Re-embedding the housing market.

Author:Griffith, Matt
Position:Features

Housing remains the neglected, Cinderella issue of recent British politics. There is a perception that house building and/or attempts to deal with high house prices face heavy electoral headwinds, leading to a timid handling of the status quo. There is a growing and healthy 'post-credit crunch' debate about the shortcomings of UK fiscal, monetary and regulatory policy within government, politics and academia, but in housing circles soulsearching is much more muted. Given the extent to which the housing market lay behind the UK's vulnerability to the credit crunch, this lack of new thought is, to put it mildly, surprising.

John Houghton and Ian Hall have asked in recent Renewal articles why housing policy is failing (Houghton, 2008; Hall, 2009). In addition, the Labour Party's current housing policy review, led by Caroline Flint MP, is now looking into the question.

Hall's critique of the state of housing in 2009 noted in particular the following 'blind spots' of the Brown government's analysis and policy on housing:

* A lopsided emphasis on the supply-side at the expense of demand-side questions;

* A failure to recognise the risks below the surface of apparent 'sound fundamentals' of low interest rates, low inflation and low employment;

* The danger of government interventions to 'prop up' the market without accompanying reforms to ensure greater market stability;

* A failure to look more fundamentally at the housing market cycle and most notably house price boom and bust, credit and regulation.

These blind spots were not solely a feature of the Brown government: they persist among many UK housing policy-makers and across the three major political parties, with dire implications for the health of the UK economy and society. We need to revisit how we think about housing.

Why is housing so vulnerable to economic cycles?

Housing market boom and bust has become a near reflex pattern of behaviour for the UK - deeply ingrained, often denied, and apparently all too hard to prevent. Housing markets are particularly vulnerable to bubbles (see for example Andrew Farlow, 2004; IMF, 2011). They are very likely to suffer from momentum behaviour, and price over-heating is harder to correct than in other markets. Critically, booms are exacerbated by collective 'gaming' behaviour from borrowers and banks alike. Participants in housing markets believe that the government will not let prices fall or financial actors fail. Indeed, the state underpins scarcity by ensuring an under-supply of new property. So we move from periodic bouts of buyers' fear of 'missing the boat' as prices rise, to the pain of negative equity and retrenchment.

Since the 1970s the UK has experienced four major boom and bust price cycles: two in the 1970s, one in the late 1980s and early 1990s, and the most recent experience of boom then credit crunch in 2008. Each of these cycles has been more pronounced than its predecessor, with larger price swings and greater levels of financial fallout for individuals, the UK financial sector and the economy as a whole.

Why demand matters

The mounting intensity of these crises is undoubtedly due in part to the UK's continued failure to deliver additional supply (see HM Treasury, 2005). But as Hall notes, supply is only part of the story. To quote the economist David Miles, UK housing supply is 'all but fixed in short run' (Miles, 2008). The UK's total housing supply grows extremely slowly, at less than 1 per cent of the total stock per year, and bears a weak relationship to total levels of demand. The result of this irresponsive supply-side is that sudden changes in demand are mainly reflected through price changes rather than extra supply. This means that changes in demand matter: to prices and to explaining the rollercoaster nature of this market.

In the housing market, demand is not simply a calculation of households and population. What matters more is effective demand - how demand is mediated by the ability to fulfil it: in short, money and mortgages.

The past decade has seen several radical structural shifts in the core components of effective demand for UK housing, with far-reaching effects on the housing market and, as a result, on access to owner occupation, the distribution of wealth, and stability for home-buyers.

Structural shift 1: mortgage finance

Between 1997 and 2007 the UK mortgage industry underwent a second 'big bang' that matched the...

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