The Budget and how the housing sector got it wrong

The budget will no doubt grab headlines for the Chancellor’s neat little fiddle to petrol prices, but I’m more interested in what’s behind some similar footwork on new homes.

The budget introduces First Buy a £250million programme that it is claimed will help first time buyers buy homes. It does this by an equity share scheme that builds up enough capital to create a 25% deposit for a first time buyer. The cost is met partly by the government (10%) , partly by the housebuilder (10%) and partly by the buyer (5%). In this way a first time buyer who can only afford a deposit of 5% of the purchase price of a house can satisfy the lender’s requirement for a 25% deposit.

Commenting on this today, the housing sector is full of medical analogies. Richard Capie of the CIH on the Today programme this morning described it as “an adrenalin shot in the arm for the housebuilding industry which is still in intensive care.“ 

Campbell Robb at Shelter described it this afternoon as “sticking plaster on a broken leg” he went on “We now have a construction industry on its knees and the lowest levels of house building since the 1920s.”

This to me illustrates what is wrong. The housing sector has confused itself with the housebuilding industry. Every housing problem that is raised whether it be homelessness, overcrowding, poor living conditions or affordability the sector’s answer is “ we need to build more houses” Except the housing sector doesn’t actually build any homes. The housebuilding industry does. From the housebuilders point of view this is no doubt great news. They have had their business elevated to a moral necessity by organisations with the public goodwill of Shelter and the credibility of the CIH.

But few people stop to ask two important questions. Why is housebuilding so low?  and if it were to magically accelerate would it really solve all the country’s housing problems?

The answer to the first is easy. Housebuilders aren’t building, because few people are buying. Housebuilding is just a business operating in a market. Right now what it produces is judged by the market to be too expensive, and by lenders to be too risky (because lenders judge houses to be overpriced) .What would any other business do? Obviously drop its prices. But the housebuilding industry sees itself as a special case, and the housing sector reinforces this belief. Instead they think it is the duty of the state to construct new ways for people to afford homes at high prices, and also its duty to take the risk of the inevitable house price drop away from lenders.

The answer to the second question is harder to answer. Let’s just say that a million new homes are built this year (ten times what is predicted). Would it solve lots of housing problems? Given that as I discussed a couple of weeks ago there is no overall housing shortage in this country, who would buy them and who would live in them? As the vast majority of the homes would be for private sale, it is fair to say they wouldn’t be bought by people in housing need. Perhaps there would be a trickle down effect. Perhaps the oversupply of houses would cause overall house prices to drop. All these things are possible. But we would inevitably end up with far more vacant homes (probably about a million more). I think it’s highly likely that homelessness, overcrowding, and poor living conditions would be largely unaffected, but arguably housing affordability might be improved.

So what’s really behind Firstbuy? The package is available to first time buyers who buy new homes. I don’t have figures, but the vast majority of first time buyers buy second hand houses. First Buy is therefore simply a form of subsidy to help the housebuilding industry. Campbell Robb said today “Today’s announcement will help less than one per cent of people struggling to get on the housing ladder, leaving them more likely to win the lottery than be helped through this small-scale scheme.” He may well moan about it now, but by lobbying on behalf of housebuilders for so long the housing sector can hardly complain when the government takes them at their word.