Taking the housing market to task
Following the launch of JRF’s housing market taskforce, Mark Stephens explains its vision for a socially sustainable housing market
In the post-war decades the British housing system became increasingly centred around home-ownership. At its peak, home-ownership exceeded 70%. But since 1970 there have been four boom/bust cycles in the housing market.
House price volatility injects uncertainty throughout the housing system. For individuals there is a temptation to overextend borrowing in a boom. Housebuilding is disrupted by these cycles and for lenders it is unclear whether extending lending during a boom can lead the market to unsustainable levels.
Volatility increases risks as the housing market interacts with the economic cycle, the underlying demographics of ownership and available safety nets. Some 850,000 households have experienced repossession since 1980. Volatility inhibits labour mobility, pricing people out of growth areas in booms and locking them in properties in downturns through negative equity.
House prices have also tended to rise in real terms and have contributed to stretching our homeowner model beyond its limits. Falls in home-ownership levels have been greatest among the youngest age cohorts, but now affect those in middle age. Consequently, home-ownership is being turned into the engine of inequality between generations as the young – and now not so young – pay for the wealth accumulation of older people.
The reliance on parental assistance entrenches the economic privilege of the children of the better off. Private renting has expanded and helped to meet the gap, but the reliance on assured shorthold tenancies is inherently insecure – between 11,000 and 18,500 private tenancies are subject to repossession order each year simply because their tenancy has expired.
Meanwhile, buy-to-let repossession rates run at similar levels to those of homeowners. Lack of affordability in the market sectors places further pressure on the social sector, with some four million households on council waiting lists.
The Housing Market Taskforce was guided by a vision of a socially sustainable housing market, which is characterised by three elements:
1. Need – ensuring that there is sufficient supply of the right kind of housing in the right areas
2. Fairness – there should be greater fairness between households and generations
3. Responsibility – individuals and lenders should act responsibly. The government should establish a framework through which people receive better protection form risks that are exacerbated by the housing market cycle.
This vision guided the taskforce’s conclusions.
First, supply is the key to tackling the problems of volatility and affordability across the market. There is a need to provide sufficient incentives within the planning system to facilitate supply, and measures such as land auctions and over-provisioning of permissions may play a role.
Second, supply is a long-term solution and it is necessary to find ways of managing volatility in the short-run. Credit controls and reform of property taxation can play an important role here. In particular council tax could be reformed over time better to reflect changes in property values.
Third, better safety nets need to be developed to protect owners from the consequences of volatility. This should involve (i) measures to improve individuals’ financial capability; (ii) responsible lending, and we broadly support the FSA’s proposals for basing lending on affordability assessments; and (iii) an overhaul of the current unsatisfactory safety nets to protect owners when they experience loss of income, perhaps on the basis of a compulsory partnership insurance model.
Fourth, we should continue to explore alternatives to ownership. There is little prospect that the private rented sector will be transformed to provide greater security in the near future. Low cost home ownership can provide an alternative for some, while others will depend on social rented housing. Ultimately there is a need to recognise the need to invest in social rented housing, and this will require subsidy.
It is clear that volatility can be tackled only by looking across the system as a whole. While it is always easier to postpone difficult decisions, one thing is certain. If volatility is not tackled now, we shall enter yet another cycle of boom and bust.