Lack of supply not to blame for soaring house prices

16th November 2016

The Redfern Review into the decline of home owenership says first time buyers’ low wages and lack of mortgage availability have contributed to plummeting home ownership rates.

Soaring house prices and plummeting home ownership rates in the UK have not been driven by a lack of new housing construction, a Labour party-commissioned review has found, contradicting conventional wisdom on the nature of the housing crisis.

The Redfern Review, published today, states, instead, that the biggest drivers of the large increase in house prices over the past two decades have been rising incomes, falling interest rates and, more recently, a lack of mortgage finance availability for first-time buyers and the weakness of this group’s income growth.

It also warns that even substantially increasing the supply of new homes will not directly improve the home ownership rate in the near term. “New household formation and supply have been broadly in balance over the last 20 years and therefore the significant increases in house prices over that period have not been driven primarily by supply constraints”, it concludes.

The report was headed by Peter Redfern, the chief executive of the house builder Taylor Wimpey, and used modelling from the Oxford Economics consultancy. It finds that tougher rules on how much first time buyers can borrow for a mortgage has been the biggest downward force on the home ownership rate since 2008, followed by rapid increase in house prices. It said that the third biggest driver was a 10 per cent fall in the incomes of young people aged 28-30 relative to those aged over 40 since the financial crisis.

The Oxford Economics model suggests that even increasing home building to around 300,000 for one year, almost double the current rate, would reduce prices by only 0.6 per cent given rates of household formation.

The Prime Minister, Theresa May, has said that increasing new home construction is a priority. In a speech in July she said: “Unless we deal with the housing deficit, we will see prices keep on rising. Young people will find it even harder to afford their own home”. While Jeremy Corbyn’s Labour leadership election website stated that “for decades we have failed to build the homes we need, now we have soaring house prices and rents demand outstrips supply”.

The UK’s home ownership rate in 2014 stood at 63.1 per cent, down from 69.3 per cent in 2002. The home ownership rate for those aged 25-34 fell even more steeply from 59 per cent to 37 per cent.

According to the Nationwide building society the average house price has risen around 80 per cent over that same period. House building starts were running at around 180,000 a year in the years before the financial crisis, well below the 300,000 a year rate in the late 1960s. Starts plummeted to 80,000 in 2009 and have since only recovered to around 140,000 a year.

Mr Redfern said increasing the supply of new housing construction could make a difference to prices but only over “the very long-term”.

Under Oxford Economics’ modelling even boosting annual supply by around 100,000 a year to 310,000 would only help keep prices in check over the next decade, rather than bring them down in nominal terms.

The report recommends the establishment of an independent Housing Commission and says that to tackle the housing crisis the Government might need to take action to address the fall in young people’s wages relative to older generations and also provide subsidies to “qualifying groups”. It says the Government might look at relaxing mortgage lending standards but admits there are financial stability problems with this since it implies large increases in household debt.

Targeting a specific home ownership level is not only difficult but may also be damaging to the underlying interests of those we are trying to help and also the wider market by encouraging unsustainable house price growth and unsustainable house price growth”, it warns.

The report says that the Government should look a providing a “healthy and stable renting environment” for young people, as well as devising a long-term strategy to increase new housing supply over the next 20 years.

Mr Healey said the report was the first major inquiry into home ownership in over a decade.

At root, this decline in home ownership matters to me because it matters to so many people in this country that we are determined to serve”, he said. “And it matters too because the shrinking opportunity for young people on ordinary incomes to own a home is at the centre of the growing gulf between housing haves and housing have-nots. Housing is at the heart of widening wealth inequality in our country”.

The report is more optimistic about the result of the European Union referendum and its immediate effects on the housing market.

Many believed the referendum result would impact immediately and negatively on the housing market“, the report claims. “However, at the time of writing, the immediate impacts look less dramatic than originally feared, although most commentators expect the economy to be weaker while the uncertainties play out. This could of course take many years”.

The report was supported by an advisory panel that included Terrie Alafat of the Chartered Institute of Housing, Dame Kate Barker, who wrote an influential review of housing for the Government in 2004 and Ian Mulheirn of Oxford Economics.

Source: The Independent, 16/11/16