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OPINION

Unsafe as houses

Unsafe as houses
November 22, 2016
Unsafe as houses

Okay, avoiding housebuilders is as much a contention as a command, but it's still worth examining. The underlying reason is simple - the average UK private investor has more than enough wealth exposed to the UK's distorted housing market without raising it through equity investments. That exposure arrives via the little plot of land that he or she is likely to own.

This housing wealth sets the British apart. It's the reason why the average Briton is almost twice as wealthy as the average German. That sounds debatable since Europe's economic powerhouse generates output of about $47,000 per head compared with $41,500 for the UK. Yet stats for household wealth in relation to disposable income show it to be true. According to the OECD, a club of rich countries, the ratio is wealth of 8.3 times net income for the average Henry and Hattie compared with just 4.5 times for the corresponding Heinrich and Hedda - quite a difference.

The concern is that housing wealth faces two looming threats. First will be the Brexit effect, and the rule of thumb is that the harder the Brexit - the more that the UK distances itself from its current trading relations with the EU - the more that property prices will be eroded. Second is the focus on the disparity in wealth both within developed nations and between generations, and the damage this does.

This link between housing wealth and inequality is especially topical because earlier this month the Redfern Review into the decline in rates of home ownership in the UK suggested that "the shrinking opportunity for young people on ordinary incomes to own a home is at the centre of the growing gulf between housing 'haves' and 'have-nots'. Housing is at the heart of widening wealth inequality".

The review, commissioned by the Labour party and chaired by Pete Redfern, the chief executive of Taylor Wimpey (TW.), does not assume that home ownership is good per se. That would be debatable anyway. Arguably, for every £-worth of benefit that a high level of home ownership brings, it produces an equal amount of distortion. Again, contrast the UK and Germany.

With its massive trade surplus, Germany's economy is widely envied, but a structure built on rectitude and lowish levels of home ownership has limitations - chiefly, chronically weak consumer spending that restrains domestic growth. By contrast, the UK's higher rate of home ownership provides the collateral for borrowing that can drive feel-good consumer spending and related demand-led growth. Yet it's unstable, prone to inflation, acutely sensitive to interest rates and dependent on the kindness of strangers to fund the trade gap.

But the issue centres on the declining affordability of homes. Yet that can only change if more homes are built. The Redfern Review is quite clear about that: "All long-term sustainable solutions to high house prices depend on increasing long-term supply," it says.

That supply is failing to keep pace with demand is clear. Data from the Office for National Statistics show that, so far this century, housing completions lag household formation by 650,000 homes. Meanwhile, household formation is running at over 200,000 homes a year and forecast to stay above that level until 2033. On current levels of building, the annual deficit will run at around 100,000 homes a year.

Superficially, that's great for those with housing wealth. But it may not work out like that because the distortions in the market won't be allowed to continue. Sure, ensuring that supply meets demand is easier said than done, but throughout the 1970s new builds averaged more than 250,000 a year. The Redfern Review also says - optimistically - that "the broader public accept the need for increased supply". Well, yes, until the development is in my back yard. Nor does the review say anything about the complicity of housebuilders in restraining supply. Almost 30 years ago the chief executive of a listed housebuilder told Bearbull that his company - like all the others - deliberately underbuilt so as to enhance the value of its land bank. Nothing much has changed.

Yet substantially increasing supply won't necessarily disadvantage housebuilders. It depends on the extent to which they create value by making capital gains on the rising value of a scarce resource (their land bank) or by generating trading profits from building homes. Too much emphasis remains on the former, proof of which is that land costs typically represent three-quarters of the price of a house.

As that changes - assuming it does - the collateral hit to homeowners could be nasty. Whether the equity investors among them offset the risk by holding shares in housebuilders is up to them. As I say, I reckon the average IC reader has too much exposure to house prices as it is.

The best course is to be philosophical about the changes to come. Think of them as an intergenerational transfer - you would have had to dig into your nest egg to get your darling ones on to the housing ladder anyway. Instead, the revamped housing market may do it for you, but by making a charge to your wealth. Still, the net cost will be much the same.