Osborne's axe could hit house prices
By
MoneyWeek Editor
John Stepek Oct 21, 2010
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So now we know. The 'cuts' have been spelled out.
The papers are full of pics of a blood-drenched, axe-wielding George Osborne. You can see why politicians prefer to spend rather than save when these are the headlines they get. I've yet to see news of a new government spending programme illustrated with a caricature of a drunken chancellor relieving himself against a convenient wall.
But when you look at what taxpayers' money has actually been spent on over the years, this would be a far more accurate depiction.
Just take a look at one of the 'victims' of Osborne's axe - the property sector...
Some bad news for the construction industry
My colleague David Stevenson has already put together an overview of where the biggest cuts were made in the Spending Review: What the Chancellor's spending 'cuts' mean for you. So I'd just like to focus on one area that might suffer as a result of 'the cuts' - house prices.
Sure, the threat of higher unemployment might hit prices. But more specifically, cuts to the affordable housing budget might be about to pull a prop out from under the housing market.
The government wants 150,000 new 'affordable' homes to be built over the next four years through the Homes and Communities Agency (HCA - the affordable housing quango). But even if that can be achieved, it's a big drop from the previous target. That was for 155,000 homes to be built over the three years to March 2011.
And the HCA's budget has been slashed too, from £8.4bn for the previous three years to £4.4bn for the next four. The shortfall will be made up by charging new social housing tenants more to rent. So they'll pay 80% of market rent, rather than 50%.
That's bad news for the construction industry. Why? Because with the collapse of house sales in recent years, building activity has tumbled too. And one of the things that's kept it going has been government funding. According to Capital Economics, "affordable housing completions supported by HCA money in the 2009/10 fiscal year were around 47% of all housing completions over the period." In other words, government money contributed to the construction of almost half of the new homes built in Britain last year.
No wonder the share prices of several house builders took a bit of a tumble yesterday.
But wait a minute, I hear you say. If they're building fewer houses, doesn't that mean house prices will rise?
How shared equity schemes have been helping prop up the market
You'd think so. But oddly enough, affordable housing might also have been a key factor in propping up both property sales and prices in recent years. You may have heard of 'shared equity' schemes. This is where a first-time buyer purchases a share of a property - say 70% - and the other 30% remains the property of the developer and the government. There are many such schemes, but this is how it worked under the government-backed HomeBuy Direct scheme, which ended last month.
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The other schemes are all variations on the theme. The main point is that a first-time buyer can buy a stake in a home rather than the whole thing. So in the example above they can get a £200,000 home by paying £140,000.
You can see what's happened here. The buyer won't be haggling hard, if at all. They're just glad to have 'a foot on the ladder'. So the overall price paid will be whatever the builder asks for. And as far as house prices go, it looks as though a £200,000 home has been sold, even if it only cost the actual buyer £140,000 upfront.
Indeed, John Messenger, RBS housebuilding analyst told the FT earlier this week that, "the shared equity and HomeBuy Direct (government-financed) housing schemes have been the most critical things holding up the housing market."
But if you get less money going into the affordable property sector, then there will be fewer of these schemes around. And depending on how significant a prop they've been to the housing market, that'll put more pressure on prices to fall.
Some will complain that this puts property even further out of the reach of the poor beleaguered first-time buyer. But I'd argue that it's a sign of how dysfunctional our property market has become that such schemes were seen as a good idea in the first place. The description 'affordable' suggests these loans are aimed at those on low incomes, but the HomeBuy Direct scheme was open to households on incomes of up to £60,000. We're not talking people on the breadline here, or the margins of society.
Could the cuts push house prices back to affordable levels?
Shared equity and 'key worker' schemes might have been well intentioned when they were introduced. But they never addressed the underlying problem of why people were being 'priced out' of the housing market. If it was all about physical supply and demand, then the focus should have been on reforming planning laws so that enough houses could be built to drive prices down.
If, as we believe, the real problem was overly easy credit and low Bank of England rates, then the government should have focused on why its macroeconomic policies were making shelter unaffordable for even the relatively well-off among the population.
Instead, they took the easy option of tinkering at the edges. And now the concept of 'shared equity' has become just another hurdle getting in the way of property prices falling back to levels that would allow the market to clear.
Certainly the market remains frozen. The most recent data from the Council of Mortgage Lenders showed that the housing market has just had its worst September in a decade in terms of actual lending. Gross lending fell to £12bn in September. That was even lower than in August, which is traditionally a bad month for the market.
The good news is that as pressure mounts for sellers to cut prices, Osborne's cuts might just give the market the nudge it needs to fall back to genuinely affordable levels.
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