Friday, March 7, 2008

Problems in the UK Housing Market

This is part of a series on problems in the UK Economy

The UK housing market is one of Britain's favourite topics of conversation. There is eith much (barely disguised) gloating over how much your house is worth; or there is also a large section of new first time buyers who despair at the cost of trying to buy a house. There also seems to be endless speculation about the future direction of house prices. When it comes to house price predictions you can take your pick anything between a 40% fall in prices and a 50% increase in the next 10 years. But, behind all the newspaper headlines what are the real issues at stake in the housing market?

Problems in the UK Housing Market

1. First Time Buyers Priced Out of the Market.

According to the Halifax, average house prices are just over £197,000. Therefore, even on an income multiple of 4 times salary, there are not may young people who earn sufficient salary to be able to buy a house. Furthermore, many mortgage lenders are now expecting a bigger deposit; 10% of £200,000 is difficult to save when you consider many graduates are leaving university with big debts. Due to the UK's obessesion with owning a house, first time buyers have simply tried to get on the housing ladder through taking out riskier mortgages such as interest only, or 100% mortgages. Therefore, young people have become increasingly indebted in order to buy a house. The rising house prices has also caused intergenerational inequality - people who bought 10 years ago have made capital gains, but, young people will be forced to take on increasing levels of debt.

Possible solutions:
  • Subsidised Mortgages for young peopl, but expensive and doesn't tackle fundamental problem of high prices.
  • Subsidised government building of housing. High prices are due primarily to the shortage of supply. Building new houses will ease the long term lack of affordability.
  • A move away from home ownership to renting - like on the continent. This requires a change in people's expectations and may prove quite difficult.
2. Volatile Prices

The UK housing market is susceptible to booms and bust. For example, in the late 80s, house price inflation exceeded 30%; this was followed by a year of house prices falling 15% (1992). In recent years, house prices have risen by over 20% and now many fear a housing price drop. The volatility of the house prices in the UK is due to a number of factors.
  • People choose variable mortgages and take out large loans. This means mortgage payments are a high % of income (over 20%) therefore, any change in interest rates has a significant impact on affordability.
  • Shortage of supply exaggerates any change in demand.
Possible Solutions.
  • Encourage fixed Rate mortgages
  • Encourage renting.
  • Encourage the building of houses in property hot spots (not always easy to do.)

3. House Price Drop could cause a recession.

If house prices do fall in the UK, it will have an adverse impact upon consumer spending and consumer confidence. House prices have become a key barometer to the economy. Rising house prices have also been used to fund equity withdrawal and have caused a drop in the savings rate to 3%. If house prices do fall, it will create negative equity and discourage spending; if the price falls are rapid this could cause a recession in the UK.

Solutions.
  • If consumer spending does fall the MPC is likely to cut interest rates because inflation will hopefully be less of a problem. However, the MPC won't cut rates just to try and boost the housing market - their primary target is low inflation. Furthermore, some would argue house prices need to fall to correct a long term imbalance.
4. Shortage of Land

Many problems in the UK Housing market stem from a shortage of supply. However, the problem is that building new houses is not so straight forward especially in the South East. Local councils are reluctant to allow the building of houses on greenbelt land. They are also reluctant to encourage more pollution and congestion in their area. The planning process tends to make it difficult to develop new land and local councils usually have a NIMBY approach. More houses are fine - but not in this district.

Solution:
  • Encourage building on brown field sites with greater housing density e.g. like the continent.
5. Mortgage Crisis

Due to problems in the US subprime market, there is difficulty in financing mortgage lending. This is causing several mortgage products to be withdrawn e.g. 125% mortgages and 100% mortgages.
  • However, maybe the idea of a crisis is exaggerated. True, mortgage companies are becoming stricter on lending, but this is perhaps a desirable response to a period of very lax lending criteria. Although it causes some inconvenience, especially for first time buyers, it does at least prevent future problems in the market.
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1 comment:

Monevator said...

The problem with the UK housing market is that the market participants - homebuyers - have the collective memory of goldfish.

I remember my parents urging me in the mid-1990s to get on the housing ladder 'as you never go wrong with property'. This was about 18 months after the worst property crash for 50 years had finally bottomed out.

In the long-run they were right, but as Keynes said in the long run we're all dead...