The UK housing market looks to be heating-up once again following the implementation of the government’s “Help-to-Buy” shared equity scheme for first home buyers (FHBs) and the Bank of England’s “Funding-for-Lending” program, which subsidises lenders’ borrowings provided they pass on the loans to households and firms.
According to three main housing data providers – Halifax, Acadametrics (FT), and Nationwide – UK house prices have begun to rise, increasing by between 3.2% and 6.2%, depending on the index, in the year to August 2013, with the pace of growth increasing over the past six months (see next chart).
While price rises of this magnitude are fairly benign, it should be kept in mind that household incomes in the UK have been going backwards, at least in inflation-adjusted terms (see next chart).
Moreover, the aggregate data masks significant divergence between regions. In particular, house prices in London are rising more strongly, up by between 5.2% and 6.8% in the year to June 2013, depending on the index used (see next chart).
Sentiment has also jumped, with Knight Frank and Markit finding that price expectations for London are the highest since they first started tracking them three years ago (see next chart).
The price rises in London, and increasing sentiment, have been enough to elicit concern of another house price bubble, with Britain’s influential Royal Institution of Chartered Surveyors (RICS) now calling on the Bank of England to place a 5% cap on annual house price inflation in order to avoid a “dangerous” debt bubble. From The Independent:
“The cap would send a clear and simple statement to the public and the banking sector, managing expectations as to how much future house prices are going to rise” said RICS’s senior economist Joshua Miller. “We believe firmly anchored house price expectations would limit excessive risk taking and, as a result, limit an unsustainable rise in debt”
RICS said that the Bank could rein in prices house by limiting the amount people can borrow in relation to their incomes, demanding larger deposits from first-time buyers or imposing tighter repayment terms on mortgages.
Obviously, there is Buckley’s chance that the Bank of England would implement such macro-prudential measures. If it was truly concerned about house price inflation and a bubble, it would first look to curb its own Funding-for-Lending program or request that the government wind-back the Help-to-Buy scheme.
More broadly, the problems emanating from the UK housing market have as much to do with constipated supply as excess credit demand. Thanks to the Town and Country Planning Act 1946, the right to develop has been virtually nationalised and the UK is ruled by NIMBYs. All of the major cities and towns in the UK are surrounded by “greenbelts” that are off limits to development. And the centralisation of government finances has also led to a situation whereby local governments receive little benefit from increased population and development, but bear most of the costs, making them anti-development.
In short, the constipated supply system ensures that any extra demand – be it from easier access to credit or population growth – feeds predominantly into rising prices rather than new construction. Reforms to the supply-side, therefore, need to be front-and-centre of any fix.
