Cover Story: Don't overblow it

There may be bubbles ahead

There’s a worry that Britain faces another house price bubble, but this time it’s not just sale prices that are over-heating – rents are blasting through the roof too. Can these bubbles be safely deflated before they blow up in our faces?

By Mark Cantrell

First published in the May 2013 edition of Housing magazine 

SO, here we go again, one might think. The smart money, or should that be the ‘smart mouths’ of the commentariat, are talking bubbles; the kind that are primed to blow with devastating economic and social consequences.

Actually, if the critics are anything to go by, it’s the Chancellor of the Exchequer who’s been blowing the bubbles, inviting Britain to join him in an “aspiration nation” with a Government stimulus package intended to revivify the market for first-time buyers.

Homeownership is supposedly back on the agenda, courtesy of George Osborne’s Help to Buy package, which promises some generous Government cash and State guarantees to underwrite mortgage-lending to the tune of a staggering £130bn. Taking out a mortgage and buying a home is a risky venture, of course, and the potential drawback to the Chancellor’s scheme is that he may well have – in effect – mortgaged the UK’s economy to the flagging fortunes of the housing market.

Help for first-time buyers is welcomed by a broad spectrum of industry figures but there are mixed feelings about the Government’s proposed method; too little too late, on the one hand, fears that it simply sets the scene for a nasty crash somewhere down the line. While it may help a few first-time buyers short term, over the longer term, we’ll all pay a price if these fears prove prescient.

The Chancellor might hope that his Budget measures boost the delivery of new homes but any such movement is expected to be small scale, even when combined with the more direct investment in newbuild, such as Build to Rent and the £225 million to deliver an additional 15,000 affordable homes. But these numbers are small fry when set against the 250,000 or so new homes needed per year to begin addressing need.

The Chartered Institute of Housing (CIH) noted “the measures could push up house prices if they fail to stimulate housebuilding on a big enough scale”. And the organisation has not been alone in warning of the potential for the Chancellor’s market interventions to inflate another housing bubble.

“[T]he danger is that if we don’t tackle the fact we’re still not building enough homes, we’ll just create another housing bubble that will continue to push prices up and out of reach of the majority,” said David Orr, chief executive of the National Housing Federation (NHF). “Our housing market has long been weakened by the lack of new houses being built, which are forcing up rental and house prices – leaving millions of people struggling to get on the property ladder or pay their rent.”

To the campaigning organisation Priced Out, the Chancellor’s Help to Buy package is a “disaster waiting to happen”. It said: “Pumping more money into a housing market with chronic under-supply has one sure-fire outcome: pushing up house prices. At best it may help a small number of new buyers but it will mean housing becomes more expensive for those that follow.

“The major problem faced by first-time buyers is high prices and daunting levels of debt needed to enter homeownership.

"Of all the policies you could think of to tackle this, it is harder to think of a riskier or more short-termist policy than Help to Buy. House prices across much of the UK are already unaffordable for young adults and families with ordinary earnings, so this extra upward pressure on prices will create far bigger problems in future.”

Indeed, house prices have already been ‘recovering’ since well before the Chancellor’s latest intervention in the market. Figures vary across the country, and from month to month, with London as ever the prime hotspot, but they remain very much on an upward drift.

The average price paid for a home in England and Wales rose by £532 in March, according to the LSL Property Services Index, with house prices up by £1,117 over the last year (and £6,600 if London is included). It puts the average house price at £230,078 – a mere 0.8% below the pre-crash 2008 peak.

The knock-on effects of high house prices, not to mention the post-crash reservations about mortgage lending, have been felt in the private rental sector, where business has been booming over the last few years as it mops up the homeownership exiles.

Increased competition from those who have become known as Generation Rent has put upwards pressure on rents; not one bubble but two, a double whammy in the making.

Last year’s Home Truths report from the NHF summed it up neatly. “The shortfall of homes year-on-year has huge consequences. Rising house prices mean the dream of home ownership is beyond the reach of millions and the size of a mortgage deposit alone stops many would-be first-time buyers from getting on the housing ladder. More and more people are therefore being pushed into the private rented sector and as demand rises there, so too do the rents.

