A report published today by the Organisation for Economic Co-operation and Development (OECD) warns that the British government must take immediate action to slow down soaring house prices to prevent destabilising economic recovery.
However, one thing I'm not entirely convinced by is that the housing bubble is constantly being attributed to a combination of low interest rates and government-sponsored schemes such as Help to Buy.
Is there actually any evidence to support the theory that Help to Buy is behind the rocketing property prices, particularly in London?
Let's not forget that prior to the first shockwaves of 2008's financial crisis, property prices in the UK were at significantly higher levels than they are today. The reason behind spiralling prices at that time was largely the supply-demand dynamic that has been a perennial sore point for successive governments for decades.
Since the financial crisis, the housing shortage has worsened due to ailing and failing construction and development companies combined with a lack of government investment in the sector. Despite a shaft of light appearing when the planning process was streamlined to allow fast-track approvals of new housing projects, the housing market has simply not received the stimulus it needs to achieve measurable and sustainable growth and because of its critical contribution to the economy, this MUST change.
Construction is one of the largest sectors of the UK economy. It contributes almost £90 billion (or 6.7%) in added value, comprises over 280,000 businesses providing more than 2.93 million jobs – equivalent to about 10% of total UK employment.
In essence, the housing landscape looks pretty much the same as it did before the crisis meaning that the supply-demand dynamic also remains the same and is STILL adding buoyancy to house prices over and above any other influences.
There is also the fact that London property prices are rising at the fastest rate in the country with increases of more than 18% in the first quarter compared with just over 9% nationally. This is impacting the national average significantly and distorting the picture even further.
Rising housing prices in London are almost entirely a consequence of the massive increase in foreign buyers snapping up prime property in the Capital – buyers who have very deep pockets and are highly unlikely to require mortgage finance. Russians protecting their money from impending sanctions; Chinese looking to invest outside of their own collapsing property market; Saudis looking to snap up bargain mansions just because they can – and unfortunately, there is nothing in place to prevent them from doing so.
In today's OECD report, it is recommended that some kind of fiscal tightening be applied to overseas investors so that they don't continue to artificially inflate the property market. Well, that's not going to happen in a million years – the government turning away cash money no matter where it's from? – no chance!
In fact, the Budget in March added fuel to the fire by allowing pensioners to claim lump sums on retirement and naturally, the perfect vehicle for their investment is in property. Now, instead of simply purchasing an annuity and sitting on their laurels (aka “retiring”), they can be proactive with their new investment wealth and become a landlord with a UK Buy to Let arrangement.
Anyway, the net result is that this huge increase in investment has jumped on the back of the supply shortage and the only way is up for house prices.
In reality, the government Help to Buy scheme brought about a small flurry of activity in first time property purchases but just over a year since its introduction, new mortgage regulations introduced at the end of April will put the kibosh on most new applications under the scheme. Prying questions about how often and with what you feed your pet, how many alcoholic drinks you may dare to imbibe on a weekly basis and whether you are a member of a gym will now become actual criteria determining your ability to afford to buy a home at all.
Getting back to the original supply issue, it was never going to be a great idea to have an open door immigration policy with housing shortages already at critical levels. Now it would seem that a similar “open door” policy has been applied to anyone from anywhere as long as they have cash. Not only is it a short-sighted policy in terms of the potential damage to the economy, it also smacks of greed – hardly a revelation I know.
The fact that the government fails to see beyond their elected term isn't shocking news I suppose but the way spiralling property prices are being spun by the government as being a good thing makes it more obvious how out of touch with their electorate they are.
- Monday 12 May 2014