Will it happen?
David RobinsonHardly a week goes by without a set of average house prices being published, each one sparking more speculation about when the bubble will burst. House-price watching has become a national obsession as investors, small and large, try to second-guess the market. But, as the recession of the early 1990s showed, that's a dangerous sport.
However, if there is a collapse this year, one thing is certain: the experience will be different from that of the 1990s.
Between 1990 and 1998, 454,280 households, containing 1.3 million adults and children, had their homes repossessed; at the peak of the recession in 1991, 1453 households had homes reclaimed each week.
But in the 1990s, the housing market had much further to fall, having been artificially inflated in the preceding months and years.
Today, by contrast, price rises are driven by an undersupply of housing, a situation unlikely to change in the short to medium term. So a recession this year could be a temporary blip … or it might not.
Home buyers are now far more reliant on mortgage finance than they were 10 years ago and indebtedness has reached record levels. Homeownership has become more common among low-income groups, so a recession could have catastrophic consequences for a large number of households. Buy-to-let investors would suffer a major financial loss.
Meanwhile, the social rented sector is, arguably, even less equipped to handle a downturn. Long-term policies have helped to place homewnership on a pedestal and this has taken its toll on the sector, which has shrunk in size and is less capable of acting as a safety net for struggling households.
And the consequences of a recession would vary across the country. House price rises might prove more sustainable in London and the South-east, where the recent dramatic increases have been driven by excess demand. Yet the social impact of a collapse may be felt most strongly there, where borrowers are most stretched and the social rented sector is relatively small.
In the North, the ratio of income to house price is far lower but there are pockets of high demand. It also appears that price rises in more vulnerable parts of the owner-occupied sector, such as some market renewal areas, are the result of speculative activity, which could prove more volatile.
If the bubble bursts, discrete policy interventions will be needed to tackle these regional differences.
The council
David ThompsonAlthough they're not using the words "housing market collapse", councils are incorporating challenging scenarios in their corporate plans and risk assessments.
Costed scenarios for future housing expenditure, demand and supply should already be part of plans for the housing revenue account, arm's-length management, transfer and the private finance initiative.
If the market crashes, we'll have to take a hard look at the assumptions underpinning the Communities Plan. The proposal to build more homes for affordable ownership than rented housing in the growth areas would need to be reviewed.
However, demand would remain high in the South-east, softening the effect of any fall, so the current proposals for affordable ownership would be slowed down, rather than stopped completely.
In low-demand areas, a collapse of prices in the owner-occupied sector would raise questions about the viability of many neighbourhoods. As a result, plans for market renewal would have to absorb even more clearance.
A collapse of the housing market would also affect older houses in need of repair and improvement. Owner-occupiers of homes built before 1939 might not be able to extract the equity needed to finance the necessary improvements. Much depends on the continuing confidence of owners and lending institutions.
A crash would also have implications for social landlords. Waiting lists would lengthen as more people chose to rent instead of buying and overcrowded households would be forced to stay together for longer.
Landlords considering funding improvements for the decent homes standard by building homes for sale would need to reconsider their income assumptions. In addition, existing proposals to clear or demolish blocks of houses where the decision was marginal may have to be revised in the light of increasing demand for rented homes.
A crash could be catastrophic for a large number of low-income households
David Robinson, Sheffield Hallam University
The housing association
Deborah ShackletonMost of my housing association's 40,000 homes are in the North, so we view potential house price collapse with mixed feelings.
In areas where significant clearance is necessary, rising prices make buying properties for clearance more expensive, so in the short term, a dose of deflation could be helpful. However, this might undermine the nascent revival of owner-occupation in the market renewal pathfinder areas, where new-build schemes are part of a strategy to improve diversity of tenure, design and sustainability.
Elsewhere, panic selling in the buy-to-let market could increase demand for rented homes, while falling prices may deter investment in shared ownership. Inevitably, a falling market would affect sales on developments already under construction.
Prudent initial assumptions will help social landlords cope with falls in value, but the commercial property companies some of us have set up to reduce reliance on government grants will find it harder to succeed.
Because of the strong underlying economy, we don't anticipate significant market collapse and, in the long term, we are confident of continued demand for quality rented homes.
The NHF
Sharon HedgesIf prices did crash, I doubt we would see a government-inspired housing market rescue package like the one launched in the early 1990s because interest rates will stay relatively low and fewer people will have their homes repossessed.
