Examination of Witnesses (Questions
1-19)
MR PETER
WILLIAMS AND
MR BOB
PANNELL
28 NOVEMBER 2005
Q1 Chair: Can I welcome you to this first
session of our inquiry on affordability and housing supply. Can
I ask you to start off by just introducing yourselves and then
I will start off with the first question.
Mr Williams: Thank you, Chair.
My name is Peter Williams. I am Deputy Director General of the
Council of Mortgage Lenders.
Mr Pannell: I am Bob Pannell.
I am the Head of Research and Information at the Council of Mortgage
Lenders.
Q2 Chair: Thank you very much. Can I
start by asking you what your attitude is to the analysis made
by Kate Barker and, in particular, whether you believe that she
is correct in saying that if the supply of new housing were increased,
the rate of increase of house prices would be slowed?
Mr Williams: Over the long term.
A supply intervention of the scale potentially to be announced
on 5 December is obviously hugely significant and enormously welcomed
by the Council. However, I do not think any of us are under any
illusion: it is not an easy thing to achieve, and the price effects
of such an intervention will be muted and largely felt over the
longer term.
Q3 Chair: Part of your submission is
suggesting that, with a big increase in housing supply, the effect
of trying to reduce house prices would be lost through other people
buying more properties. Is that the point that you are trying
to make, and what evidence do you have for that?
Mr Pannell: It is certainly the
case that, as people's wealth and income increases, there is an
increased demand for housing, so we would expect that to be reflected
if there is an increase in supply, particularly in local areas,
that some people would take the opportunity either to consume
additional housing services in that area or migrate into that
area from neighbouring areas.
Q4 Chair: How much do you assess of the
additional home ownership would come from people already living
within those areas but unable to afford to buy at present?
Mr Pannell: It is difficult to
be precise, but it would be a fraction of the gross increase in
supply in that area.
Mr Williams: Given the demand
for housing as an asset, let alone as a place to live, clearly,
we know there is a fairly significant ability for people to consume
housing, thus we should not assume that new supply means new households
able to access the market. It may mean existing households in
the market simply consume more housing.
Q5 Chair: Indeed, but if there were not
an increase in supply, there definitely would not be an increase
in home ownership.
Mr Williams: That is probably
likely. Clearly, home ownership has continued to increase even
though housing supply has been at a fairly modest level. That
has been a natural process that has been evolving over a number
of years, and of course, the right to buy is part of that. Do
not forget the level of home ownership in Britain has substantially
increased because of a transfer between tenures. That had nothing
to do with a supply intervention.
Q6 Anne Main: You said there would be
a slow effect. One of the issues you raised in point 46 was the
issue of Stamp Duty and other regulatory costs. Would you see
those as having a greater impact then on the affordability of
houses, or an equal impact? What assessment have you made?
Mr Williams: We have not assessed
the differential impacts. Clearly, as I said, the impact of housing
supply on price is very hard to enumerate in full detail. We know,
obviously, that Stamp Duty is a significant and known cost at
present, and so in the short term, Stamp Duty still remains a
significant inhibitor.
Q7 Martin Horwood: You said something
quite important there which seemed to be slightly contradictory
to what you had said a moment earlier. You said, if I heard you
right, that the increase in supply might not mean new households
accessing the market, even if the market as a whole looked more
affordable. Is that really what you are saying?
Mr Pannell: I think what we are
saying is that a large part of any increase in supply is likely
to be dissipated, so, depending on the particular types of property
being built in a particular area that we are talking about, the
environment at the time for investment purposes, etc, the extent
of dissipation is very difficult to predict in advance, but a
substantial part is likely to be dissipated and not result in
an increase in owner occupation, certainly not of the same order
of magnitude.
Q8 Chair: What measures do you think
could be taken to stop that dissipation?
Mr Williams: I am not sure we
would want to suggest there should be any measures taken to stop
that dissipation. This is ultimately a market. You are currently
observing a large increase, for example, in the supply of flats
in London, and some of that has gone into the investment market
and that has expanded the private renting sector. All of those
things ultimately do increase the choice available to people across
the market in its totality.
Q9 John Cummings: Interest rates over
a number of years now have fallen in real terms to historically
low rates, and obviously, lenders are actually lending up to five
times household salaries. How much is this contributing to causing
house prices to escalate?
