Beyond the housing market crisis

Areas of the northwest could soon be characterised by communities living in poor quality and increasingly expensive rented homes. Philip Leather and Brendan Nevin explain why

The housing market in the north west of England has so far failed to emerge from the crisis which during 2008 enveloped financial institutions and segments of the wider economy which were dependent upon consumer expenditure, financial services and property development.

We have been monitoring trends relating to house prices, sales and lending within the region for over a decade and while recent data suggests the housing market has now entered a prolonged recession, there’s a danger in being too preoccupied with short-term trends.

There would appear to be longer term structural changes emerging which will impact upon regional development, housing policy and neighbourhood management and have major social and economic implications as the decade proceeds.

The asset bubble which characterised the UK housing market from 2002-2007 masked a number of structural changes to supply, demand and tenure which were being driven by adjustments in local employment markets and in income and wealth. The most obvious manifestation has been seen in a shrinking owner occupied sector, the growth of private renting, the falling number of social sector re-lets, and the overall inelasticity in the supply of new homes in the face of large increases in asset values.

These changes are likely to dominate the debate about the direction of housing policy once the current downturn abates.

THE SMOKESCREEN OF PROPERTY PRICES
The market is currently characterised by historically low turnover of property, a paucity of willing sellers and prices which are once again falling, albeit modestly. But the focus on house prices is slightly misleading when assessing the extent of the adjustment which is taking place – in real terms, taking account of increases in incomes and inflation, over the last four years prices have fallen between 20-30%.

This is an international phenomenon. In the United States, for example, prices have now fallen by 33%, greater than occurred during the Great Depression. Given the need for the banking system to recapitalise, the general risk aversion which pervades financial institutions at the moment and an uncertain prognosis for employment and economic growth, a return to a healthy/normal housing market is unlikely for the duration of the current comprehensive spending review period (2011-2015).

Affordability for the poorest in society has hardly improved at all as a result of wider employment change and depressed incomes for those at the lower end of the labour market. Even after price falls in lower value property, their relative values are unlikely to return to those of the mid-1990s when it was possible to enter owner occupation for £20,000/30,000 in the northwest.

While areas which have severe regeneration needs may well see prices fall to these levels in extreme circumstances, it unlikely there will be an emerging and significant supply of properties in this price bracket across the region because of greater demand, restricted supply and the development of the buy to let investment market over the last 15 years.

A NEW ERA OF RENTING?
In the future there will be a much greater reliance on private renting and the social sector for working households with low incomes. But this comes at a time when the rate at which new homes are being built is low, meaning supply – for sale and rent – will increasingly come from existing stock.

Space standards will therefore begin to fall and rents will rise per square foot. There will be increasingly a trade off between space and cost at the lower end of the market, and potentially pressure on housing benefit costs.

All of these trends have been evident in London for some time, as owner occupation has fallen to 55%, and rents, subdivision of property and overcrowding have increased. The prolonged housing recession combined with demographic change will combine to produce a legacy of shortage and a mismatch of supply and demand in parts of the northwest which will begin to generate similar outcomes to the Greater London market – albeit without the inflated values associated with a world city.

Currently the new housing supply in the northwest is growing by an average of only 9,500 per year – around 40% of that needed if public policy was to continue to plan for one additional dwelling for each additional household.

The government has abandoned targets for new homes and the regional planning process which was designed to facilitate property development. There is evidence, however, that old system of attempting to predict long-term demand was becoming more problematic. Greater integration of labour markets across the EU has meant that flows of migrants can change very quickly if economic circumstances alter between member states.

If the UK’s ability to build new homes continues to be constrained then in future any inflow of migrant labour will have a disproportionate impact on the bottom end of the private rented sector, leading to increases in rents.

FRAGILE NEIGHBOURHOODS
The northwest contains a highly diverse collection of local economies. Some parts of Merseyside, north Greater Manchester and east Lancashire do not have vibrant economies – in fact in some areas such as east Lancashire there is evidence of entrenched structural economic decline.

These areas have a lower pressure of housing demand particularly for owner occupation which can be cheaper to enter than the private rented sector. However, unlike the 1970s and 1980s, most areas are experiencing household growth that is independent of economic factors, leading to high levels of benefit dependency in both the social and private rented sectors. The government’s welfare reforms may be the biggest short-term driver of changes in the pattern of supply and demand in these locations.

All of the trends outlined suggest that public policy makers need to look beyond the current housing market crisis to what will emerge when the economy returns to growth and the financial system returns to liquidity. Without legislative changes to introduce security to private renters, communities are likely to become more unstable in the bigger urban centres.

Managing the growth of the private rented sector will require a greater level of resource from local authorities to ensure appropriate regulation and standards. The removal of public subsidy for inner city regeneration and renewal will increase the risk for house builders in challenging localities and contaminated sites. A general shortage of funding will also make site assembly a more protracted process and the combination of all of these issues is likely to reduce new development in disadvantaged places – at least in the short to medium term.

The coalition government’s reforms have removed many of the national housing interventions in favour of locally devised and funded solutions. The new role for the private rented sector, the increases in housing demand (much of it related to economic migration), and locally developed homelessness and housing benefit regimes all produce echoes of England pre-1974 when the larger urban areas were fragile places with increasing problems of social cohesion.

The public and private sector investment which has been attracted to these places by coordinated and redistributive national urban and housing policies by successive governments in the intervening years has undoubtedly improved the physical environment and the economic prospects of some towns and cities. The removal of these programmes will now test the sustainability of these improvements and provide a significant challenge to the era of localism going forward.

• Philip Leather and Brendan Nevin are partners of Nevin Leather Associates. This article draws on the conclusions of North west housing market review update to Q4 2010, published by the Institute of Political and Economic Governance at Manchester University.