Tackling the Crises in Housing Provision

Christine M E WhiteheadLondon School of Economics and CCHPR University of

Cambridge

British Irish Council Ministerial Meeting Eland House, London

30 October 2013

Impact of the Financial Crisis: overview• Early in 2000s house prices and housing debt rose rapidly in most

countries across the world.• After crisis divergence between countries – with some recovering quite

rapidly but UK and Ireland in group where house prices fell sharply.• Current position (2012 with 2007 = 100) England 108; Wales 95; Scotland

113; NI 57 (but odd figure 2007); Ireland 51; Jersey lowest for 5 years but fairly stable; Guernsey?; Isle of Man?

• Also declines in transactions and mortgage loans - particularly in Ireland.• Housing completions fell rapidly (in Ireland by 90%; in the UK countries by

between 45 and 50%) although now starting to pick up again.• Importantly however whether countries weathered the storm well or

badly across Europe output levels have fallen – except in France where strong government involvement.

The development of real house prices: examples of countries where real declines since crisis

Source: OECD

What Did Not Happen• Expectations were of a crisis like that in early 1990s when negative equity and

high unemployment led to very large scale arrears and possessions.• This time very low interest rates, and surprisingly small reductions in

employment has meant that except in Ireland most households have been able to maintain payments and possessions are as low as the mid 2000s.

• In Ireland current rates of arrears are running at 12% but there have been fewer than 500 possessions in 2012 because of forbearance rules.

• In general mortgages system are very similar across jurisdictions and have always been flexible (in part because housing systems very volatile so forbearance part of ‘normal’ institutional behaviour – although also supported by governments).

• Concerns are that if interest rates rise will be big repayment problems and in Ireland where large scale negative equity people will walk away.

• Yet house prices rising in some areas notably in London and South East and in parts of Dublin.

Tenure Implications• Ireland saw a big increase in private renting during the boom

associated with rapid in-migration. This included large scale Buy to Let investment. Owner-occupation rates have been high for a century, so impact in numerical terms relatively limited but problems for first time buyers and negative equity.

• England has seen a rapid fall in owner-occupation from 70% to around 65% since 2003 with absolute falls from 2005. The private rented sector has grown from 12% to 17%and is now of comparable size to the social sector. Frist time buyers face large deposit requirements.

• In other administrations, impact on tenure somewhat more limited – e.g. in Scotland owner-occupation has stabilised at 60% but private rental sector has doubled in a decade – mainly at expense of the social sector.

• Issues around high house prices as compared to other countries especially in smaller administrations.

Supply side issues• The biggest difference between Ireland and the other administrations.• In Ireland supply elasticity very high – so during early 2000s output

among the highest per head in Europe (only Spain in competition) -with a maximum of 93,000 in 2006. In all other parts of the British Isles supply elasticity is very low and rapidly expanding demand has not generated large increases in output. In the UK the maximum was 226,000 in 2007 well below the projected rates of household formation.

• Now running at only 8,500 in Ireland- with a large uncleared overhang of unsold properties and massive impacts on the economy.

• In the UK output in 2011 was around 142,000 with no uncleared overhang – but still big negative impact on construction activity, economic growth and the balance between households and dwellings.

Government Responses

• All have tightened up on general financial regulation and particularly on self assessment for mortgages.

• Credit constraints are excluding many purchasers who can afford to buy, so a tension between general regulatory change and incentives for housing investment and capacity of first time purchasers.

• Interventions to assist those in mortgage difficulties implemented but mainly unnecessary in the UK but more important in Ireland.

• Emphasis now on trying to support development for economic growth reasons.

Longer term issues

• Growth in household numbers and incomes – can supply respond.

• Increasing spatial concentration of employment and opportunity – leading to concentrations of demand in capitals and university cities.

• Worsening income distribution and inter-generational wealth and income issues.

• More general indebtedness among younger households especially in England.

• Increasing dependence on income related benefits even among working households – public expenditure time bomb.

Government Initiatives: England as an Example

Some 100 plus initiatives concentrated on: •getting investment going again•supporting owner-occupied market through equity loans but also supporting high loan to value ratios through guarantees•restructuring social housing to enable higher borrowing and investment - but at the cost of higher rents•incentivising (i) development in prs through upfront lending and (ii) institutions to enter the private rented sector to provide new sources of funds•increasing use of guarantees for mortgage institutions; longer term borrowing by social landlords; and by institutional investors (better for government accounts)•planning simplification and incentives to local authorities•changes to local government finance to support localism

Housing and macro-stability

• Concerns to avoid asset bubbles and subsequent disasters. • Rhetoric more on mortgagors but major problem since 2008

has been bad loans for development and reductions in price of land hitting developer and bank balance sheets.

• Are there macro-stability instruments available? loan to value ratio limits (Scandinavia); increased interest rates; quantitative controls on lending; more general regulatory controls?

• And if successful will they stop recovery in its tracks?

Fundamental issue - Supply

• Current constraints: confidence; land supply; planning controls; the development model; funding, demand.

• Continued local objections to development and few mechanisms for overcoming these concerns.

• Role of the Green Belt; brownfield development; densities; types of units – and many other issues.

• Development oriented towards owner-occupation – leading to slow build out and difficulties of rapid expansion in output.

• Potential roles for equity involvement and public/private partnerships in the rented sectors.

Overview

• Housing markets in most major European countries still very unsettled.

• Prices rising in Germany, Norway, Sweden and many pockets in other countries.

• But output levels still very depressed across Europe and development capacity being lost.

• Financial system nowhere near back to normal.• Government finances overstretched.• And if economic growth does pick up likely to come out more in

price increases than in investment.• A long way to go to normality.