323: UK Housing Crisis and it just gets worse
History of Often Hidden Crisis:Thirteen years of Labour saw property prices rise three fold. The population rose dramatically with increased immigration and larger families. Meanwhile despite the market requirement, the level of home building consistent dropped to an incredibly low level of 90,000 by the time they left office. Meanwhile, 25,000 homes were being demolished a year leading to a final net 65,000 homes being built in 2009. This from a socialist party that was supposed to be looking after its core voters the proceeds of North Sea oil and consistent growth of 2-4% for 11 years resulted in this meagre building programme - meanwhile the population was expanding by 300,000 a year. Almost all these properties were privately built, mostly out of reach of first time buyers. Almost all were flats, exactly what hard working families did not want. They wanted houses three bedroomed with a small garden and somewhere safe to park the car. A simple working class aspiration. The property price declines of 2008 to April 2009 partly masked this crisis.
So will things improve?
What policies will be put in place to boost home building?
Will the crisis be mitigated or worsened?
Lib-Con Coalition:The Lib-Con coalition have expressed practically zero intent or interest in boosting house building or developments in general. They both seem in favour of stopping projects, particularly if these are either funded by public money or have public guarantees underpinning them. Examples are cancellation of Heathrow third runway and re-evaluation of Crossrail. Both parties value the countryside and lack of change to this resource, lack of urban sprawl and listen to green views. We think it highly likely that there will be a further drop in house building, particularly in non urban areas. This could be caused by their plans to give more planning control at local level thereby making it easier for local planning offices to stop projects, or neighbouring area's projects. We expect building levels to decline further below the 90,000 a year mark through 2010 and 2011. Remember the Barker Report seems a distant memory now. But this recommended building levels of at least 200,000 homes a year but preferably 250,000 to 300,000 homes a year. 90,000 homes minus demolished properties is pretty close to zero. Meanwhile the population of the UK is forecast to rise from 60 million to 70 million by 2030. Where will the extra 10 million people live we wander? Southern towns such as Kingston and Colchester are expected to see their populations rise by 15% in the next ten years - primarily through immigration from eastern Europe. Where will people live?
Cramped in flats:Already, British people live in about the most cramped accommodation in the whole of Europe. The average floor space is 40% lower than a Dutch home (and the Dutch have less land than the UK). Costs are high. Just when we desperately need incentives to stimulate home building, the new Lib-Con coalition is planning to lump 40% (or even 50%) capital gain tax on developments and private buy-to-let businesses - stupidity of the highest order. This will likely lead to a sell off of buy-to-let property tenants on the streets meanwhile properties lying empty while they are being unsuccessfully sold (through lack of funding from banks and a flooding market with lack of available finance).
Slow Planning Not Helping: Because of the extremely slow planning procedures, timing, effort required and costs, many commercial properties lie empty because change of use is required from for example an office to a place for teaching, or paper shop to fast food shop. Every time there is even the slightest change of use, one needs to apply for planning permission a 6 week process costing £600 if the forms are filled in perfectly (every box not correctly ticked leads to a 4 week delay). No wander commercial investors cannot re-lease properties because they are constantly battling planning and building regulations in a vein attempt to achieve permission - before the interested prospective leaseholder finds another property. This hardly benefits the country economically. It panders to the Nimbys and anyone that does not want to see employment or wealth creation.
Capital Gains Tax Impact:Anyway, the message is with the threat of capital gains tax rises, increasing planning and building regulations burden plus lack of home building, the supply of suitable homes for families will dry up even more. Wealthy elderly people will continue to live in large homes because the cost of moving and paying stamp duty is prohibitive. Families with kids will continue to live in cramped accommodation. Young people will see their rents rise, and will be lucky to be able to afford renting a small studio. Three bedroomed detached houses in the south of England will be for the wealthy only and they will be taxed to death trying to afford to live in them. Once a family moves in, they will stay and build loft conversions, basements and every other way to increase the size of the property rather than pay horrendous stamp duty, capital gains taxes, fees and VAT every time they move home. Worker mobility will decrease. Old people will hog big houses. Families that need houses will stay in flats.
