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 Barkerâ€™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 wasnâ€™t true on the way up that prices were rising primarily because too few homes were being built, and itâ€™s not true on the way down that prices are falling mainly because too many houses are being built.
The governmentâ€™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 â€“ other than draw their salaries and have an interesting discussion. Arenâ€™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?