Tuesday, 23 February 2016

Gimme Shelter!

We're in the middle of a serious housing crisis. Here are two ways we could fix it.

It's long been a maxim that the best place to invest your money is in bricks and mortar. That's probably never been truer than in the housing market in the UK for the last thirty years or so.

Have a guess how much market prices have increased since 1970. Go on.


OK, 25%?

Hmm.. let's try a bit more....100%


In fact, average house prices, in real terms, have gone up an eye-watering 346% since then. And that's the national average - it doesn't take into account regional variations. For example, in my home town the average home has gone up in monetary value by 6% in the last six months alone, and it is estimated that house prices may go up by 43% once the new Crossrail scheme becomes active in 2017. To put that in context, a property 'worth' £200,000 (just about a two-bed place) would be 'worth'  £288,000 within the space of a few months.

For home owners, this may seem great news - but the reality is that it is an economic and social disaster that is waiting to blow up in our faces. Cities and towns cannot operate if people don't live in them, and what we are seeing is that people can't afford to live in them, largely because they cannot buy or rent at a reasonable price. Cities such as London have seen absurd increases, and desperately needs housing stock. A report yesterday highlighted the fact that there are some 22,000 properties there that have lain vacant for more than 6 months, a number that seems likely to increase with overseas investors buying property as investment rather than letting. Even so, this is a tiny figure - many more homes are required.

Rural towns and villages are suffering form this paucity, too. With the increase in the number of second holiday homes, people have found themselves being priced out of their own areas, leading to a loss of economic input and activity in the area, which in turn impacts on goods and services available.

For the last thirty years, it has been clear that successive governments have been reluctant to intervene in this situation - after all, home ownership is a prized notion for both Labour and Conservative, and the increase in notional values makes for a happier electorate. However, non-intervention is still a political choice, and one that appears to be an increasingly bad thing.

I'd like to suggest two ways in which this issue could be alleviated - they may be seen as difficult initially, but I believe in the long run they can only prove beneficial to all.

To deal with properties lying empty first: Since 2014, local authorities have been able to levy an Empty Homes Premium on properties that have been unoccupied for more than six months. This premium is anything up to 50% of council tax extra on what would be paid had the home been occupied. I feel that this is inadequate: Instead, councils should be allowed to charge an 'Economic Activity Premium' - that is, they can charge the amount that an occupant would be typically expected to spend on local goods and services. Not only would this discourage having empty properties, it would also contribute into the local economy. This would be particularly beneficial to rural communities, helping to sustain core services and amenities. If people can afford to have second homes, they should also be expected to ensure that they contribute to the area that home is in. Whether they do so by paying a premium or letting their property out doesn't matter. Homes are meant to be lived in, not moulder for six months of the year.

The next proposal is more radical, but achievable. It is this: All two-bed properties are to be worth no more than 3.5 times the average domestic income of any given region. Where it is the case that they are currently carry more worth, this triggers a wave of local housebuilding with the specific aim of reducing demand. So, a two-bed house  in, let's say, Burnley, is worth £70,000: If the average domestic income is £25,000, then that house is within the affordable range I have suggested. On the other hand, two-bed properties here in Reading are in the region of £280,000, and average domestic income is approximately £40,000 - meaning that the house price is seven times more than the income. By my suggestion, this would mean that new properties would be built to counteract this imbalance between demand and affordability.

I've suggested the figure of 3.5 times the value of domestic income because it makes the prospect of home ownership realistic. I've also suggested two-bed homes in particular because these are the ones most in demand from prospective buyers. The aim is to create true sustainability and stability within the housing market as a whole, but with the added benefit, ultimately, of averaging house prices across the entire country. For those who say, well, it isn't the government's job to intervene in a free market, I'll say that the government did and continues to intervene anyway - only in a negative way. The selling-off of council properties seemed a great idea in the 1980s, but it was accompanied by a cap on capital building projects by local councils - in other words, regional housing stock was deliberately suppressed in order to create a housing price bubble.

Unless something is done soon, that bubble will most definitively pop, and the outcome is not likely to be pleasant.

edit: This concise article very clearly lays out the disparity between earnings and house prices.

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