Housing – Think again Minister

The Housing Minister struggled on the radio this morning. Asked if it had been wrong to insist on high density development of flats in City centres, now so many are empty or experiencing large price falls, she ducked. Asked if she wanted house prices to fall further to make them more affordable, she said she wanted stability but had no idea on how to achieve it. Asked if she would revise the 3 million new homes target and the 240,000 annual build rate in the light of a halving in housing activity, she implied she would not. There is an air of unreality about a government setting a target double the likely rate and repeating they would like to live in a world where such a large number was produced!

She remained wedded to the first foolish version of the Barker’s analysis, that house prices are the result of supply and demand for accommodation based on a crude analysis of the number of new households formed versus the number of new houses built. On this basis she should now be saying we are producing far too many homes, which is why the price is falling. She should be welcoming the massive cutbacks in the housebuilding industry to get it into balance. It wasn’t true on the way up that prices were rising primarily because too few homes were being built, and it’s not true on the way down that prices are falling mainly because too many houses are being built.

The government’s failure to understand the role of mortgage finance and the importance of the market in second hand homes in the overall housing market has led to a list of idiotic policies which are trashing the housing market in the UK. They need to revisit their analysis and understand that when credit dries up property values fall. People are unable to form as many new households as they would like, children stay living at home for longer. Relatives find temporary accommodation with relatives. More people live in rented accommodation awaiting better financial times. The policy mistakes include:

1. Ordering high density flats to be built when these are not popular with many buyers, and are the first type of property for mortgage companies to drop when times get tougher.
2. Believing that a modest increase in the supply of homes will counteract a raging credit bubble, brought about by following a lax monetary policy and through misdirected banking regulation.
3. Allowing a run to develop on the most aggressive mortgage lender, and then nationalising it in a way which prevents it making new advances.
4. Continuing during the building slump to demand more high density developments.
5. Presiding over a Bank of England policy which thinks it needs to fight an inflation which is historic and will subside, when they should be fighting the slowdown and recession now hitting lead sectors.
6. Failing to keep money markets liquid enough to allow a sensible supply of mortgage credit.
7. Persevering with ludicrous targets for the next couple of years instead of admitting there will be far fewer homes produced.
8. Continuing to press more planning approvals through on appeal, further depressing the price of building land at a time when building companies are in difficult negotiations with bank managers and shareholders over the state of their balance sheets and the extent of the damage to value of the land they bought at higher prices in different times.

In sum, Ms Flint showed an ignorance of how the housing market works, reiterating a failed interpretation of how house prices are formed. She failed to offer any meaningful reassurance to builders, had nothing to say to the thousands now being laid off in the building industry, and implied that persevering with targets miles above reality was the most comfortable position she could think of adopting.

Today the Monetary Policy Committee of the Bank of England meets. It is widely predicted they will do nothing – other than draw their salaries and have an interesting discussion. Aren’t they aware that the building industry is in meltdown? Do they realise housebuilders are having to discuss with their banks how to finance and refinance their land banks in the new circumstances they find themselves against a very gloomy background for cashflow and profit. How much more damage does the Bank want to do to the economy before it offers some relief in the form of lower rates? And how much longer before the monetary authorities led by the Chancellor put enough money into markets to provide some hope of a more sensible level of business, before major capacity is lost from the building industry and many more are on the dole?

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10 Comments

  1. Mark Wadsworth
    Posted July 10, 2008 at 11:20 am | Permalink

    That's a fair analysis, but we've had these land price bubbles in half the Western world.

    Sure, we could do all the things that you suggest, but these land price bubbles happen time and time again (under governments of any party), which, to my mind, is a good argument for replacing all wealth/property related taxes* with Land Value Tax to keep land prices low and stable.

    * The list includes Council Tax less Council Tax Benefit, Business Rates, SDLT, Inheritance Tax, Capital Gains Tax, TV licence fee, Insurance Premium Tax, s106 agreements, 'roof taxes' and also includes subsidies to land and property ownership like agricultural subsidies, Housing Benefit, VAT zero rating for new homes etc etc.

    Happily enough, once you net all this off, the total receipts are roughly equal to total spending by local government (ignoring Education – which ought to be replaced by vouchers anyway).

  2. Martin
    Posted July 10, 2008 at 11:55 am | Permalink

    I agree…I know this sounds ridiculous but it's almost like Gordon and co want a recession….As a layperson I do not see any action taken whatsoever to stimulate the economy…Quite the opposite in fact ie increased VED. I really am beginning to think that Brown and Darling have no idea what to do next…and listening to Flint, she niether. Martin

  3. Neil Craig
    Posted July 10, 2008 at 2:00 pm | Permalink

    Upmarket house prices a century ago were equivalent, in RPI terms, to £40,000 – £80,000 today. The at least fourfold increase is because of government regulation, both in preventing building & in mandating individualised design features which have effictively kept the industry in the pre-Henry Ford era.

    This shortage has, in turn, turned houses into an investment instead of somewhere to live & it is this part of the price which is subject to the violent price bubbles we see.

