My wife and I are in the final stages of buying a flat in Croydon. It’s a two-bedroom ground-floor place with a modest garden, a parking space for a car we don’t have, and a handful of white goods included. We count ourselves incredibly lucky to be able to afford a home in what has become an absurdly expensive market for first-time buyers. And yet, are we about to make a catastrophic error?
This year, much of my job has involved pondering worst-case scenarios for the property market, which makes it tough to shake off the pessimism. Housing is the least affordable it has been since the government started recording data in 1997, which in a higher interest rate environment would imply we’re due for a major price correction.
One school of thought says the fall won’t be as dramatic as it might have been, given low unemployment will mean fewer forced sales, but many still point to a downturn of between 10 and 15 per cent over the next couple of years. Should we want or need to sell up in two years’ time when our fixed-rate mortgage ends, we might even find ourselves in negative equity.
On the other hand, just as mortgage rates have become unpalatable, so too have rents. Almost as though to justify our decision, our landlord this month told us she had no choice but to bump our monthly payments up by a stomach-churning amount, on account of the higher interest rate environment. Landlords have to remortgage too, after all.
And so, for many people, buying an overpriced home is a better option right now than renting an unaffordable flat, even if the house may subsequently fall in value over the short term. This unpalatable compromise is the housing crisis in a nutshell, and the government is still not putting forward ideas on how to solve it. In last week’s Budget, the dearth of housing did not get a mention. The 2019 manifesto commitment to build 300,000 homes a year has all but disappeared from the party’s rhetoric.
Therein too lies the underlying bull investment case for listed housebuilders. In spite of the current housing downturn, cladding costs, the competition watchdog opening up yet another investigation into their practices, and their historic resistance to building eco-friendly buildings, their businesses are still going gangbusters, relatively speaking, because there are not enough homes to meet demand.
There is a need to build more social housing to deal with the fact that when the housing market goes south, the housebuilders are less inclined to build. After each downturn over the past 60 years, private housing delivery has never recovered to its previous peak, creating the cumulative supply drought we have now. Building more social housing would also mean there is less onus on private residential developers to hit the affordable housing targets they typically fail to meet.
Recent attempts at planning reforms and Help to Buy were both deeply flawed, but at least they invited discussion about what should be done instead. The latest Budget seems to imply that the government is now willing to let the market play out. That will mean housebuilders build less, the market slows down, and homes remain unaffordable. Unless something changes, the next cycle will make housing even more expensive – and so the strength of its investment case remains.
