by Shaun Richards
This morning has brought news from the UK government on an area which is regularly reported as being in crisis ( housing supply) which brings us to a related area which has been in recession since the early part of last year ( construction). From the BBC.
Construction firms that have been slow to build new homes could be refused planning permission in future under a shake-up to be unveiled by Theresa May.
The PM will tell developers to “step up and do their bit”, warning that sitting on land as its value rises is not on at a time of chronic housing need.
There are various issues here as a fair bit of this is vague such a “slow to build” and doing your bit may be far from sufficient incentive to house builders who in some cases have been doing rather well.
Bonuses in the construction sector have been under the spotlight since Persimmon announced last year that 140 staff would share a bonus pool of £500m and that its chief executive was in line for a pay-out of £110m, a figure that has since been reduced by £25m following an outcry among investors
As an aside if £110 million is so wrong I find it fascinating that £85 million is apparently okay! Still at least something was done. As to the concept of housing need the Joseph Rowntree Foundation has crunched some numbers.
Independent analysis shows that an average of 78,000 additional affordable homes (a mix of low-cost rent and shared ownership) are required in England each year between 2011 and 2031. This level of supply is required to meet newly-arising need and demand.
Delivery has been falling short. On average 47,520 additional affordable homes have been provided in England each year since 2011, leading to a cumulative shortfall of 182,880 homes over the last six years. A step change is needed to boost supply of affordable homes by at least 30,000 more a year.
That seems a lot lower than what we are usually told which reminds us that such numbers are open to more than a little doubt and speculation. This poses a problem for a government increasingly heading down the central planning road.
Let me add another issue which is that a factor often ignored is that it matters where you build the houses as well as how many. This often seems to be ignored as for example once you think like that an arrow points at London and the South East. But you cannot just build anything as the current travails only a mile or two away from me at Nine Elms are proving.
The economic depression
There are quite a few problems for economics 101 in the current situation. Firstly you might think that higher house prices would quite quickly generate more supply but it would not appear so. Also the housing industry was supposed to respond to monetary policy and as we find ourselves after a cut and a rise back at the emergency Bank Rate of 0.5% there is much to mull and that is before we factor in the £435 billion of Bank of England QE.
Yet house building responded little to this as if we set 2015 as 100 we get some interesting numbers. The pre credit crunch peak was 2006 and 2007 which were both in the 95s. The scale of the initial hit is shown by the fact that 2009 was 55.4 showing a big hit and then crucially very little recovery as the number oscillated around 70 for the next three years. Along the way many smaller building firms went to the wall as our supply capacity fell and I wonder if that was a much larger factor than often realised. It is hard not to wonder if some support for smaller house builders might have protected us from the need for much larger support measures later. This meant that this sector clearly had an economic depression.
The official response
This provides quite a lot of food for thought for the central planners in Downing Street and Threadneedle Street because in response to the numbers above we saw a two-pronged strategy. In the summer of 2012 the Bank of England deployed the Funding for Lending Scheme which reduced mortgage rates quite quickly by around 1% ( and later by up to 2% according to its research) and made sure the banks had plenty of cash to lend. Then in March 2013 the Guardian reported on this.
In his budget speech, George Osbornelaunched Help to Buy…………This £3.5bn scheme will run for three years from 1 April and help up to 74,000 buyers, as well as providing a boost to the construction sector, said the Treasury.
This saw the UK establishment put the pedal to the metal in this area but the most recommended reply was already on this case.
Another tax-payer funded scheme to prop up house prices. Has it never crossed Osborne’s mind that if people are not able to afford a house on the basis of prudent lending criteria, house prices might be too high and should come down? ( ReaderCmt ).
There was a clear side effect to this as the tweet below highlights.
Persimmon's Profit:
rise in average selling price and tight control of land prices + costs = big profits
(chart updated with today's 2017 full year results) pic.twitter.com/Mh52EvWczh— Neal Hudson (@resi_analyst) February 27, 2018
As you can see the clear effect here was on profits for house builders which surged and financed the payment of extraordinary bonuses for those at the top. This leaves us wondering if the house builders were happy counting their cash and in no great rush to expand supply as they were doing nicely anyway. How much of the effort simply went straight to the bonuses we looked at above?
House Prices
We know that these measures boosted house prices as according to the official series the price of the average house rose from £167,682 in February of 2013 to £226,756 last December. This provided its own problem however because real wages have in fact failed to recover to pre credit crunch peaks so houses became much more expensive relative to them. Yes the wheels of affordability were oiled by ever lower mortgage rates but at these prices demand for house purchase was always likely to dip which puts a brake on supply.
It is however nice to see the Joseph Rowntree Foundation implictly agreeing with my argument that house prices should be in the main measure of inflation.
Real income growth among the bottom fifth of the population in recent years is mostly wiped out once housing costs are considered, with consequences for the living standards of those on low incomes.
Comment
If we look at recent years we see that economic policy in the UK was based on the housing market. It was a type of credit easing and the consequences were higher house prices with large and what can only be called excess profits for the main house builders. No doubt some economic activity was generated but those looking to get a foothold in the market have been hit by high inflation when real wages have fallen. On that basis this is pretty much breathtaking. The quotes below are from the BBC.
Young people without family wealth are “right to be angry” at not being able to buy a home, Theresa May has said.
Announcing reforms to planning rules, the PM said home ownership was largely unaffordable to those without the support of “the bank of mum and dad”.
This disparity was entrenching social inequality and “exacerbating divisions between generations”, she said.
It is of course true but it is a clear consequence of the policies pursued by what is now her government but before one in which she was Home Secretary. It came on top of house price friendly policies from preceding governments also. Anyway the speech shows a complete lack of grasp of how the private-sector operates.
Mrs May criticised bonuses which are “based not on the number of homes they build but on their profits or share price”.
Another way of writing the quotes below would say you can only afford the new higher prices if someone who has already benefited helps you.
“The result is a vicious circle from which most people can only escape with help from the bank of mum and dad.
“If you’re not lucky enough to have such support, the door to home ownership is all too often locked and barred.”
That in essence the problem in the central planning approach as the initial problem is the apparent failure to grasp not only reality but their own role in the problem. I fear more central planning is unlikely to help as so far what has been called help has in fact mostly hindered.
Perhaps the biggest irony of all is that house building had responded in 2017 as according to the official numbers it was 20% higher than in 2015.