    Nonetheless if houses cost what they could, or even a bit closer to it, they would sell. Currently we see it as being accepted that young people without financial backers cannot hope to get on the housing ladder. It is not necessary that this be so.

    Your # 1 proves my point. The government is not ordering that flats be built, it has no such power unless it pays for them. It is ordering that restriction of all other building be even harsher, which is not the same thing.

    (If it were really desireable that no more land be used for housing the way to do that would be to introduce Land Value Tax as an element of council tax. This would provide a free market incentive to minimise the land used for housing, on the other hand it would hurt those keenest on preventing building in the countryside since they are the ones who already own such property.)

  4. James
    Posted July 10, 2008 at 4:09 pm | Permalink

    Is there no way we could have a mutiny against this government. They are all living in a fantasy world turning Great Britain into 'Little Britain'. There will not be anything worth saving if we have to wait for a General Election.

  5. Nick M
    Posted July 10, 2008 at 4:17 pm | Permalink

    I am thinking along the lines of Martin. There is not a chance they'll win the next election and I think they're trying to give Cameron & Co a deteriorating economic situation hoping things keep on getting worse as they did in the early Thatcher years (for the same reason you can't turn a super-tanker on a tuppence). Remember Mrs T was quite unpopular 'till the "Falklands Factor".

    It's a deeply cynical strategy but then what do you expect from a party one of who's apparatchiks wanted to use 9/11 to bury bad news.

  6. TrevorH
    Posted July 10, 2008 at 6:31 pm | Permalink

    Ms Flints main concern and area of expertise is in the length of her hemline.

  7. Robert
    Posted July 10, 2008 at 6:38 pm | Permalink

    John , I am sorry but bust follows boom as sure as night follows day! As I have argued before, we and other central banks have allowed the money supply to run ahead for at least 6-8 years and that has created a global asset bubble which is bursting in the more leveraged economies. It needs to, then prices will correct to levels where first time buyers will be able to both get finance and purchase a property having had to save a reasonable deposit circa 15% and based on sensible income multiples e.g. 3-3.5x . One just has to be patient as the scene plays itself out – both banks and the personal sector need to de-leverage and that will take a couple of years at least. Politicians when they interfere, often make things worse trying to prevent the necessary 'pain' – in the meantime, we all have to tough it out, and yes there will be as the military say sadly 'collateral damage', but the ecnomy once purged will be stronger for it. No politician can banish the cycle as markets and human behaviour is at the extreme driven by fear and greed at different times of the cycle.

  8. David morris
    Posted July 10, 2008 at 9:13 pm | Permalink

    NickM

    No, what's even sadder is that these muppets genuinely believe they are doing the right thing, but don't have any ability to learn from past mistakes and look at possible consequences.

    e.g. VED which I am pretty certain will result in older, more polluting, vehicles being kept on the road longer because they have trashed the used car market.

  9. bill Quango mp
    Posted July 11, 2008 at 1:06 am | Permalink

    Caroline Flint is the most ambitious and least able member of Gordon's team.
    A pretty remarkable achievement considering the very stiff competition for that accolade.

    Statistically, one other planet in our galaxy has life on it. You just have to keep searching amongst the billions of stars to find it.

    Statistically among the billions of ideas proposed by Flint, one will be a good one.
    Its just a question of listening and waiting. And waiting, and waiting…

  10. William B.
    Posted July 11, 2008 at 2:42 am | Permalink

    I find it very difficult to comment on many ministers in the current government without appearing to make a personal, hurtful insult. It's just that there is no soft and fluffy way of saying "you're not up to the job for which you are being paid a chunky salary by the taxpayers".

    The one gleaming light of honesty in the last 11 years of shabby self-serving deceit was Estelle Morris's resignation as Secretary of State for Education and Skills in 2002. Here was a decent person whose conscience would not allow her to continue in office once she realised that she did not have the range of skills needed to do such a serious and difficult job to a high standard.

    The skills needed to head a government department are possessed by very few. It is necessary to have the intellectual skills required to understand: (i) the current law and how it applies in practice, (ii) the effect any change in the law will have, (iii) how policy initiatives will affect areas outside your department's remit, (iv) the limits to what policy initiatives can achieve and many other matters. Then there are the personal skills of organisation and leadership without which you cannot be effective as the head of anything.

    Trouble comes when people are in politics for themselves and not for what they can achieve. Usually they are blind to their own shortcomings with the inevitable result that bad policy and bad law will be formed. Those who are not blind to their own shortcomings are even more dangerous because deceit and bluster take the place of honest incompetence.

    Sadly, the Housing Minister is not the only one in the senior ranks of government at present who does not appear to have the requisite range of skills to carry out the serious responsibilities of cabinet government to a proper standard.

    What hope is there of the deficiencies being corrected by new appointments? Where are the Douglas Hurds, Ken Clarkes, Tom Kings, Michael Howards, John Majors, William Hagues and (if I might say so) John Redwoods of the Labour backbenches? Many outstanding people emerged between 1979 and 1997 because Conservative Party candidates were not selected by reference to how docile they would be to the whips. By contrast the Labour party machine has packed their benches with grinning lobby fodder of desperately poor quality ever since 1997 and now we all have to pay the price.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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