Restructuring to reduce market volatility

Last May the Joseph Rowntree Foundation Housing Market Taskforce produced a major report which touched on a wide range of housing market issues, with the main concern being how to reduce the substantial and dysfunctional volatility that plagues the market. Four issues were identified: increasing housing supply in the long run, implementing policy instruments to deal with short run price volatility, developing innovative and effective mechanisms for protecting consumers from the consequences of market volatility, and fostering alternatives to home ownership that will provide households with long term secure accommodation.

Two of the academics involved in the work of the Taskforce – Mark Stephens and Peter Williams – have returned to provide an update, published today, on policy developments under the Coalition. Has the Government taken the sort of steps that will move the housing market on to a more stable footing?

The short answer to that question is “not really”. There have been some initiatives that will be valuable if they are implemented successfully. But equally there are some areas where policy is quite possibly heading in entirely the wrong direction. And there are some areas in which there has been a limited amount of useful activity.

The measures the government has taken to enhance housing supply include the New Homes Bonus, changes to the planning system, Affordable rents rather than social rents, and Real Estate Investment Trusts to encourage institutional investment in the private rented sector. There is innovation here, some of which might enhance housing supply. Stephens and Williams note that it is too early to say how effective some of these innovations will be.

I’d stick my neck out a bit further and say that in total they aren’t going to be sufficient. In particular, nothing has been done to address the nature of the housebuilding industry and its relationship to the land market, which is also a significant part of the problem.

In terms of managing short term volatility, this has been given some serious attention by the Interim Financial Policy Committee. Some sensible thinking has been done about how to move towards more prudent lending. However, proposals have stopped short of hard-edged rules about maximum loan to value ratios or loan to income ratios. The question is whether the proposals will therefore be sufficiently robust. Stephens and Williams argue that the situation needs to be monitored and that firmer action on credit controls would be justified.

Again, I’ll stick my neck out a bit further and say that I don’t think the current approach will be adequate. At the moment the market looks fairly calm. But when the market heats up and lenders are competing with each other for market share the pressure to weaken lending criteria will be too great to resist, unless hard-edged rules about the parameters of lending – such LTVs or LTI – are put in place.

Another policy that can act counter-cyclically in the short term is property taxation. While there has been a lot of debate about a mansion tax there has been limited progress in that direction. And Nick Clegg has muddied the water somewhat with his reference to a non-property based wealth tax. The Liberal Democrats at their upcoming conference are very likely to reassert the desirability of more comprehensive property taxes, land value and land use taxes. The debate is still live. The problem is that it is largely being discussed in the context of the fiscal deficit and the balance between income and wealth taxes, rather than the slightly more arcane but equally important context of housing market efficiency.

The FSA’s Mortgage Market Review has made some sensible proposals directed at protecting borrowers by exploring in more detail the sustainability of their commitments when taking out a mortgage. The concern, again, has to be whether the reliance upon guidance and exhortation to good practice will be sufficient or whether the framework still leaves too much discretion in the hands of the lenders.

Stephens and Williams note that while there has been some policy movement on safety nets it does not all seem to be heading in the right direction. Current proposals risk creating some new problems. And Government thinking has not embraced the sort of fundamental reconceptualisation advocated by the original Taskforce report.

Finally, while the decline of owner occupation continues, the search for alternative forms of secure – typically rented – accommodation seems to lack urgency. In fact, policy action on social housing, security of tenure and welfare reform is moving in the opposite direction.

While there has been a lot of effort put in to attracting institutional investment in private renting improving security of tenure has not features strongly in the debate. To the contrary, the primary policy concern is not to frighten the horses – proposing increasing typical tenancy lengths might dissipate interest from institutional investors before we get started. Average tenancy lengths are creeping up anyway. But there needs to be a conversation about this issue if progress is to be made.

The other alternative is to revisit social housing and look to models and principles that have been jettisoned. Models of conventional social housing – relying more heavily on price subsidies rather than income subsidies – may simply be better value for money mechanisms for delivering housing, at least until the major issues of private housing supply are dealt with.

Overall, reflecting the recommendations from the original Taskforce report, Stephens and Williams argue therefore that the Government needs to act in the following five areas:

Conduct a revaluation of property for Council Tax purposes with a view to gradually transforming it into a national land and property value tax, following full modelling to identify difficulties and to inform its design.

Ensure the Financial Policy Committee has the power to introduce mortgage credit controls, and that the housing market as a whole is monitored as a threat to wider economic stability.

Monitor the FSA’s new mortgage rules to ensure they do not unnecessarily exclude low risk borrowers from the housing market, collecting the necessary data to do this and formally reviewing the rules after three years.

Introduce a more effective safety net for home-owners that shares responsibility fairly between home-owners, lenders and government.

Switch the emphasis of housing subsidies away from a reliance on Housing Benefit towards housing supply, as part of a new model for financing new affordable housing.

Points 2 and 3 are largely a question of examining whether policy change that is already underway has gone far enough. This needs to be watched very closely. My concern is that the circumstances in which it becomes apparent that the new models are not effective are precisely the circumstances in which it will be hard to bring in more stringent regulation.

The other points are encouraging the Government to be braver, more radical and less ideological in the measures it takes to stabilise the market. I think that is right. And it is important to point it out.

But I’m not hugely optimistic that they’re listening.



Some of the thinking associated with the Taskforce is now also becoming available in the academic literature;

Stephens, M. (2012) Tackling housing market volatility in the UK: Part I: Long- and short-term volatility, International Journal of Housing Policy, vol 12, no 3, 367-380. (subscription required)

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