No-one moves anymore: A little know fact is that in the 1960 during the so called building boom or babyboomer housing boom the average person who owned a home moved every 6 years. They were moving up from small houses to larger houses as families grew - quite a natural process. Indigenous Uk people now only move every 18 years they stay three times longer. Very little trading up takes place. Meanwhile people that rent those millions that cannot afford to buy will move every few years. Some will need to move in the next few months if the new government go ahead with their crippling capital gains tax threat. These people have no assets, student debts, and marry when they are 40 (instead of 25 in the 1970s) many women try and have kids when they are 38, some never succeed. It's a sorry tail that leads back to the lack of properties being built. Prices in the areas of increasing population in southern England continue increasing leaving people under 40 out of the market - multiples of five times salary are required with a 20% deposit for a reasonable interest rate. Only the most wealthy younger people can afford to own. A sorry tail when compared with the 1970s and 1980s.
Housing Shortage Tends to Underpin Long Term Market:For the property investor, what it means is that property prices and rental prices will be underpinned by the lack of supply. But there could be a period of crashing house prices from July 2010 to May 2011 if no tapered relief on a 40% or 50% capital gains tax is proposed with start April 2011. We all know there would be a flood of properties put on the market all at the same time. This could precipitate the biggest house price crash in history if panic selling starts. Certainly there will be few buyers in the current economic environment - remember the banks are lending less now than just after the 2008 financial meltdown. If a crash starts, there would then be a serious amount of empty properties hanging around just when they are most needed for families rents would sky-rocket as shortages of rental properties took hold.
Failed Policies and Low Building Rates: In summary, Labour failed in its housing policy - failed it's voters and this has lead to many social problems. The best way to get your own home is to be a single mother or pregnant single mother. Married families go to the bottom of the queue. And it looks most likely the rot will not be reversed by the Lib-Con Coalition either. In the long term (possibly after a short sharp crash triggered by capital gain taxes changes if no tapered relief is available), as long as financing can be accessed, properties prices would likely drift higher as more and more of people's disposable income is spent on housing, along with tax, at the expense of holidays, clothes, meals out and leisure activities. Some of the richest people will probably leave the UK because of the prohibitive tax regime, but numbers will not be enough to impact the middle and lower market under supply, particularly in fast growing urban areas like West London, Cambridge and towns in southern England.
Impact of Tax Changes Would Make Matters Worse: The new government desperately needs to encourage home building and increasing flows of property for private rental - but so far we have seen no evidence that this will be the case. In fact, all the evidence so far points to further shortages - albeit there could be a short flood of properties on the market later this year if the capital gains tax change: 1) starts 6 April 2011 (instead of immediately); coupled with 2) zero tapered tax relief for buy-to-let properties. If this happens, it would be the single most catastrophic event to hit housing in twenty years - and it may be many years before things recovered to normality - meanwhile buy-to-let investors would have lost all confidence in the market and their investments. Rents would have sky-rocketted and there would be many empty properties as no financing was available to sweep them up. We know it would happen - it's just the honest economic and market logic. To think someone who invests in a property and providing a service to tenants for a 10 to 20 year time frame during inflationary times - should pay the same 40% or 50% tax as a day trading speculator - is outrageous, absurd, stupid and ignorant. Everything we would never expect from a Tory administration. How can they do this? Who do they think we are? The Tories never mentioned this in their manifesto. Voters voted from them only three weeks ago. 36% Tory plus 22% Liberal Democrats (plus the 24% Labour) never voted for this absurd tax change that would lead to lower revenue we all know - this idea coming from an ex-economist is mind-blowing! If it happens, it's time to bail out for investing - why should people take 100% of the risk but only get 50% of the reward over a ten year time frame when inflation has risen 50%? - its absurd. We recommend Vince Cable goes back to economics school - he's making a fool of himself and the Lib Dems, and ragging Tories along with it. The person that seem to make sense for the UK and the average individual who works hard is John Redwood.
Instability and Shortage: Overall - whilst there is a massive shortage of good quality accommodation for rental and purchase, there is also a chance tax policy decisions could destabilise the market and regrettably make matters a whole lot worse. The way out of the mess is to:
give tapered relief on capital gains tax (to zero or 10% rate after 5 years) for buy-to-let investors (and other investors for that matter)
don't shoot the market in the foot by having a blanket 40% or 50% as of 5th April 2011 - this would lead to a house price crash for sure - almost everyone would loose out and it could lead to banking meltdown
start encouraging investment in the building of houses in southern England especially
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