Housing policy: what can it hope to achieve?
Published: 7 September 2011 | Author: Bernard Clarke
Published at the end of last month, the recent Housing Market Analysis report commissioned by the National Housing Federation (NHF), hit the headlines with significant impact. One key statistic, in particular – a claim that home-ownership in England would decline to 63.8% within a decade – attracted considerable media coverage.
In our view, publication of the NHF report, commissioned from Oxford Economics, has helped spark a useful and timely debate about trends in housing and tenure – with the government intending to publish its housing strategy later this autumn, and the Labour Party having launched its own review of policy in this area. A range of interesting questions sparked by the report include:
- Is home-ownership set to fall for almost two decades, as the NHF report predicts? The proportion of UK households in owner-occupation has already been in decline since 2003, but the NHF is expecting this trend to continue for another 10 years. So, is home-ownership really set on a course of long-term, linear decline? Or will the proportion of owner-occupiers begin to rise again as conditions improve in housing and mortgage markets?
- Has the recent decline in home-ownership been by accident or design? Are we seeing a long-term shift in tenure preference away from home-ownership, or are there other reasons for the fall in owner-occupation against people’s wishes? If the latter, will we have to accept – and then attempt to resolve – a long-term conflict between aspirations to home-ownership and the capacity of people to fulfil them?
- What are the implications for government policy? Are the challenges for the government about the choice or balance of tenure, or are they driven more fundamentally by a long-term imbalance of housing provision, irrespective of tenure?
- And, finally, what are the implications for lenders? Will they have access to adequate funding, be able to provide the right types of products, and operate within the right kind of regulatory framework to help consumers to fulfil their aspirations and the government to achieve its policy objectives?
Since 1975, we have conducted our own surveys on aspirations to home-ownership, both in the short-term (within two years) and over a longer period (within a decade). Those surveys have shown consistently that around 80% of people continue to aspire to be owner-occupiers within 10 years.
Significantly, recent problems in housing and mortgage markets have failed to dampen enthusiasm for home-ownership in the long term. Last year, 85% of respondents to our survey wanted to be owner-occupiers in 10 years’ time – the highest proportion we have ever recorded. And our findings were echoed in a report on public attitudes to housing in England, published two months ago by the Department for Communities and Local Government (DCLG).
The DCLG report found that 86% would buy their home if they had a free choice. Only 14% would prefer to rent, suggesting that the current resurgence of the private rented sector and the decline in home-ownership do not reflect fundamental changes in attitudes or aspirations.
But despite the continuing enthusiasm for home-ownership emerging from the surveys, the NHF report identifies a significant decline in the proportion of people in owner-occupation in recent years, a finding also reflected in the English Housing Survey.
There are a number of reasons for this. The affordability of home-ownership relative to renting is one factor. The relative decline in home-ownership from around 2003 was preceded by a five-year period in which house prices almost doubled. And falling prices since 2007 have failed to reverse this trend. We attribute this in part to a new affordability problem created by the size of deposit required for mortgages, particularly for first-time buyers.
We have estimated that the effect of larger deposits – following a lengthy period in which house prices rose much more rapidly than incomes – has prevented at least 800,000 would-be first-time buyers from entering the market since 2007.
But affordability pressures do not provide a complete explanation for the relative decline of home-ownership. Demographic trends, coupled with the effects of a long-term shortage of housing, have contributed significantly to a decline in the proportion of the population capable of realising aspirations to home-ownership. For more than a decade, high levels of net inward migration into the UK have contributed to a relative increase in the number of people renting.
Trends in home-ownership
In the long term, it is far from clear how we will resolve the conflict between persistent high levels of aspiration to home-ownership and the recent decline in the rate of owner-occupation. Over time, improvements in housing affordability, the wider economy, consumer confidence and conditions in mortgage funding markets may enable more people to fulfil their aspirations, and may help bring about a relative increase in owner-occupation once more.
But, given that the rate of UK home-ownership has never exceeded 71%, it is difficult to see how realistically the aspirations of 80% or 85% of people to be owner-occupiers can ever be fulfilled. Crucial in determining the outcome, however, will be demographic trends, property construction rates, the government’s approach to housing policy and the impact of regulatory reform of the mortgage market.
Implications for housing policy
As the government prepares to publish its strategy later this autumn, ministers will no doubt be considering what can be done to promote more stable and sustainable provision of housing, in owner-occupation and other tenures. What is really needed is a balanced provision of homes, sufficient to meet demand and in a range of tenures, providing appropriate choices for consumers and options for those for whom home-ownership will not be achievable.
The housing minister, Grant Shapps, has spoken of delivering an "age of aspiration" and knows that, for many people, this includes the desire to be a home-owner in the long term. At the same time, the government will want owner-occupation to be sustainable for individual borrowers, and to avoid a repetition of the cyclical fluctuations in the housing market like those we have seen in the last 15 years.
One of the key barriers to a more stable housing market – and to the provision of homes in a balance of tenures suited to the needs of the population of the UK – has been the long-term failure to provide an adequate supply of housing. For many years, house-building has failed to meet government targets, or to keep pace with the needs created by the formation of UK households.
A failure to deliver an adequate supply of new housing is a problem that has defeated successive post-war policy-makers. It is a long-running issue, which pre-dates – but has also had a significant bearing on – current problems in the housing market. The failure to build enough homes in post-war Britain has constrained access to social housing, helped to squeeze out aspiring buyers (as our surveys show, and the housing minister acknowledges), and left the private rented sector struggling to fill the gap.
There are a number of reasons for this, including constraints created by planning policy, a shortage of funding for housing, and market failings. Currently, the government is focusing on planning constraints, in particular, and has begun to consult on proposals to simplify regulations and remove barriers to development.
As it deliberates on housing policy, the government must not overlook the impact of the next phase of the mortgage market review currently being undertaken by the Financial Services Authority. Our research has shown that an approach to regulatory reform that puts the highest priority on consumer protection risks excluding from home-ownership large swathes of consumers for whom owner-occupation is both sustainable and the tenure of choice.
We support policy measures that will facilitate sustainable home-ownership. We would like to see as many people as possible achieve their long-term aspirations, as long as their commitments are sustainable. But despite our surveys showing that at least 80% of the population aspire to owner-occupation we have no views on an overall "target" for levels of home-ownership.
Lenders fund housing in all tenures. We believe the fundamental priority should be to provide enough housing in the UK, in an appropriate mix of tenures to meet the needs of the population. The goal should be to provide adequate choice for people in different circumstances, and at different stages of life – ensuring, in particular, that there is a good range of options for those for whom home-ownership may never be a realistic choice.
One implication of this for policy-makers may be to consider ways of encouraging greater flexibility in housing choices and options, making it easier for people to move between tenures as their circumstances and lifestyles change.
Lenders themselves remain constrained by a continuing shortage of mortgage funding, by regulatory pressures and continuing uncertainty, and by an unhelpful economic backdrop. They are not in a position to produce a ‘silver bullet’ solution to the problems of mortgage and housing markets but stand ready to work with the government on policy development and implementation – this autumn and beyond. In particular, lenders would support measures to:
- improve the supply of housing;
- improve the availability of funding, so that they can lend responsibly to borrowers who aspire to, and are able to sustain, home-ownership, as well as helping to finance the social and private rented sectors; and
- implement regulatory reforms that are proportionate, and strike the right balance between protecting consumers and enabling them to fulfil their aspirations.