However, some buyers may pick up bargains, so diversity of tenure, which has been talked about but has yet to get off the ground, could come into its own.
A crash could be problematic for registered social landlords that have built homes for sale. Shared-ownership housing would become more difficult to sell, too.
Associations would need to raise their marketing game very quickly. On the plus side, greater affordability would take the strain off key workers and housing waiting lists in the South. I doubt sub-market-rent schemes would be affected that much.
A housing crash would probably halt interest rate rises as consumers reined back. This would be helpful for RSL business plans.
And I'd be interested to see what effect a changed market would have on the government's deliberations over the Barker Report on housing supply, which recommended increasing building.
The renewal expert
Chris BrownIn the 1990s, urban regeneration projects helped to support the economy and provide hope. We had a grant system and gap funding that was responsive to the private sector.
Now we have regional development agencies whose lead department, the DTI, has responsibility for, but little interest in, urban regeneration. The agencies' boards reflect the DTI's economic priorities and don't like gap funding.
If the housing market crashes, housing availability (along with house price rises and key-worker shortages) will cease to be a major political issue and homeowners will turn on the government that pushed them into negative equity. This core of middle England will side with the environmentalists seeking to protect the green fields of the South-east, and the urban regenerators fighting for deprived communities.
The growth areas policy and stamp duty rises will look foolish. These will need to be reversed and deprived communities will become the government's priority again.
The lender
Piers WilliamsonFrom the outside, the social housing market appears counter-cyclical. It provides housing to vulnerable groups and tenants who do not qualify for conventional rented or owned housing, so demand for social housing should increase as the the conventional market deteriorates.
So long as RSLs’ cashflow stays strong, prudent lenders won’t hit the alarm button
Piers Williamson, Housing Finance Corporation
However, this view masks vital sub-sector and geographic trends. Areas such as sub-market rental, non-grant-funded shared ownership and development for sale are all vulnerable to a crash.
A major failure in any of these areas is likely to lead to an orchestrated rescue.
Lenders that have relied on the existing use value of social housing valuations – which assume all the properties will continue to be let as social housing – are less likely to see a decrease in the value of their collateral.
However, where more aggressive assumptions (market value or market value subject to tenancies) have been used to value homes in regional hotspots that would see the most marked correction; security margins will inevitably be affected. My guess is that, so long as cashflow remains strong – and properly managed registered social landlords have intrinsically strong cashflows – most prudent lenders will not hit the alarm button.
Recent soundings from lenders around the fringe of the RSL sector suggest that they recognise the intrinsic strength of the sector.
The estate agent
Liam BaileyThe response to a housing market collapse would partly depend on the event that triggered it.
A crash caused by significant interest rate increases will have different effects from one due to a general economic downturn.
If we assume it was a rapid rise in interest rates, financing mortgage debt would become more expensive, reducing affordability. In this scenario, even after a crash, property would be no more affordable to first-time buyers than it is now. The propensity for households to buy or rent would relate to the likelihood of future rate increases. The tendency to sell would probably decrease, however, as vendors decided to sit and wait.
The fact remains that the UK doesn't have enough homes. The reduced supply of property for sale together with higher demand for rented property would cause upward pressure on house values in the medium term.
Rental levels would undoubtedly rise as households were effectively kept out of the owner-occupier market for longer.
The developer
Mary LynchWe think a crash similar to the one in the late 1990s is unlikely. However, we are prepared for a steadying of the market, which has already been detected in London and the South-east.
A dramatic reduction in house prices would mean fewer homes were built. This is because developers with land banks and options would defer building for sale until the market improved. Also, regeneration schemes that rely on the intrinsic value in the land may not be able to progress without social housing grant.
At the moment, many social homes are funded without grant, using section 106 planning gain agreements.
As there is only a limited amount of grant, the development of new social homes would slow significantly.
At most risk would be developers with large land holdings in areas where prices had reduced substantially. This would especially affect those whose businesses were solely focused on building homes for sale.
On the other hand, the government has pledged to invest significant funds in social housebuilding and regeneration. Developers like Lovell whose businesses include building houses for sale, working for housing associations and taking on large-scale area regeneration would be able to withstand this kind of market movement.
What do you think?
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