Today I heard on the radio that mortgage advances have fallen 44% compared with the same period last year. Its a fitting epitaph to this governments woeful misunderstanding of the housing market, and the folly of their current policy which will not succeed in tackling the problem of providing more people with better homes that they own.
The government have made access to home ownership in this country much more expensive by combining two policies:
1. Allowing a credit boom until last autumn, which drove house prices to new heights as banks and building societies took advantage of the low interest rates and easy money to lend more and more against individual properties. They also lent more and more as a proportion of peoples income.
2. Introducing Home Information Packs, which has deterred people from putting their homes on the market, reducing supply and delaying the price adjustment which would otherwise take place in response to the credit crunch.
The main reason for the current high property prices is the first one. The lurch from boom to bust conditions in UK money markets will put downward pressure on prices, as we are beginning to see, but the other two policies are delaying and reducing this adjustment.
The governments own analysis has been pathetic. They have said house prices are too high for first time buyers because too little housing is being built. They have steadfastly refused to answer my simple question,?? How far do they want house prices to fall so they are affordable again??? They have decided the answer to high house prices is to build more. They also allowed many more people to come to the Uk who need homes, seeing the problem as solely one of inadequate supply and not looking at either demand or the terms of finance for house purchase.
In the meantime they are presiding over a house-building industry in difficulties, now cutting back on the number of homes they will build even where they have land with planning permissions available.
The truth is the government will not be able to build itself out of high house prices, as the supply of new homes is a tiny fraction of the number of homes that come onto the market each year. The government should recognise that the main determinant of house prices and therefore of affordability is the supply of mortgage finance, and the terms of that finance. We have just seen a long period of rapidly rising house prices driven by boom credit, yet the government refused to understand that it was primarily a monetary phenomenon.
The government may also find out that falling house prices are even more unpopular than denying access to younger first time buyers by allowing ever higher prices.
In housing policy there is no substitute for a government managing conditions in money and credit markets competently, so that house prices are relatively stable. This government made the problem of housing affordability far worse by the boom credit conditions of the last few years, and is now going to do the opposite for a bit with the credit crunch. Falling house prices put people off becoming first time buyers, and credit crunches drive out of the market the people who most need credit to be able to buy a house.
The government not only needs to stabilise credit conditions, but also should abolish Home Information Packs. It was a stupid time to introduce them, when the market is going through such convulsions, as the Northern Rock crisis unfolds.