Saturday, 9 April 2016

"New-build homes aren't the answer to rising house prices"

Interesting albeit slightly confused article in This Is Money:

New-build homes make property even more unaffordable, according to research from a leading academic shared exclusively with This is Money.

Every 1 per cent increase in the supply of new homes causes the ratio between an individual's mortgage payments and their income to worsen by 9 per cent.

The finding of Dr Alla Koblyakova, of the real estate economics and investment research group at Nottingham Trent University, dispels the assumption that the supply of new-build properties alone helps to stem unsustainable growth in house prices.

"The Government thinks that by increasing the supply of new homes, the overall cost of owning a property will come down," says Dr Koblyakova, from the university's school of architecture, design and the built environment.

"But this research shows us that the mortgage market behaves differently. When new housing comes on to the market, lenders relax their conditions and lend more money. And when consumers are more able to buy a property for a higher price, the price of property doesn’t come down.

"This is a significant finding and is the opposite of what’s generally expected. It’s important, therefore, that future affordability programmes focus not only on the supply of affordable housing, but also on the supply of housing finance."

The study - based on a sample of more than 1,700 mortgage holders between 2010 and 2014 -considered analysis that homes in the UK were categorised as ‘seriously unaffordable’ last year. The house price to income ratio nationally was 4.6 and 8.5 in Greater London. Affordable housing is graded as 3 or less.

"The main issue that property values in the UK go up faster than wages. It’s not possible for the Government to control house prices. But it is possible for politicians to motivate lenders to offer longer mortgage contracts to reduce the size of monthly mortgage payments. By increasing the duration of a mortgage to 30 years, for instance, it’s possible to make owning a property more affordable for those on average incomes."

There's a lot of confusion between cause and effect here but hey, she's noticed that house prices have been increasing faster than wages. Extending mortgage terms would - using her own correct logic - just push up prices even more so it's not clear why she even suggested it. And of course the government can control house prices, they did it for most of the 20th century, albeit indirectly.

But interesting nonetheless.


The Stigler said...

Yeah. The combination of rent controls, council housing and building societies pretty much kept the renters out. There was still a market but it was generally where there was demand for rent. For some people, renting is the right thing, like students.

I worked for a BS for many years and we didn't have buy to let. If you wanted a bridging loan, you'd have to justify it. Sadly, even Nationwide now do Buy to Let mortgages.

Bayard said...

"There was still a market but it was generally where there was demand for rent."

There wasn't much of a market, even for students, and much of what there was was black or grey. It was definitely not a situation to which we would be advised to return.

Building more houses was never the answer to high prices, but the government pretends it is so as to help their friends in the land speculation, sorry, property development industry.

"It’s not possible for the Government to control house prices."

Although the author makes an interesting point about the mortgage markets' reaction to an increase in supply, it's a shame that she should have missed the obvious point that the government could bring down house prices tomorrow by putting up interest rates. OTOH if she thinks that lengthening mortgage terms will do anything but put prices up further, she's either not thinking very hard about the subject, simply peddling a theory, with statistics used to support it or blinded by dogma.

Mark Wadsworth said...

TS, of course renting is appropriate for students, but it would be better if universities built their own student housing.

Mark Wadsworth said...

B, put up interest rates and reintoduce loan to income caps of about 2 or 3.

Lola said...

MW.@ 13:56. You'd also have to cap BtL mortgages.