Up to the task? Dealing with housing market volatility

It does not take great insight to realise the UK housing market is in a mess. Recently we’ve witnessed significant nominal house price declines and consequent negative equity, a massive contraction in the supply of credit, a private sector construction collapse, and social house building as a victim of austerity. Repossessions have risen. And that affects not just owner occupation but also ripples out to the private rented sector as Buy to Let landlords fall behind with their payments and tenants lose their homes. Demand for both social and private rented housing has increased as ownership becomes unaffordable or inaccessible for many.

Layered on top of all this we’ve had a series of policy initiatives around housing allowances in the private rented sector, support for independent living, and rents and tenure in the social sector that are not obviously going to improve the situation. Indeed, critics argue forcefully that these policy manoeuvres are only going to exacerbate the problems.

The dimensions of the problem are not generally contested. The question is what we do about it. The latest attempt to chart a course out of the jam we’re in is the final report of the Joseph Rowntree Foundation’s Housing Market Taskforce Tackling Housing Market Volatility in the UK, published today.

This is a major intervention. It is the culmination of a substantial stream of work over a couple of years. Nine programme papers on more focused topics have already been produced by recognised experts. These have formed the basis for roundtable discussions with broader groups of experts and stakeholders. All this work has fed into the final report, which presents both principles and policy directions.

So what are we presented with?

First off, the Taskforce does a good job of showing what a mess the system is in and why it matters. It also provides a good overview of recent policy initiatives. The Taskforce argues, quite rightly, that we need to move beyond the short term measures used to cope with the post-2008 downturn and take a more strategic approach. We have been in ‘Elastoplast’ mode. We need to be seeking more robust, longer term solutions.

The Coalition government has been active in housing and planning policy. The report is rightly cautious in its appraisal of this activity. Some initiatives appear positive, but are either small scale or underfunded. Some are unlikely to make much difference. Others are likely to make things worse unless handled carefully. The Taskforce believes much more needs to be done to deal effectively with the problem. I think that is right.

The focus of the report is price volatility. The UK housing market seems peculiarly prone to strong price cycles, and has been for the last 40 years. Price volatility is a problem in itself. But it is also related to volatility in transaction volumes, housing supply and demands on other tenures in ways that create broader problems. This is in large part a function of the institutional foundations of the market. The Taskforce is therefore right to argue that institutional change is necessary if these issues are to be addressed effectively. And we are not just talking about reform to housing and land markets here. Nor is it a question of getting the planning system right. The Taskforce argues for reform that encompasses the housing finance market also. Of course, that makes the challenge and the political risks greater. It is absolutely right to note that there are “no easy solutions” when seeking to tackle volatility and vulnerability in the housing market.

The Taskforce is seeking ways to dampen price volatility in order to create a “socially sustainable housing market”. The focus is upon vulnerable households and marginal owner occupiers – those who find themselves in owner occupation for want of viable alternatives, but struggle to maintain their place in the housing market and are especially vulnerable in market downturns.

The Taskforce’s proposals are framed around three key elements – need, fairness, and responsibility – and concentrate on four broad areas where action is seen as most urgently needed:

  • housing supply
  • managing the housing market cycle
  • providing better protection against volatility
  • developing alternatives to ownership

Key elements

Seeking to make sure appropriate housing is available to meet need is perhaps a relatively conventional starting point for analysis. A welcome element of the Taskforce’s thinking is an attempt to reassert the case for choice across tenures, rather than the privileging of owner occupation that continues to dominate much policy debate. Giving the issue of fairness – constructed as intergenerational equity – a central role is welcome from the point of view of framing the debate more broadly. Greater responsibility on the part of both borrowers and lenders is seen as a crucial component of a future, more stable market, and is very much in tune with contemporary policy thinking.

Proposals for action

The Taskforce’s recommendations are a mixture of the relatively traditional and the more novel.

Increasing housing supply across all tenures is seen as key to access and affordability. There is scepticism that the Government’s removal of regional planning targets is going to help land supply unless they are replaced by other incentives to develop. Otherwise localism is likely to mean NIMBYism. There might be a case for a vacant land tax, but at all times we have to be alive to the dangers of perverse incentives. The Taskforce is right to suggest that there is more to learn from studying land markets elsewhere.

The report reviews the range of possibilities for increasing social housing supply but concludes that it is additional subsidy that will really make the difference. At the same time it recognises that this is unlikely to be forthcoming. The main arguments here – that “traditional” social housing is what’s required – feel quite familiar. That doesn’t make them any less important or valid.

In addition to reshaping supply, the house price cycle could be managed by short term counter cyclical measures to influence demand. There are possibilities around revised capital adequacy requirements or credit controls. While the Taskforce sees these as potentially making a contribution they are not seen as providing the answer. Personally I feel the report dismisses credit controls rather too easily. I would suggest that lack of credit controls, coupled with competition for market share by the banks, play a key role in amplifying a boom and that capital controls – such as maximum LTVs – are a sensible way of regulating so that competition is productive rather than destructive.

