Borrow, Build, Sell. These are the characteristics of the UK housing market. A business model predicated on those selling and buying homes accessing cheap debt finance. A model which helped to fuel large increases in UK house prices, and led to one of the deepest and most protracted recessions in recent history.
It therefore came as a surprise that the government’s trumpeted ‘Help to Buy’ scheme is aimed precisely at supporting this discredited model, when we are still living with the repercussions of a property induced crash. By assisting aspiring home owners to take on reverse mortgage debt that they may not be able to afford to repay, and providing government financial guarantees and equity into schemes, Help to Buy runs the risk of fuelling further increases in house prices, and provides all of the same ingredients for another property induced boom bust cycle.
There are all sorts of valid reasons why banks aren’t lending to property development at the moment. These include overextended balance sheets, the need for recapitalisation, and attempting to reduce liabilities on a list of ‘toxic’ property assets where the value of the loan is in substantial excess of the asset value.
The housing market is well overdue some form of correction in order for house prices to stabilise or reduce to be more in line with the average person’s ability to make monthly payments on their current income levels. It is only due to the continued excess of demand over supply that such a correction hasn’t happened.
A major priority of an incoming Labour government therefore has to be to address the growing chronic shortage in the number of homes available for people to rent or buy, without relying on bank lending, but, unlike the Coalition, whilst avoiding stimulating exactly the same conditions which led to the crisis in the first place.
Crises such as these also present a good time for the Labour Party to reconsider the nature of specific markets and industries and the degree to which they promote opportunity for the many, not just the few. The nature of the UK property market is arguably one of the biggest causes of inequality in our society, with those with the means having access to high quality housing, often that they own, and those who don’t often living in insecure rented accommodation of a poor standard with little of their own assets.
In addressing housing as a key political priority in 2015, the Labour Party should therefore also consider the nature of the property industry, and not only the supply of housing, but also the quality of this housing, its tenure, and accessibility to the majority of the population.
It is not often that significant opportunities arise to reshape industries, but this is one, and one that the Labour Party should grasp firmly with both hands. The demise of short term cheap credit has created a financing environment where much longer term equity investment has become the only game in town.
With a focus on long term value creation, as opposed to the short termism which characterises the property industry, long term equity investment has the opportunity to stimulate a change in the business model in this industry, into one which is focused on investing in communities, rather than planning, designing, building, and selling homes as quickly and cheaply as possible.
The UK is one of the only countries in Western Europe where people would prefer to live in an old house rather than a new one. A pretty damming indictment of the quality of new build housing stock, if ever there was one.
So what does long term investment offer over the short term version? It provides an opportunity to properly plan and design new or redevelopment projects that will help to invest in and support a place and its community, rather than just providing new homes. This means development which is more likely to be accepted by the existing or neighbouring communities as it will contribute to the range of services and amenities on offer, rather than create additional demands on existing ones.
Better designed development can also be more sustainable, helping to reduce the impact on the environment for future generations, and helping to combat climate change. Long term investment also provides an opportunity to create new markets in providing high quality, well managed and maintained, purpose built housing for rent.
Investing in our communities is key to creating the building blocks for a more equal society, and for an economic recovery. Creating the right climate for investment in new housing to address the fundamental shortage of supply is vital for the Labour Party to help stimulate economic growth and provide the foundations for our country to be competitive well into the future.
Focusing in on creating the right policy, regulatory, and financial incentives for long term investment in new high quality sustainable housing is a way in which the Labour Party can help stimulate this industry in line with Labour values, and avoid the pitfalls of recreating another property induced boom and bust cycle, as this government seem to prefer.
Paula Hirst is Director of Urban Development and Regeneration at the accountancy firm Mazars, but writes here in a personal capacity.