Wednesday, March 23, 2011

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.“ 

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.


  1. Sorry I dont know how many house builders you actually know but there is much much more to house price's being to high than greedy builders! the first being the price people demand for land after a so called "expert" has been along and given it a "value" if only it had full planning concent it would be worth £X!
    So thats the figure everyone works to for the land which is the figure we are forced to pay if we are lucky! Because if a "land agent" or worse still an "estate agent" gets any where near it they will rinse every penny out of it.
    Then we have the cost of building which is going up almost by the month! If you realy want to know why no one is building most of them just can't aford to. And my last point who is sitting on the most land? THE BANKS they have pulled it away from builders and are just sitting on it wating for the market to turn RBS alone has over 7500 sites in England and the banking industry as a whole has 35000+ flats! why dont they just sell them and take the loss they have forsed on to every one else?

  2. So basically this is a repackaged "HomeBuy" scheme which saw the Local Authority footing some of the costs... but as local authorities have been screwed to the wall....
    So ... a developer basically pays out for the house it has just spent money building.... I'm not sure.. but couldn't this affect the financial viability of house building organisations... say I bought a house... then defaulted on a mortgage.. how would this affect the builder!?

    Why are we assisting the building of new houses when there are 1000s of empty homes?! 2600 in my local authority area alone!!!

  3. You've made a good point distinguishing the building of new homes from the perceived shortage of homes.

    Help may be at hand though, a new report from Policy Exchange, entitled More Homes: Fewer Empty Buildings, has highlighted the potential of using empty offices and shops to homes people. In theory at least, some of the housing made available from such a scheme would be in desirable locations, which would ease the supposed need for more new homes.

  4. New Homes Birmingham24 March 2011 at 13:17

    Sorry - this was the first post I read - I can see that you've covered the Policy Exchange report two posts down.

  5. Anon, you make a good point about the multiple causes of high house prices, and you also reinforce my point that housebuilders see themselves as a special case. I wouldn't call housebuilders greedy, they are simply trying to run profitable businesses. My beef is with my sector elevating what housebuilders do to virtuousness, and giving the misleading impression that increasing housebuilding will solve everything. It won’t.

  6. I like your opinion on this topic. We have a lot in common. It was very interesting to read this article. I hope the others are as good as this one.

  7. I like your blog you are very intelligent and broad minded person. This article would help a lot for those who are firs time buyers. Your article was very exciting also. Thank you and keep posting.

    Charles A

  8. A very compelling article here that has given an unbiased view on the current situation. I feel the highlight being distinguishing the building of new homes from the perceived shortage of homes. We at Housetrade are concentrating on stimulating the market through costs savings by avoiding paying estate agents fees which can benefit buyers and sellers.

  9. £250 million is not that much actually... especially falling into the wrong hands! Has there been set up anything new since then?