Sunday, May 08, 2016
Housing: a simple story of supply and demand?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Let me take a break from the heat of the Breferendum debate this week and enter the calmer but only slightly less contentious waters of the housing market. Another set of elections have passed, amid ambitious promises to sort out the problems of housing. I think I can guarantee that when these elections are next held in a few years’ time those problems will still not have been sorted out.

Britain’s housing problem is easily described. There is plenty of housing demand but not enough supply. And, while it has been possible to comfort ourselves in recent years with the fact that supply, while inadequate, was moving in the right direction, it now appears that it no longer the case.

In such a situation there is only one outcome, prices will rise and housing will become more unaffordable. It is not unaffordable to the vast majority of existing home owners, most of have substantial equity in their properties and continue to benefit from very low mortgage rates. If housing was unaffordable to the majority, prices would fall.

But the problem of unaffordability impacts particularly on new entrants, the first-time buyers faced with a dauntingly large first step to get on the housing ladder. Hence the renewed interest in the leg-up role of the Bank of Mum and Dad, which according to Legal & General is part-funding at least a quarter of mortgages this year. And hence the return of the 100% mortgage from Barclays, an idea which had apparently perished in the ashes of the banking crisis, though this one comes with more strings attached (in the form of parental support) than was the case then.

Let me start with housing supply. One of the best indicators of supply is provided by NHBC, the old National House Building Council. It provides building guarantees, and all but a fraction of new homes being built are registered with it.

Its latest numbers show that in the first quarter of the year, 36.566 new homes were registered, which sounds reasonable enough but represented a drop of 9% compared with the first quarter of 2015, when 40,144 new homes were registered. There were declines in both private registrations, down 7% on a year earlier and in social housing, down 15%.

That first quarter fall was enough to bring an end, for now at least, in the upward trend of housing supply. For the 2015-16 financial year, a total of 152,329 new homes were registered, virtually unchanged on the 2014-15 figure of 152,262. Mike Quinton, NHBC’s chief executive, said the supply of new homes was “consolidating”, though also pointed to an 80% rise in registrations compared with the lows of 2008-9. It is consolidating in spite of continued support from, for example, the government’s Help to Buy equity loan scheme for new homes. We should, remember, be building around 250,000 new homes each year.

In London, where the housing shortage is most acute, and where the mayoral candidates battled among other things over the provision of 50,000 new homes a year, separate figures from Stirling Ackroyd, estate agents, showed that London boroughs approved just 4,320 new homes in the first quarter, down 64% on a year earlier. Those who are quick at mental arithmetic will have noticed that 4,320 new homes in a quarter represents barely a third of an annual target of 50,000.

New housing is not the only source of supply, as I often point out. What existing homeowners do is also very important. The cycle of trading up as families expand and downsizing when they have flow the nest is part of the essential ebb and flow of a properly functioning housing market. But that cycle, if not broken, is severely damaged.

According to Rics, the Royal Institution of Chartered Surveyors, “lack of supply is still an overriding feature of the market”. While the number of people putting homes on the market is better than it was a few months ago, it remains well below normal. I put a lot of that down to high transaction costs – stamp duty and other fees provide a significant deterrent to move – but there are other factors. Older people wanting to downsize also complain of a shortage of suitable properties.

What about demand? Latest Bank of England figures show that mortgage lending is strengthening. In March lending was up by 3.4% on a year earlier, while its annualised growth in the latest tree months was a robust (by recent standards) 4.7%. A year ago mortgage lending was trundling along at less than 2%.

Some of its recent strength, it should be said, reflects a buy-to-let and second home rush ahead of George Osborne’s imposition of a 3% stamp duty premium on such purchases, which took effect last month. But part of it reflects the underlying growth in demand you would expect in a rising population, and the gradual normalization of the mortgage market. Housing supply, in all its forms, is inadequate to meet housing demand.

We see the consequences of that, of course, in prices. The Halifax, part of Lloyds Banking Group, will provide an update on prices tomorrow but its last bulletin had prices rising at an annual rate of 10.1%.

The official house price index, from the Office for National Statistics, has prices growing at a 7.6% annual rate, but that is still more than three times the growth in average earnings. A glance at the ONS’s long-run chart shows that prices are currently more than 120% higher than in 2002, the base-date for the index, and 20% above their pre-crisis peak. As time goes by the crisis will come to look like barely a blip on the house-price radar.

I said this was a non referendum piece but it would be wrong to ignore the impact of the forthcoming vote on housing. Brexit uncertainties are weighing on the economy, and thus on the housing market. Rics, to quote them again, says that we should look to commercial property for the biggest effects, but that housing will also be affected, with prices pushed lower “in the immediate to short term”.

In the long run, however, it is the fundamentals that will determine what happens to housing. The problem of inadequate new housing supply pushing up prices was, after all, quantified by Kate Barker in her review for the Labour government in 2004. This was before the surge in migration from the rest of the EU and it is a verdict that will survive the end of that surge. Leaving the EU might moderate the long-term upward pressure on house prices but would not remove it.

The problem of unaffordability for those wanting to get on the ladder – and the difficulty of saving for a deposit while renting – will remain. Many people say the housing market is not working. In one key respect, however, it is. When supply is weak and demand strong, prices will tend to rise. That’s what happens in all markets.