Prices might be going up, but the new homes aren't

Published 30th Aug 2009

Estate agents may be feeling more optimistic, but better news from the market conceals the truth of Britain's chronic failure to build new homes and keep the dream of ownership alive.

The great British housing crash largely passed Andrew Pratt by. Managing director at Grainger Trust, the UK's largest listed residential landlord with £2.3bn of assets, Pratt has just completed a 212-unit housing development in the shadow of Arsenal's Emirates stadium in north London.

It was a triumph. Never mind that nervous banks are reluctant to lend money, the 92 homes available to buy sold out in just 10 weeks. The properties earmarked for private rent did not see a huge take-up, so Pratt put a further 30 on the market. All but two remain unsold.

With the number of housing transactions at historic lows, most housebuilders are forced to offer huge incentives - legal fees, moving costs and stamp duty all paid - to get stock off their hands and cash in the bank. But all Pratt did was drop the asking price by up to 20% from the market's peak 18 months ago.

A large number of first-time buyers came up with the asking price, assisted, as Pratt said, "by the bank of mum and dad". Buy-to-let investors also piled in to help.

Recent days have offered comfort to housebuilders and the government clinging to the hope that the engine of the British economy - a roaring housing market - may be spluttering back to life. On Friday, the Land Registry said house prices in England and Wales rose by 1.7% in July compared with June - the biggest monthly leap in value since July 2004.

The previous day, Nationwide said prices were up for the fourth consecutive month. And Savills, the upmarket estate agency, said overseas cash buyers in central London, helped by cheap sterling, were creating a mini-recovery in the capital's posh property market.

On Tuesday, Persimmon, the UK's biggest housebuilder, surprised the city when it became the first quoted firm to "write up" the value of its 64,000-unit land bank. A turnaround after a year in which major housebuilders slashed the value of their land assets, writing off billions in moves that provoked sector share-price falls in excess of 80%.

Last week, however, that all seemed years away as evidence grew that mortgage lenders were slowly opening the vaults again. Gross mortgage lending totalled an estimated £16bn in July, a 26% rise on the previous month, though 36% down on the previous year. The number of mortgage approvals, now 47,500, is 20,000 higher than the depths of the crash last November, though, again, still 50,000 shy of peak figures.

So is that it? Will normal service be resumed? "I would love to think we are past the housing crash but realistically I don't think the recovery will be strong," says Shelter's housing policy expert, Caroline Davey. "Unemployment is going up, repossessions are still high. At some point interest rates, which are currently acting as a protective measure, will go up. Those in mortgage arrears are rising and are already high. Look at social housing waiting lists. They are rising. In the private rented sector, people are experiencing real difficulties. Even in a macro-economic context, it's too optimistic to the call the end of the crash."

Fears of a second leg to the housing slump should not be underestimated, she says. There are 270,400 mortgage loans in arrears of three months or more, equivalent to 2.43% of all home loans and up 117,700 on the previous year, according to the Council of Mortgage Lenders. Repossessions are being kept to a minimum as the government presses banks to avoid them, as a quid pro quo for the £1.2tn taxpayer bailout. Nevertheless, they are still rising and further increases in unemployment could spark forced sales, dampening any recovery.

Housebuilders, meanwhile, are still labouring under billions of pounds' worth of debt. Hundreds of thousands of construction workers have been laid off and built units are at historic lows.

It all makes for painful reading for a Labour government whose electoral fortunes were buoyed by the feelgood factor, induced by seemingly never-ending rising house prices. Now, though, it has all come home to roost.

"Any government that allows an extended period of rampant house price inflation fails its people." This analysis of Labour housing policy over 12 years does not come from a Socialist Worker apparatchik, but from the chief executive of a FTSE 250 construction company, playing with his sea bass on a bed of spinach at a City restaurant.

When Labour came to power in 1997, the average price for a house in England and Wales was £63,313. By January 2008, when the market peaked, you would need to fork out £184,362 to purchase one - a near 200% rise.

So easy was credit during the boom that, according to a study by the Greater London Authority, in early 2007 two out of three new homes bought in London were sold to buy-to-let investors.

Senior housing officials are split on whether they should have tried to take the sting out of the buy-to-let market. One says: "If it had not been for [buy-to-let buyers], many homes would not have been built in the first place. Without them there would have been no pre-sales, and without pre-sales no developer would have gone ahead."

Housing minister John Healey says: "Some claim buy-to-let buyers crowded out first-time buyers. I think it's hard to isolate buy-to-let as a single factor driving up house-price inflation. I think in some areas they may have contributed. They still account for 3% of homes across the country. Their effect may have been greater in some areas."

