A bloated industry bleats for relief
Thursday 24 August 1995
The latest dispatches from the war zone of Arcadia Avenue certainly offered no relief to anyone expecting an immediate upturn in the housing market. Turnover this summer is 10 per cent down on a year ago. Net advances from building societies in July were sharply down on their level last summer and mortgage lending from banks was at its lowest for nearly three years.
There is no shortage of reasons for the gloom currently enveloping the housing market. The increase in unemployment in July, while small, signals no let-up in the sense of insecurity that pervades the labour market. When jobs are at risk, people shy away from making large financial commitments.
The continuing tussle between Kenneth Clarke and Eddie George over interest rates has also undermined confidence. A lot of people remember all too well the doubling in interest rates to 15 per cent in less than 18 months at the end of the 1980s. There are still a million households whose properties are worth less than their mortgages because of the ensuing collapse in house prices. Once bitten, twice shy.
Add the further reduction this year in income tax relief on mortgage interest payments, and the depressed state of the market becomes easier to understand. No wonder the industry that lives by it is lobbying for tax breaks in the November budget.
So far, Mr Clarke has stoutly resisting these demands for special treatment. The Chancellor should continue to do so. Additional subsidies would add fuel to a recovery in house prices that is only a matter of time.
As the chart shows, houses are as affordable as they have been at any time in the past 25 years. Crucially, they are as affordable as they were in the late 1960s before investing in housing came to be seen as a surefire way to mint money.
According to the Treasury, real personal disposable income, which grew by less than 1 per cent in 1994, will be rising by 2 per cent in 1996. Add in pounds 5bn tax cuts and that could take it to 3 per cent.
Most forecasters expect the economy to pick up speed again in 1996 after the present hiatus of below-trend growth. The average projection for next year in the Treasury's latest compilation of forecasts shows the economy growing at just under 3 per cent. Provided this happens, employment growth should also pick up again, restoring some confidence to the labour market.
Perhaps most importantly, the City's perception that interest rates have peaked should start to percolate through to the public. The turnaround in expectations has been dramatic. At the beginning of the year, the markets were expecting base rates to rise to 9 per cent by December. Now they are expecting rates to be under 7 per cent.
Before long the combination of low interest rates and low house prices will resuscitate the housing market. As with all asset markets, the present fall in prices will overshoot, and people will conclude that this is the time to buy or trade up.
Amid all the gloom it is easy to lose sight of some of the fundamentals that still support the housing market. Most important of all are the planning controls and green-belt policies that restrict supply. It is no accident that, according to a recent Bank of England study, the UK and Japan saw the fastest average rates of growth in real house prices in the 1970s and 1980s. Both countries have highly restrictive policies on land use.
Even after the shock of the clampdown on mortgage tax relief, homeowners continue to enjoy important tax privileges. Most important is exemption from capital gains tax on your home. With private rented property not enjoying similar privileges, renting can never be as attractive in the long term as owner-occupation.
With divorces at an all-time high, the forces leading to increased formation of households remain strong. The splintering of household size is likely to compensate in some measure for the fall-off in the number of twentysomethings which so bolstered the market in the 1980s.
The big surprise then would be if the market continued to decline for much longer. In its latest forecast of the economy, the National Institute of Economic and Social Research says "we have reached the bottom of the house price cycle" and predicts a rise of 3 per cent in 1996. As with all asset markets, the rises may be sharper than that once confidence returns.
Yet if the housing market is not set for "enduring malaise", the same cannot be said of the industry that grew to service it in the 1980s. Annual turnover in the five years ending 1988 averaged 1.9 million transactions, peaking at 2.1 million in 1988.
With turnover last year running at 1.3 million, no one is expecting a return to such high rates of turnover. A bloated industry of agents, lenders and advisers that expanded with the housing market in the 1980s must contract. This is what lies behind the current rationalisation of the building society movement.
The housing market is not chronically sick. It is the industry built around the housing market that is suffering the real malaise. It claims to speak for homeowners when it offers its diagnosis. In reality, this physician speaks for itself - and must heal itself.
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