Instead, the Taskforce focuses upon reforms of property and transaction taxes. We’re talking revisions to Stamp Duty Land Tax and Council Tax. The arguments to make both taxes more fine-grained and more frequently uprated are well made. The idea of moving Stamp Duty from its current ‘slab’ structure to a ‘slice’ structure are plausible. These are reforms that could make the taxes more counter-cyclical. More ambitious is the suggestion for a longer term move to a national property tax. That would require a complete overhaul of local government finance.

These are all sensible ideas – some are going with the grain of current political thinking, but some might struggle to get a hearing.

There are further environmental arguments about overconsumption of housing, or perhaps arguments about housing as a social signal (as I discussed here), that could also be invoked to justify progressive taxation of housing consumption. This may have strengthened the case. But it may just make the argument more complex.

Perhaps the most novel suggestion the Taskforce makes is around safety nets for vulnerable home owners. Since the state system of protection was largely demolished in the mid-1990s we’ve had a problem here. The coverage of private mortgage payment insurance is pitiful. The Taskforce therefore suggests a three tier system based upon prudential lending, responsible borrowing, and partnership insurance under which the risks associated with payment difficulty are shared by borrowers, lenders and the government. The emphasis here upon improving borrower financial capability is very welcome. The proposal for partnership insurance looks like it has the potential to offer a way forward that does not entail returning to the status quo ante, which would be a non-starter. The idea of sharing risk is very much à la mode, but keeping with the idea that there is a need for some form of state organised and underwritten national risk pooling.

It makes good sense that a range of alternatives should be available so that households shouldn’t feel home ownership is the only option. We now have a situation in which many households choose home ownership even if it is not really a wise choice, given their circumstances. But the taskforce struggles a bit with alternatives to home ownership. Private renting is seen as suitable for some. But it is not viewed as an alternative to owner occupation as long-term settled accommodation for families with children, unless greater security of tenure can be delivered. This is a plausible and relatively conventional position, but the chances of arguments for greater security of tenure gaining traction under this government – when they completely failed to do so under the last – are pretty much zero. It is good to see the Taskforce effectively calling time on the idea of greater institutional investment in private renting. I’m not against such investment, but this has been a chimera chased by policy for the last thirty years. We need to be realistic. Low Cost Home Ownership initiatives can make a contribution, but that contribution is likely to be modest. So the Taskforce sees conventional social housing as the main alternative to owner occupation, and considers that the Government’s ‘affordable’ rent regime will not deliver the solution for vulnerable households looking for longer-term accommodation.

So there is much in the Taskforce proposals that is worth serious consideration. But there are one or two things that I would pick up on.

Rational consumers

The arguments for reduced volatility, greater choice across tenures, and improved financial capability are sensible. They have the potential to reduce key elements of the uncertainty associated with housing decisions:

This will allow households to make decisions about their housing choices with greater certainty – for example, whether to rent or buy, when to buy and the level of housing consumption they can enjoy in relation to other goods and services.

However, I feel that the argument rests on a slightly desiccated model of the rational consumer. And it underplays the extent to which housing is not like other goods and services. Much of the uncertainty of housing market decisions is not part of the housing environment but generated by the biography of the individual and the evolution of the broader economic and social context. Similarly, we know that ‘surprises’ such as relationship breakdown trigger a good chunk of housing market behaviour. It is not about rational deliberation at all. In a context where government is seeking to flexibilize the labour market further and for many the ties of social relationship become weaker these broader uncertainties increase. This reinforces the need for an effective safety net of the type the Taskforce advocates. But it is also about fewer people being able to sustain home ownership in the first place. The need to view the housing system holistically has never been greater. The point also simply underlines the complexity of housing decisions from the consumer perspective.

This is not an argument against the case being presented by the Taskforce, but an argument for recognising the importance of the package as a whole, and of recognising that the sort of reforms being advocated can only ever take us so far.

The housing market in context

The Taskforce are right to seek to contextualise reform, but I think there is more work to be done here.

The report contains a valuable discussion of some of the longer term implications of the decline in owner occupation – in terms of the implications for housing costs in older age, outright ownership as a hedge against housing cost increases, and the adequacy of pension provision. Reductions in owner occupation, which mean an increase in housing costs in older age, coupled with a reduction in the generosity of occupational pension provision could spell serious poverty for more pensioners thirty years hence. This is an important connection to make and a vital issue that has yet to have the airing it deserves. It needs to be part of the debates around the future of pensions and care in later life, not just discussions of housing.

But, at the same time, I think the report rather underplays the asset ownership element of the story. Part of the reason for the popularity of owner occupation is that it has been the most effective means of accumulating wealth available to most households. Moves to rebalance tenures and to suggest that some households would be better not aspiring to enter home ownership leave one open to the accusation that it is an attempt to deprive the less fortunate of their opportunity to social mobility through wealth accumulation. I don’t happen to agree with these arguments, but they are very much where policy thinking has been for a while, even though we appear to have moved beyond the era of asset-based welfare.