As house prices reached seven times average earnings, 100% mortgages pumped up prices that, at their peak in 2003, grew by 24% annually.

Was that not the precise time for the Treasury to address lending limits? "The nature of [our] involvement was mediated by the regulator and the tripartite system," says Healey, who was at the Treasury just as prices were showing their headiest rises. "I guess we were not close to lending decisions being made at the time. This is territory well trodden."

For those lucky enough to be in at the start of the housing bubble, life was easy. But increasing numbers have been locked out of home ownership. In 12 years under Labour, the number of households on council waiting lists has risen 70% to 1.7 million.

Despite endless announcements of "step changes" in the rate of new housing supply, "growth zones", regional housing targets, "community plans", "urban summits" and Gordon Brown's determination to make increased housing a central plank of his administration, Labour has been unable to build homes in large enough quantities to take the heat out of inflation and mitigate growing social problems.

Only in 2007 did the number of new homes begin to approach the government's annual target of 240,000 units. Even then, it was 33,000 shy of it.

This year, it is widely predicted that the number of completed homes will plummet to 80,000 - a level not seen since the second world war.

Dominating Labour housing policy for the past 12 years were the towering figures of Gordon Brown and John Prescott. On occasions, they would spend weekends together in Prescott's Hull constituency mapping out the future of Britain's housing provision. But talk to senior housing figures and the adjective most often used to describe Labour housing policy is "Thatcherite".

Councils were not trusted by Labour to oversee the building of homes. Their refusal to countenance rent rises to raise money for more units frustrated officials. The optimistic plan was that rising prices would yield enough to allow builders to provide sufficient affordable homes in partnership with housing associations.

The market was seen as the best way to increase supply, and central targets were imposed on local authorities through regional strategies - something that was never popular with them. In the words of a self-critical Whitehall official, government "overrelied on the market to drive it through".

The inability of Labour to achieve its housing targets will provide ammunition to the Conservatives in the run-up to the election. The Tories, in contrast to Labour, will leave housing provision targets up to individual local authorities and encourage them to build more.

To Labour, though, this is a dereliction of government duty. "If you simply had central government sitting back and local authorities declaring UDI [unilateral declaration of independence] on housebuilding, you are abdicating responsibility and you are setting up a system that does not work," says Healey.

"You don't say to a GP: 'you can open a practice where you like'. You take a view that the provision of housing is important. How you articulate that is really quite tricky. That's where voluntary growth zones can be introduced. We have a system of mediation between national and local need and numbers. It's one of the most difficult things to explain and defend."

Senior government housing officials admit housing policy has lacked coherence, and has not been helped by the constant chopping and changing of housing ministers. In 12 years, Labour has got through nine (see table below).

At the same time as councils were ordered to build more homes, the Department of Communities and Local Government, which is responsible for housing, was arguing for thousands of homes in the north to be demolished.

Finance-starved housing associations were encouraged by government from 2004 to "stretch" their balance sheets to buy land in competition with private builders. Many are now in financial distress, having paid too much in the boom years for developments they cannot afford to build out. The demand for family homes has not been met by the private sector, which has been encouraged to build city-centre apartments.

The government can point to two real housing success stories since it came to power. First, it inherited a council housing stock that was in a scandalous state of disrepair. Two million homes were considered unfit when Labour took over in 1997, having had negligible investment. The government faced a choice: buy land to build more homes in a rising market, or spend tens of billions making the existing homes fit to live in. It chose the latter, installing hundreds of thousands of new kitchens, central heating systems and windows up and down the country. "It was a once-in-a-generation overhaul," says Healey.

Its other main achievement has been the wholesale makeover of towns and cities throughout the country, many of which are unrecognisable now. The centres of Newcastle, Birmingham, Manchester bear testimony to a largely successful regeneration policy.

But in reflective moments, Prescott may brood over his regrets as the country's former master-planner-in-chief. He may well ruminate on whether he could have pushed harder to get the building costs of homes lower. His competition to launch a £60,000 house never took off. His attempt to introduce a planning-permission tax - a duty on the uplift of land values caused by being granted planning consent - was ditched. And he always wanted, but failed, to introduce measures to force housebuilders not to sit on land that had planning consent.

Now, despite recent price falls, homes are still out of reach of most first-time buyers because they require large deposits before a bank will consider lending. "Housing affordability is getting worse, not better," said a senior government adviser. "The reason is the requirement for a deposit. The expensive thing is not the house, but saving for a deposit."

Unless you're with the Bank of Mum and Dad, you are pretty much locked out of British property.

Source: ' Observer '

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