Mr Pannell: Our sense would be
that most of what we see happening in the housing market is a
reflection of what is happening in the wider economy, so a large
part of the increase in house prices reflects the very buoyant
jobs market, what we have seen in terms of the reduction in both
short and longer term interest rates, to the extent that lenders
are innovative and provide more flexible product offerings. That
obviously helps a broader spectrum of households and individuals
to access home ownership. By doing that, of course, one of the
things that happens in the market is that prices will adjust to
the demand that manifests itself, but we do not see that relaxation
of criteria is the main thing driving that forwards. It is very
much the mechanism by which the improvements in the underlying
economy are expressing themselves.
Q10 John Cummings: Would you agree that
a national or regional affordability target would help?
Mr Pannell: There certainly needs
to be a regional and perhaps even a sub-regional dimension to
affordability targets, because there is no such thing as a national
housing market. It is very much a patchwork of interweaving local
markets.
Q11 John Cummings: What about a national
target? Would you agree with that?
Mr Pannell: There obviously needs
to be a more global context within which you then set regional
and sub-regional targets, yes.
Q12 Anne Main: Regional affordability
targets: they could still be relatively affordable but totally
unaffordable to people who are on low incomes, so how would that
help? It would just make them more affordable to people who perhaps
want to invest in them. That is my point, that they become a cheaper
investment proposition locally; they do not become affordable
to poor people.
Mr Williams: This takes us back
to our earlier point about just because you are putting supply
in, just because you are putting affordability targets in, that
does not mean to say the people you would like to occupy it, at
the price they would like to occupy it, actually do occupy it.
Q13 Chair: Unless they are provided through
a housing association, of course, where only people who meet the
housing association's criteria are able to . . .
Mr Williams: Yes, although even
there, what we have observed through the key worker living programme
is that it has not been as easy to target it at the people you
would like to target it at as it might suggest.
Q14 Anne Main: You said it would help.
In what way do you think it will help, since I do not think it
will help, or I am dubious it will help? How do you think it will
help having a regional affordability target?
Mr Pannell: I thought I had said
that it was necessary to have a regional dimension to affordability
targets.
Q15 Anne Main: Why?
Mr Pannell: Because the housing
market characteristics change quite dramatically even within one
region. If you compared the position for key workers, for example,
in the London and South East area vis-a"-vis some of the
places further away, where house prices and incomes and the labour
market are very different, you cannot possibly hope for a single
national measure to work in a predictable fashion across all regional
and more local markets.
Q16 Sir Paul Beresford: Who would enforce
these targets and how would you achieve them? How would the Government,
if the Government is enforcing them, achieve them?
Mr Williams: As we understand
it, through the work ODPM is working on on affordability, those
affordability criteria will be passed to local authorities to
implement and police, and that will impact upon the supply of
the land and other resources.
Chair: Can I suggest we get back on track.
That is something, Paul, we need to explore with the ODPM, I think.
Q17 Martin Horwood: If interest rates
rise, as you predict, is this going to cause the kind of fall
in house prices that would result in a crisis in the housing market?
Mr Pannell: In terms of our forecast,
we are actually expecting a relatively flat profile for interest
rates, certainly over the next two years, but if interest rates
were to rise, to follow your scenario through, our sense is that
the fundamentals in the housing market underpin current housing
values to a very marked degree, and even if you look back to the
late 1980s, when obviously there was a very significant debt problem
and arrears and repossessions crisis emerging, the reality is
that the vast majority of households, in a very significantly
constrained environment and very difficult time for the macro
economy, maintained their service payments on mortgages throughout
that period.
Q18 Martin Horwood: In your submission,
in paragraphs 19-22, you paint a rather charming picture of inventive
new products and more repayment models and different ways of providing
people with the means to pay being a way of making the market
more affordable. That seems to fly in the face of classical economics,
which says that if you increase the amount of lending to people,
that is actually inflationary. Is that not right?
Mr Williams: That is clearly a
concern. Obviously, there are limits to what lenders can do. They
do not have control of housing supply but they do have control
over mortgage products, and what we have tried to do is arrive
at products that give people some capacity to interact with the
supply situation as they find it but, clearly, if we simply stimulated
demand wholesale, that would be bad news. This is why we have
been very concerned in our work on shared equity with the Government
that the programme there is not so large that it would destabilise
the market. No, lenders are absolutely with you, that what they
want to see is a process where supply and demand are reasonably
well balanced, but these are about helping specific groups into
an existing market.
Q19 Martin Horwood: So do you think the
past expansion of repayment models and financial products has
been inflationary?
Mr Williams: In one sense they
are; in another sense they are not. Clearly, we take the supply
situation as we have it. We assume supply follows, and, sadly,
it is the case in Britain that supply has rather lagged, as you
know, but I do not think that is a task for lenders to address.
This is a task for those that operate on the supply side of the
housing system.
| 
