There’s little doubt that we need radical solutions to build more homes. There is a broad consensus for that view, leaving aside supporters of Malthus, the Daily Telegraph anti-house-building campaign and a few others.
There’s little doubt also that the issues are complex and we need a strategy rather than one big idea to save the day.
But unless I am very much mistaken the 88-page Laying the Foundations: A Housing Strategy for England probably doesn’t amount to a strategy that will deliver us far from the housing market purgatory in which we find ourselves.
I will leave to one side the obvious criticism that this document is rhetoric heavy and detail light.
My broad concern is that it seems to have failed to live up to the “game-changer” tag that many were attaching to it in the hype before its release today. (I’ll address a more specific concern later.)
The document contained little new, beyond the heavily flagged mortgage indemnity scheme and a £400 million funding pot to kick-start construction, the source of which is a little unclear in my mind at least.
And while £400 mbillion may sound like a lot of loot to the fella in the street, the problems facing house building rank in cash terms in the tens of billions of pounds
Mind you, handily for those who get lost in the welter of Government policy, it attempts to put all the bits of Government thinking on how to get accelerate house building into one document, albeit without much detail.
At its heart is a “presumption in favour of new build”. I’ll not knock that. We need to build more homes.
But it needs to be recognised that this is a strategy for house building more than a strategy for housing.
So, for instance, the mortgage indemnity scheme will provide support for buyers of new homes. It will not support buyers of second-hand homes.
The existing FirstBuy scheme provides help for buyers of new homes. It does not support buyers of second-hand homes.
The boosted Right-to-Buy scheme is also aimed at releasing funds to build new homes.
And, again, the focus on section 106 agreements (those deals done by local authorities and developers to provide social benefits as part of planning) is aimed at unlocking shelved schemes for new homes.
The New Homes Bonus, one time the centrepiece of this administrations housing strategy, is clearly aimed at new homes.
Naturally, there are things that appear to be more “housing” than “house building”, such as the emphasis placed on private sector renting. But even underlying this, one knows is a hope that creating demand from institutional investors will lead to more demand for new, more purpose-built, housing schemes.
So what this strategy attempts to do is tip the balance in favour of new homes sales, particularly when it comes to the English contingent among the 200,000 or so first-time buyers (FTBs) who enter the UK housing market each year.
The most eye-catching of the strategy elements is the mortgage indemnity scheme, so let’s have a look at that.
There is obviously the possibility that this will shift would-be FirstBuy buyers into FTBs with mortgage indemnity.
But leaving that to one side, if this policy is to have any real impact in the FTB market it will either have to increase the population of would-be FTBs or attract would-be second-hand FTBs to buy new.
It will probably do a bit of both. The unknown is by how much.
I can find no publicly available data on how many FTBs buy second-hand homes and how many buy new-build. But looking at house builders’ presentations it would seem that somewhere around 15% (Persimmon) to 30% (Taylor Wimpey) of their product mix is aimed at FTBs. So a fair guess may be about 25% of new-build is in that market.
Looked at another way about 20,000 to 25,000 of the 180,000 or so FTBs in England buy new homes, at the moment.
It must be said this is a fairly small group of households. It would have to at least double if it was to have any real impact on house building numbers.
Let’s look back to the pre-recessionary days of 2003 before the mortgage madness the led up to the credit crunch, when mortgages were free flowing and the income to interest payment ratio was higher. Then there was a smaller proportion of FTB within the total market for house purchase loans than today – 29% against 38% on the data available from the Council of Mortgage Lenders.
So, how many more buyers the mortgage indemnity scheme will squeeze out of the FTB market is up for debate.
That said, the cost of renting has risen sharply so high rents might act as greater driver to buy than they would have in 2003.
Still, on the face of it, the most likely source of new-home FTBs might well come from attracting FTBs away from the second-hand market.
Certainly the months after its introduction will be interesting in judging the desire and willingness among potential FTBs to enter the market.
There appears to be more impressive possibilities for house builders in the less defined second-time buyer market.
One of my concerns over the housing market has been the plight of the second-time buyer. Many are trapped in their first-purchase homes, many with negative, negligible or low equity.
It’s entirely possible that a cut in the deposit they would need to find, enabled by the mortgage indemnity scheme, might tempt greater numbers to eye a move to a new home.
But before we get too exuberant, it must be remembered that markets are complex things and any distortions will tend to have unintended consequences.
What sits in the back of my mind is that a channelling of buyers from the second-hand market into the new-build market will distort prices.
One effect of this policy, all other things being equal, would be to raise the relative price of new-build homes in the market, or put another way it will increase the new-build premium. The other connected effect may be to reduce prices in the competitive second-hand market.
Either way it may be that the gap between a second-hand first-time buyer home and a new second-time buyer home may increase. This means that while the buyer may be able to make a move up the ladder on the back of the lower deposit, they may end up paying a price for it.
With this mortgage indemnity scheme, as with so much in the strategy, I am concerned that while it might prove a short-term palliative it doesn’t look like an answer to the long-term health problems within the housing market.