As reported in Mortgage Introducer yesterday morning, last week Adrian Coles, director general of the Building Societies Association, warned about something he called the “reverse butterfly effect”.
He pointed to a series of cause and effect relationships whereby Help to Buy funding could drive up house prices, which would then nullify the overall value of the initiative.
I agree this is a risk, particularly as the system hasn’t been changed first. We need to fix the system and I would like to discuss how this might actually be done using established problem solving and quality improvement methodologies.
Firstly I think we need to ring-fence the problem and decide what the boundaries are. Factors contained within are endogenous, or things we can do something about, and those outside are exogenous, or things that are beyond our control.
We need to think about homebuilding and homebuying and social and private rental sectors collectively. This is not how we currently perceive the market.
The principle stakeholders are represented by organisations like the HBF, CML, NHF and NLA and this thinking works its way through the strategic planning process. Look at the government’s Laying the foundations: a housing strategy for England and you will see that this paper breaks down into these silos too.
In the marketplace these sectors interact. For example, buy-to-let investors buy multiple properties and retain them indefinitely. In contrast, homeowners buy then sell after several years and so recycle their home back into the system.
A shortage of properties causes house prices to remain high; which increases first time buyer exclusion; which increases demand for private rental properties and which encourages buy-to-let investors to buy even more properties. After decades of boom and bust we should, by now, understand this behaviour
A functional market
Next we need to consider what the market is there to do. Housing minister Mark Prisk has called the housing market dysfunctional but what exactly is a functional market?
But a market can be both functional and dysfunctional. For example, buy-to-let investors are making hay while first time buyers are excluded. Outcomes to various stimuli can be grouped by whether they are essential or desirable, using decision analysis, to allow us to prioritise.
I think it is essential that those who want to buy a quality home at an affordable price can do so. It is only desirable that buy-to-let investors turn a profit.
But that is only my opinion. Others may have a different view. So how do we decide what the essential functions are?
Quality theory would encourage us to find out what the customer really wants. Builders, lenders, housing associations and private sector landlords don’t count. They are providers not customers.
Currently we offer the customer cramped, overpriced properties. Is this what they want? Probably not. But in the property development sector, planning regulations, including section 106, have sucked all the vitality and innovation out of the system. Falling profitability has caused reduced supply and an oversupply of mortgage finance caused a property price bubble, then the credit crunch.
So government interference in a market may be contributing to our problems. Perhaps the Funding For Lending and Help to Buy schemes are examples of further interference, only this time in the mortgage lending sector.
Unintended consequences
Robert K Merton invented the term unintended consequences. He would argue that they occur when we focus on the short term, make decisions based on incomplete, inaccurate or biased data, are committed to obsolete principles, are resistance to change regardless of the evidence and we fail to consider the inherent complexity of the system, where small changes can have big effects.
So to eliminate unintended consequences we need to understand the behaviour of the system better. As Einstein said ‘we cannot solve our problems with the same thinking we used when we created them’.
So have things really changed?
Quality theory tells us ‘quality is free’. In other words, when a system is conforming to customer requirements, it is running at peak effectiveness. But when a system fails to deliver we see aberrant, nonconformant behaviour.
Nonconformant behaviour hits the bottom line. Those excluded for life will be over a million pounds worse off. For every million disadvantaged, the total loss will be over £1 trillion. Resolving the problem would enable these individuals to spend or save instead, which would benefit the economy. And looking ahead, many millions will be affected if homeownership levels continue to decline.
This nonconformant behaviour will also increase the housing benefit bill and the cost of long term care for those retiring in the private rental sector with no equity by tens of billions per annum. Clearly systems thinking, decision analysis and quality theory can tell us a lot about our problems and how we can fix them.
In the final analysis fixing the system will provide financial benefits.
These can be calculated and a payback analysis produced and published. Had Help to Buy been subjected to this rigorous and systematic approach then everyone would now understand the government’s thinking. Instead many have concerns.
Personally I am tired of academics taking a detached view. And I am frustrated by euphemisms like, ‘generation rent’, and ‘bank of mum and dad’.
We really need to fix this system and to do this we must start by putting the customer first.
