’ few can move further up the chain, but that would hold prices back, which is what politicians and economists want.

Holding back lending will worsen stock shortages
But they forget, if people can’t buy, then they are likely to have to rent. And we have a massive shortage of rental properties as well as properties to buy.

So restricting mortgages will just transfer the housing problem to the private rental sector.

And here there is a horrific problem. There are something like 4 million people on council waiting lists and around 1 million of those is in London. So the idea that tens of thousands of homes being built in London is going to solve the housing crisis which is most acute there, is ridiculous.

The reality is, whatever policies politicians or economists propose to hold property prices back will just cause a problem elsewhere.

We can’t house everyone in the private rental sector
The reality is too that the PRS is not the place to put everyone from council waiting lists and politicians are relying on the sector too much.

Firstly there are not enough homes for rent, secondly many lenders and insurance companies don’t allow renting to benefit payers.

Secondly if tenant fees are dropped in England, the ‘good agents and landlords’ will end up having to reduce the admin cost of referencing tenants and/or where they can, put up rents. As a result they will only take the ‘easy tenants’.

Why take someone on benefits with all the extra costs involved of getting guarantors etc?

Also, it’s clear from programmes on the TV we have recently seen that some people need more than just a roof over their head. Castledeane lettings who specialise in letting to those on benefits and were featured on the TV programme: Britain's Benefits Tenants are clearly doing as much work on the social side as they are putting a roof over people’s heads. And thanks to the star of the show ‘Bev’ the tenants there get that service – but this business model isn’t for everyone.

Socially vulnerable people need more than a roof over their head
Putting socially vulnerable and low paid workers into an unregulated private rental sector won’t work for many – and it isn’t. It’s not letting agents and landlords fault.

A refusal to regulate and build social homes are the real problems.

What is needed is more social homes from the likes of Housing Associations to help these people get their lives back together – or just keep a roof over their head, when financially it wouldn’t be worth a landlord or agent taking the risk.

If a tenant wants to rent and the government/politicians want people housed in the PRS, then it is unfair to penalise landlord and letting agents by taking away their ability to charge a tenant legitimate fees.

As a landlord, why should I risk putting someone in my £100,000+ property that can’t afford a deposit to cover damage they may do and/or can’t afford credit checks? That means if they have any difficulties, they will immediately default on their rent at the expense of a landlord potentially defaulting on their mortgage. Where is the incentive to rent a property on this basis?

To me, banning tenant fees is like saying BUPA are charging too much for operations, or private schools fees are too high. Or expecting car hire companies to not take any deposits when loaning out their cars because the low paid/vulnerable can’t afford it.

The reality is the only reason tenant fees are an issue is because there aren’t enough social and affordable homes to put people into. Why penalise the lettings community for that?

Policy Solutions
We have to accept that social and affordable homes are required. Just dealing with the private sector isn’t going to solve our housing crisis.

Someone, somewhere, for the next election needs to come up with a way of taking responsibility and reducing our council waiting lists, providing enough affordable and private homes.

It’s only the party/parties with this approach, in my view, that are worth considering voting for.

Unfortunately our housing crisis is now so acute that it has to be the number one agenda item on all politicians lists as it affects all of our society and if not tackled, it will hold our country back both economically and socially.

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