So if one is going to argue that it is sensible for some households not to seek to invest via owner occupation we ought to be developing alternative vehicles through which assets can be accumulated. That transforms the argument. It is not that we don’t want the poor to accumulate wealth, it is just that it is better to accumulate wealth in non-housing form. Of course, if policy succeeds in squeezing volatility out of the system then the prospects for wealth accumulation through house price growth are reduced anyway. The past will be no good guide to the future.

This contextual component of the story needs to draw in not only the economic factors but also the broader social and culture factors. Yes there have been significant financial advantages to owner occupation. But there is also a strong cultural presumption in the UK that ownership is something to aspire to and to remain renting after a certain age is some sort of social failure. Notions such as renting being ‘throwing money away’ are deeply engrained. The availability in other tenures of appropriate property on sensible financial terms will help open up options. And there are cohort effects that can usher in changes in tastes and preferences. But we shouldn’t get carried away with thinking that these will be sufficient to reorient the British attitude to home ownership. If we are to seek a rebalancing away from a preoccupation with home ownership then this represents a major cultural shift. We need narratives of social status, value and achievement that do not rest on ownership of residential property.

The analysis in the Taskforce report flows from a perspective that is in many ways familiar. It fits relatively comfortably within the sort of understanding of housing issues that dominates much housing analysis. One element of the argument is that private renting is “not a suitable alternative” to owner occupation for those seeking secure long term accommodation. That is what families responding to surveys tell us. I am inclined to agree – being, as I am, a product of the same sort of perspective. But I wonder whether this is an argument that requires more effective buttressing if it is going to make headway in the current political context. The “not a suitable alternative” conclusion has embedded in it all sorts of assumptions about what constitutes “appropriate” accommodation. These assumptions are being challenged by the current Government.

We’re seeing the upper age limit for sharing among Housing Benefit recipients increased to 35; we’re seeing punitive benefit cuts for those who under-occupy in the social rented sector; embedded in the policy around the reforms of social housing rents and tenancies is the idea that the sort of security offered by social landlords in the past is somehow unnecessarily generous. The LHA reforms linking assistance to the 30th percentile seek to manage recipients’ expectations downwards. Similarly, questions have been asked by Government Ministers over whether we aren’t perhaps too generous with the overcrowding criteria when determining whether someone is homeless. When considered in the round, one could argue that there is a concerted attempt to redefine (downwards) what constitutes “appropriate” accommodation for those who can’t stand on their own two feet in the market. One might suspect there is a concerted attempt to re-establish a strong link between housing quality and income.

It seems to me that some of the basic tenets of our thinking on housing are being challenged (a point I discussed recently in another context here). And the need for a robust explicit defence of them is greater than ever.

But that takes us a bit away from the Taskforce report itself. My point is not that I disagree with the case, but that some of our taken-for-granted assumptions might need to be worked through with renewed vigour.

With luck this report will prove the catalyst for some serious debate. The Taskforce analysis is effective in demonstrating the need for far-reaching action. Unless there is substantial institutional reform another housing market boom is inevitable. Now is a good time for a telling intervention.

Back at the beginning of the year Grant Shapps stated he wanted to deal with housing market volatility (as I discussed here). He was a bit vague on what he might actually do. Here is a collection of very sensible ideas, from colleagues absolutely steeped in the complexities of the market, that could assist in realizing the Government’s professed objective. It will be fascinating to see how the story evolves from here.

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5 replies »

  1. I can’t see any Government inviting itself to be crucified on the altar of property taxation (as sensible as it might be) after seeing how the Poll Tax did for Margaret Thatcher.

    There is no sign of a change of culture in terms of people wanting to own property, and hence enhance their security and provide them with an asset to hand onto their children. The current Government’s attitude to social housing demonstrates that it is seen as slightly troublesome like a distant relative that one doesn’t talk about in polite company. It should also be remembered that many home counties MPs have provided vocal support for the ‘no homes here’ protests which grew up around the way local authorities responded to the RSS.

    Ultimately the problem in this country is a lack of supply and price volatility is a function of supply and demand being massively out of balance. Everything else is tinkering.

  2. Oddly, Alex, I find myself almost entirely in agreement with your comments as far as they go. I think that more could, however, have been said about the particular issues with the law created by some of the market alternatives suggested by the task force, and that we at Nearly Legal have been grappling with for some time. But, then again, that doesn’t seem to have been the purpose of this report (although they do appear to have had some legal input). I also heard about this event, but thought it looked rather dull – was it?

    • The law doesn’t feature very prominently in the discussion and it didn’t at the lauch (which I didn’t find dull – but was probably most engaging for those of an economic turn of mind). I’m sure that some of the proposals do have significant legal technicalities that would need to be wrestled with. Just another illustration of the unhelpful separation between housing studies and housing law I guess.