Many moons ago I suggested, drawing on Professor Nick Crafts’ research on the 1930s, that housebuilding was an essential route out of Britain’s post-crisis torpor.
Some disagreed, suggesting that housebuilding was somehow wasted spending, and only “productive” investment, in plant and machinery and the like, is worthwhile. The answer is that you need both, and the advantage of housebuilding is that it is a great job generator.
These days, however, every Tom, Dick and Harry calls for more housebuilding. It has become the panacea. Critics of George Osborne’s Help to Buy scheme say we do not want the government to boost the supply of mortgages but just to increase the supply of new housing.
That is a very odd. Ask any builder why housebuilding has been weak in recent years and they will put finance at the top of the list: the finance to develop new sites and the mortgage finance that enables customers to buy.
While there is case for more social housing, it is naive to expect even an echo of the post-war council housing boom. These days, when we talk about new housing supply we are mainly talking about private sector supply.
Why has housebuilding been so weak in the past few years? Immediately before the crisis, nearly 220,000 new homes were being built. When mortgage availability dried up in 2007-8, new building slumped by nearly 40%. The failure of housebuilding to recover after that, until very recently, was a direct product of the mortgage famine.
Social housing, these days almost exclusively the preserve of housing associations, has responded in a counter-cyclical way, filling some of the gap left by the private sector. But on the eve of the crisis in 2006-7, housing associations and local authorities only accounted for 12% of new homes completed.
That proportion has gone up to around 25% (and will probably go down again now) but we are a long way from the days, last seen in the early 1970s, when there was more social housing built – mainly then by local authorities – than by the private sector. This was in the context of nearly 380,000 homes being built a year.
The shift from mortgage feast to famine as a result of the crisis was dramatic. Bank of England figures show that in 2005 there was £91bn of net mortgage lending (gross lending less repayments), peaking at £110bn in 2006 before subsiding slightly to a still very strong £108bn in 2007. Even in 2008, the eye of the storm, net mortgage lending was £41bn.
For the next four years nothing happened. Net lending averaged less than £10bn a year, achieving less over four years what was achieved in the single annus horribilis of 2008.
Another way of looking at it is in the Bank’s figures for housing equity withdrawal, the amount extracted by homeowners from the housing market.
For most of the 2000s, housing equity withdrawal was huge, totalling £232bn between 2000 and the spring of 2008, when the economy dived into recession. Then the process reversed itself dramatically. Since then, households have collectively injected £209bn back into housing. There are many reasons why the consumer recovery has been weak but this is high on the list.
The key point is that boosting mortgage supply and increasing housebuilding are not alternatives; they are intimately related. The first phase of the chancellor’s Help to Buy scheme, which offers interest free equity loans of up to 20% of the value of a new home has, together with Funding for Lending, provided a decisive boost for housebuilding.
Official figures show housing orders are rising at their fastest rate since 2007, while the more timely construction purchasing managers’ survey from Markit shows housebuilding accelerating at its strongest since 2003. Help to Buy, as predicted here, is helping to build.
If so, why do we need the second phase, brought forward from January by George Osborne at the Tory conference? In this, the government will guarantee up to 15% of a property’s value, in return for a fee charged to the lenders.
The answer takes us back to where I started. New housebuilding is great but it cannot do everything. The read-across from new housing to the wider market is not perfect – you cannot newly-build Victorian houses with character (or large gardens) and the numbers will always be against new housing. Even in a good year, new housing will add less than 1% to the housing stock. It is, as I say, no panacea.
A proper housing recovery requires things to move in the market for existing homes. People who have hung on instead of selling because the market was dormant; perhaps older people contemplating downsizing. Younger households stuck in a home too small for their growing families need to be able to trade up. This too will feed through to more housebuilding in a way a stagnant market would never do.
Defending Help to Buy is a lonely task. The trite argument that it will only push up prices is too easy a soundbite.
Fortunately I have some company. The always-sensible Michael Saunders, an economist with Citi – not a mortgage lender – puts it well. Help to Buy is artificial but no more than the myriad schemes, including ultra-low interest rates and quantitative easing, introduced to lift the economy. This one has the merit that, in its first phase at least, it is working.
Peter Spencer, economic adviser to the Ernst & Young Item club, says the policy is “well timed and well targeted”. He adds: “The main benefits will be felt outside London, where they will help to restore a level playing field between first-time, first-move and cash-rich buyers,”
House prices have adjusted a lot. Saunders points out that they are 25% lower in real terms than pre-crisis. The house price-earnings artio, calculated by the Halifax, is 20% lower than it was.
The test for Help to Buy 1 was whether it would boost housebuilding. It has. The test for Help to Buy 2 is whether it results in a significant increase in transactions – currently barely more than half pre-crisis levels. I think it will.
This piece is cross-posted from EconomicsUK with permission.