As Tony Blair took up the office of Prime Minister 10 years ago, little did he know that another event was taking place – Mortgage Next was being created.
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Mortgage Next is a business of the Blair era and has thrived and prospered over the past decade despite or because of Blair’s domestic policies – depending on your political point of view. However, we are entering a new political era with Gordon Brown now in the hot seat and, as he took office, he promised to make changes. It will be interesting to see precisely what those changes will be.
Challenges ahead
As far as the housing and mortgage markets are concerned, Brown has some interesting challenges ahead. There is a chronic shortage of housing and, with immigration and the increased formation of single parent households continuing to rise, there is little prospect of a quick resolution. At the moment 223,000 new households are being created every year and yet we are only building 174,060 new homes. The government’s ambition is to build 190,000 new properties a year but even that will not be enough to satisfy demand.
The newly formed National Housing and Planning Advisory Unit has confirmed that, unless we increase the rate of house building dramatically over the coming years, housing will be completely unaffordable for first-time buyers, who will be priced out of the market by 2026. What’s more, it is anticipated that by 2026 the average home will cost the equivalent of 10 times average earnings.
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In order to build more property the onerous planning rules need to be overhauled and builders need to be encouraged to use their land banks for development, rather than sitting on them in anticipation of higher profits. Events this Summer have put a sharp focus on needing to build property in the right places. In hindsight, building new housing on flood plains doesn’t seem such a good idea.
Harsh truth
Perhaps the harsh truth is that first-time buyers need to come to terms with the fact that they may not be able to get a foot on the first rung of the housing ladder quite as quickly as they may want to. Some may even have to accept that they may never be able to afford a home of their own.
So where will they live? Will we have an explosion of youngsters living in cardboard boxes and sleeping on park benches? The silver lining to the housing cloud is that private rented housing is on the increase, thanks to the popularity of buy-to-let. Youngsters are also delaying the decision to take a mortgage, preferring the mobility and more attractive lifestyle offered by good quality city centre rental accommodation.
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It is not beyond the realms of possibility that the UK ends up becoming divided by housing. There will be home owners, many of whom will also be landlords owning several properties, and tenants who never manage to get on the housing ladder. If this sounds silly, look at Germany where 60 per cent of all homes are rented from private landlords. It is a model that does work in other countries and did work in the UK, until the government sold off its rented housing stock in the Thatcher era.
Interest rates
To date, the government has largely handed responsibility for trying to keep the housing and mortgage markets under control to the Bank of England. However, interest rates appear to be a reasonably blunt tool when it comes to taking the heat out of house price inflation. Having increased rates four times in the past few months, you would be forgiven for thinking that the market should be starting to slow down. But it isn’t. Nationwide has just announced that house price inflation had bounced back in June with prices rising by 1.1 per cent, lifting the annual rate of house price growth to 11.1 per cent.
These figures make it even more likely that another rate rise is imminent. Nationwide believes there will be a slowdown during the second half of 2007 with growth falling back by the end of the year to between 5 per cent and 8 per cent. However, the fact that house prices have risen by 2.2 per cent in the past three months, shows just how prolonged the lag factor can be between rising rates and the market responding.
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Part of the problem has been the large number of people with fixed rate mortgages, because they haven’t yet felt the effects of higher rates. But they will do soon. Another problem is the continuing infatuation that the good citizens of the UK have with home ownership. Surveys continually show that people are willing to sacrifice an awful lot in order to have a home of their own. Changing that attitude could be very difficult, especially with so many people remaining cynical about pensions and the stock market and preferring instead to invest their hard-earned cash in bricks and mortar, which has been a sure-fire winner in the past.
Halting the spiral
Perhaps our new Prime Minister will have to consider more direct government intervention if he is determined to bring a halt to spiralling house prices, but that could make him a very unpopular new leader.
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I’m afraid that the housing and mortgage market present Brown with a challenge which is every bit as daunting as sorting out the NHS, education and foreign policy. Let’s hope his promise of change brings some fresh and effective thinking and not simply more of the same medicine he has prescribed in the past as Chancellor of the Exchequer.