“With private rents becoming increasingly unaffordable, and with the lack of security and often quality, that private renting offers, many people are turning to the affordable housing sector for a home. One in 12 families in England is now on a social housing waiting list and homelessness has risen by 26% over the last two years.”

Traditional social housing remains critically understocked, however, and so offers little scope for a haven for such exiles. Furthermore, there is concern across the sector about its ability to deliver sufficient new homes.

The sector’s ventures in the Affordable Rent programme, low-cost home ownership, even private rental and sale offerings could be expected to mop up some of those cast out of the conventional marketplace, but in many respects it’s early days yet. In any case, it is far from clear whether it can deliver sufficient properties under the existing environment to defuse any ticking market timebombs.

Rents, like house prices, are in constant flux, varying from month to month and place to place but again demonstrate a strong ascent. Indeed, generally speaking, rents appear to be rising with far greater vigour than sale prices.

The March 2013 HomeLet Rental Index showed that the average cost of renting in the UK went up 3.3% during the first quarter of this year, reaching an average rent of £776 per month. The LSL Property Services Buy-to-Let Index reported an average March rent of £735 per month for England and Wales, a 0.5% rise on February. It reported a new high for London, with an average monthly rent of £1,106.

The Countrywide Quarterly Lettings Index, meanwhile, indicated that average monthly rents rose the most in Wales and the East of England in the first quarter of this year, both up 5.5% to £618 and £814 per month respectively. Outer London’s average monthly rents rose by 5.4% year-on-year to
£1,107 per month, though the index reported a decline of 1.1% in the South East, falling to £1,054 per month. The North and South West also experienced  a year-on-year rise in average monthly rents to £603 and £745 respectively (up 2.7% and 2.3%). In the Midlands, rents rose 1.8% to an average of £636.

Snapshots of snapshots the above figures may well be, but they serve to demonstrate the inflation taking its toll on household finances; the risk is that people priced out of homeownership are now becoming priced out of private rent. Indeed, rising rents are arguably another barrier to homeownership, depleting households’ disposable income that can be put towards a deposit for a home.

In its latest Savings and Investment Report, pension provider Scottish Windows indicated it would take renters 23 years to save enough for the average deposit on a home, put at £50,845.

For first-time buyers, it would take 13 years for them to save an average deposit of £27,984; as things stand now, doubtless prices and therefore deposits, along with rents, would continue to eat into their savings capability during that time.

This is taking its toll, according to the charity Shelter. In a survey, it found that two thirds of renters are struggling to pay the rent or even falling behind. The survey of 4,300 private renters found that one in three were cutting back on birthday and Christmas presents; one in four visit family and friends less often; one in seven use a credit card to pay the rent; one in 12 have borrowed money from children to pay the rent; also, it found that 6% (the equivalent of 515,000 people) had been forced to move home because of a rent increase. And pressure on the private rental sector continues to increase, even as wages stagnate, the charity said.

“This is proof that the growing cost of renting is hitting families where it hurts, forcing them to make impossible choices about what they can cut back on next,” said Campbell Robb, Shelter’s chief executive.

“When families are forced to resort to taking money from their children’s savings or paying their rent on a credit card, it’s a clear sign that sudden rent rises are pushing many ordinary families to the edge.”

Hardly surprising, then, that the numbers of people falling off the edge are likewise increasing. Quarterly statistics from the Department for Communities and Local Government (CLG) indicated 13,570 households were accepted as homeless in October-December 2012, up 6% on the same period of 2011.

Homelessness was up 10% in 2012 compared to the previous calendar year.

“This is yet more proof of how families across the country are being pushed to breaking point,” Robb added.

“The crippling cost of housing, combined with rising prices, flatlining wages and cuts to housing support, is meaning many families are simply no longer able to hold on to the roof over their heads.”

As we already know to our cost, house price bubbles are catastrophic; all the more so when they burst – as burst they must – and send their destructive shockwaves crashing through the economy, and ordinary people’s lives. Unless the bubbles are safely deflated, then eventually this house of cards will come tumbling down – and then where will we be?

This article first appeared in the May 2013 edition of Housing magazine. It was subsequently republished on the Housing Excellence website, 22 May 2013.

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