Government Housing Policy Goes Bananas

At first you wonder what the hell the Coalition are playing at with regards to housing, and why their rhetoric is so different to what is happening on the ground, but gradually it all starts to make sense when you realize that it is essentially being dictated by the major housebuilders.

The Coalition listen to the Housebuilders, partly because they are massive contributors to the Tory’s coffers, but probably (I hope) mainly because they are seen to be experts on housing (rather than anything dodgy, heaven forbid).

But their aims differ from that of the country as a whole: a housebuilder’s aim is, quite rightly, to increase the profit of housebuilers.

The Coalition are very keen to pay lip service to the idea of increasing the number of houses built, as their vote is in danger from key constituents of their base, as the baby-boomer property owners who benefited from the massive property boom are starting to reaslise that their little Tobys, Tobias and Tobs’s are not moving into their own homes.

This is, as we all know, as they are unable to obtain mortgage finance – and thus are cluttering up baby-boomer housing despite the fact that they are sometimes pushing 35. Banks won’t lend to high LTVs as they realize that there is a significant danger of house prices dropping significantly, and this would decimate their already precarious loan books, cause LIBOR to shoot through the roof, interbank lending would cease and banks would seize up and we’d have GFC part II – Director’s Cut, bank runs etc.

Most people have a basic grasp of economics and think: high prices = shortage of homes, ergo, more homes = lower prices = Tobias moving out at last.

Of course, this is ignores the very basic reality that every single piece of empirical evidence suggests that high house prices have nothing to do with a shortgage of homes, and in fact supply outstripped demand/population growth (yes, including immigration) for the whole of the period 1997-2008 by several percent a year. But let’s ignore that as no one ever believes it – because it is repeated constantly by everyone that there are not enough houses, the proof being HOUSE PRICES ARE TOO HIGH! THERE MUST BE A SHORTAGE! – obviously nothing to do with the fact that mortgage lending increased by 500% during this period, it MUST BE BECAUSE OF A SHORTAGE not our fractional reserve banking system ploughing billions into pumping up hard asset classes etc etc no one is listening…

But I digress. The Coalition aim to increase house building somehow, or at least be seen to be to satiate their core vote – but the housebuilders don’t want to, but want to pretend to as it’s good PR. De Beers don’t flood the market with diamonds or they would lose billions – prices would fall. Same with Housebuilders. They realize the market is precarious – only foreign money coming into London, combined with massive bank forbearance and historically low interest rates, are keeping things alive – prices are dictated at the margins, so if you can maintain low transaction numbers at a decent level you can pretend price stability is being maintained.

Actually the government probably do know what needs to happen to normalize the market (they are probably not that stupid) using simple supply-demand principles - but it would be completely unacceptable to them of course – the solution would be to put interest rates up to historic norms, ie 5%, watch 2 million people lose their homes with vast, enormous misery and 6 months of absolute turmoil and Armageddon and then a return to normal growth. The longer that is put off, the worse it would be – but they are choosing (and who can blame them, really?) years of, they hope, managed price decline and debt stagnation. Is this better? Maybe it is. Two decades of gradual decline versus six months of devastation and ten years of growth? Which would you choose?

So what to tell government to do, if you’re a housebuilder? After all, they will do what you tell them to do, you ARE the expert. Why, reform Section 106s! Now, Section 106 agreements are a fairly stupid but almost workable solution where a housebuilder building, say, 100 flats has to set aside a certain number for affordable housing, as the council doesn’t want to build these themselves – they have all their money tied up in much more important things, like final salary schemes for local government workers etc - so let's make housebuilders do it all, after all they have massive yachts and you should see the cost of that guys watch I met from...etc etc

Housebuilders still manage to make massive profits despite doing this, but if they didn’t have to then they could make even MORE profits! So seeing as they're asking, let’s get the government to get rid of 106s, which they are doing, and replace them with a Community Infrastructure Levy (CIL), which they are doing, and which means that housebuilders no longer have to build affordable homes and shoulder the cost entirely themselves – but the cost of this type of similar, social development is spread evenly among the whole community, among all developers – ie people who are bolting on extensions, basement dig outs etc.

Result: no small scale development as it becomes vastly more costly more for small scale players = housebuilding increasingly concentrated in the hands of developers = no increase in houses being built but bigger profits for the housebuilders. Winning!

Have you ever heard of the CIL? No? I hadn’t until recently, and I’m a surveyor! And yet, for a basement dig out a client wants to do I was told today the new tax is £50,000. Result = no basement dig out.

Well done government.