Housing boom: what boom?

There are two key factors behind the latest decline; the first is simply that there are fewer properties coming onto the market. Potential sellers are holding back because there is a limited choice of properties that they can move into. This in turn has pushed up the prices of those properties that do come onto the market, which brings us back full circle to deterring potential buyers from selling and moving up the housing ladder because of the increased cost. This could be alleviated by a better supply of new build houses, something that is slowly improving as house builders boost output. It has to be said though, that while the big builders are increasing the number of houses they build, the total is still a mile away from what is perceived as the minimum requirement to meet demand. That said, private house building has never satisfied demand, and the current chasm has been created by an almost complete absence of building by local authorities. And room to reverse this is severely constrained because local authorities are being heavily squeezed by spending cuts.

The second factor depressing turnover will also be hard to address. The mortgage market review carried out by the Financial Conduct Authority came into force in April, and is designed to prevent borrowers getting out of their depth. They now have to prove that they have the income to withstand a rise in interest rates up to as much as 7 per cent, while domestic bills and other liabilities have now been included when assessing a borrower’s ability to pay. A shorter-term problem also arises because lenders have had to train staff to carry out lengthier advisory meetings with potential mortgagees; thus reducing the number of applications that can be processed. More checks and balances by lenders will certainly reduce the number of less robust mortgage approvals, but there is no evidence that these are out of control. In fact, mortgage approvals are currently 40 per cent less than they were in 2002. What’s more, warnings about over leveraging also lack credibility, given that mortgages with a loan-to-value ratio of over 90 per cent make up just 2.4 per cent of all mortgages.

There are other pressures too. After the mountain of bad debt and negative equity generated in the last downturn, the Bank of England is increasing stress tests on the top eight lenders to make them more capable of withstanding a drop in house prices of as much as a 35 per cent. This is one way to try and mitigate the effects of a housing market running away, without using the sledgehammer approach of increasing interest rates. Other ways to control upward pressure on prices would be to reduce potential buyer eligibility through loan-to-income ratios. But while this would undoubtedly improve the quality of mortgages granted, it would also mean fewer transactions, and that would do nothing to reduce the huge number of people consigned, not through choice, to the rental market

Bank of England governor Mark Carney has tried to bluff some sense into the market by promising to take action if house prices look to be out of control, but what does that mean? Given the huge variance from place to place, it would be impossible to introduce selective measures that affect one overheating borough and not another, where the housing market is still struggling to get back on its feet.

However, loan-to-income ratios do remain a worry, as these are at record highs. So, introducing more stringent ratios on the amount that borrowers can raise against their salaries could help to curb successful applications, and this could undermine house price inflation. But even here, the effects would be limited in some areas. In London for example, a third of all sales are cash transactions.

Ensuring that everyone has the means to buy their own home is a pipe dream that has never been realised. But the psychology of home ownership should not be underrated. Mark Carney has warned about the housing recovery upsetting the economic recovery when in fact a healthier housing market is a key pillar of that economic recovery. And as consumer expenditure in all forms comprises two-thirds of GDP, the government will be rightly concerned to keep consumers happy, even if it could mean stamping on the brakes some time in the future.

But is it necessary?

According to the Office for National Statistics, average house prices on all dwellings performed between December 2007 and December 2013 as follows: