Challenges facing British housing market

Posted on August 29, 2016

A bricklayer lays a brick at a Countryside Properties Plc green-field residential construction site in Chelmsford, U.K., on Friday, Oct. 2, 2015. U.K. homebuilding expanded at the fastest pace in a year in September as an improving economy and record-low interest rates boosted construction growth. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg

Of all the potential shocks to the UK economy that loomed in the aftermath of Britain’s June 23 vote to leave the EU, few seemed as dramatic as the impact on the housing market.

Estate agents reported a sharp drop in buyer interest, while real-estate funds, facing collapse, had to freeze withdrawals. Following a surge in property prices since the end of the global financial crisis, it was easy to conclude that the pin had arrived to prick the housing market bubble. Two months on, apocalypse seems at least to have been deferred. Yet, even without shocks from that quarter, British housing displays serious structural problems that have yet to be addressed.

    A fall in house prices was one of the risks of a Leave vote cited by George Osborne, the then chancellor, during the referendum campaign. That was not surprising. Housing has traditionally been a source of instability for Britain. Busts following booms were instrumental in creating the recession of the early 1990s, when high interest rates hammered highly leveraged homeowners, and the UK’s experience of the financial crisis, when over-aggressive mortgage lending brought institutions such as Northern Rock and RBS to their knees.

    The housing market at the time of the referendum was vulnerable to a repeat performance. Since the financial crisis, house prices relative to incomes have surged, particularly in London and the south-east of England. And while the influence of international property owners on the London market is often overstated, there can be little doubt that an outward surge of foreign money could inflict serious damage on
    prices in the capital.

    The evidence since the vote suggests such fears have yet to be realised. HM Revenue & Customs data show the number of transactions in July holding up well compared with June. The Royal Institute of Chartered Surveyors’ regular survey showed optimism about rising house prices recovering after an initial fall. The Bank of England’s quarter-point cut in interest rates, though of modest direct impact, may have had an important signalling effect that short- and long-term borrowing costs are likely to remain at rock-bottom levels.

    However, while it will help the economy avoid recession, house prices holding up or rising is hardly an unalloyed good. British housing still faces serious structural problems, which government actions have failed to overcome and in some cases worsened. Home ownership in Britain has dropped to a 30-year low, with many younger households being priced out of the market even outside the south-east, exacerbating wealth inequality.

    The response of the Cameron government — a “Help To Buy” scheme aimed at lower-income households — appears to have had the effect of pumping up demand and prices but without a commensurate increase in supply. The obstacles to mass housebuilding, despite repeated promises by governments of different stripes, remain formidable. Sadiq Khan, the mayor of London, has expressed concern about the lack of affordable housing in the capital. Yet he has shown greater reluctance than Boris Johnson, his predecessor, to allow building on the greenbelt.

    True, the government has raised stamp duty on buy-to-let owners and is removing tax breaks, which may release more property for owner-occupation. But so far it is hard to see any impact. A collapse in the residential property market that precipitates a recession is hardly the way to address the structural issues. Yet it should be clear that continuing with the pattern of pumped-up demand and inadequate supply will create problems.

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