4 Housing
House prices and supply
48. There has been a resurgence in house prices across
the UK. Data from the Office for National Statistics show that
house prices grew in the twelve months to October 2013 by 5.5
percent, with prices in London growing at 12 percent over the
same period.[93] Recent
price indices from Nationwide showed a more rapid trend towards
the end of the year, with prices rising nationally by 7.1 percent,
and by 14.9 percent in London during the whole of 2013.[94]
The 2013 Q4 Credit Conditions Survey from the Bank of England
also indicates that secured lending conditions have eased recently:
In the three months to early December, lenders
reported that the availability of secured credit to households
increased. An increase in availability was reported for borrowers
with loan to value (LTV) ratios above 75%, and there was also
an increased willingness to lend at LTV ratios above 90%. The
expansion in overall availability was driven by market share objectives,
higher expectations for house prices and an increased appetite
for risk. Consistent with an increased risk appetite, credit scoring
criteria were loosened and the proportion of loan applications
being approved increased significantly.
Lenders expected the availability of secured
credit to significantly increase in 2014 Q1, including for those
borrowers with a LTV ratio above 75% and 90%. Many lenders attributed
the increased availability at the highest LTV ratios to participation
in the Government's Help to Buy Scheme, while some others attributed
it to increased competition associated with the Scheme. Consistent
with a move into higher LTV lending, lenders expected the average
credit quality of new lending to fall over the next quarter.
Lenders reported that demand for secured lending
to finance a house purchase increased significantly in Q4, with
the net percentage balance rising to its highest level since the
survey began. Lenders also reported that demand for secured lending
for remortgaging increased significantly in 2013 Q4. Some lenders
suggested that the increase in demand was supported by first-time
buyer and homemover interest in the Government's Help to Buy Scheme.
Competitive pricing and increased promotional activity was also
reported to have stimulated demand. Lenders expected little change
in demand for secured lending in 2014 Q1.[95]
49. NIESR notes that rising house prices may stimulate
consumption:
Stronger house price inflation outturns would
lead us to lift our forecast for consumer spending growth this
year. The consumer spending equation for the UK is based on the
estimated equation in Barrell and Davis (2007). NiGEM simulations
suggest the rule of thumb that a 10 per cent increase in house
prices raises consumption by 1 per cent in the first year.[96]
But rapidly rising house prices also may be a cause
for concern. As NIESR notes, "In the short term the housing
market presents a challenge for policymakers. Increasingly rapid
rates of house price inflation could well be an increasing cause
of concern for both the Financial Policy Committee and the [Monetary
Policy Committee]".[97]
At his appointment hearing in October 2013, the Committee asked
Sir Jon Cunliffe, the new Deputy Governor for Financial Stability
at the Bank of England, whether he thought a housing bubble was
forming in the UK. He said:
I am not sure I would agree that we are entering
into a housing bubble. I would agree that house prices have risen
pretty quickly this year and also that expectations of future
house prices have risen, but it is coming from a relatively low
base. Compared to some historic measures, housing activity is
still not back to levels we saw before the crisis. House prices
to income ratios are probably where they were about 10 years ago.
Is it something that needs to be watched very
carefully? Yes. Does the UK have a history of housing booms? Most
certainly. Is it something that would need to be dealt with if
it posed a risk to financial stability? Yes, but I think it is
too early to say whether we are entering into a bubble. [98]
For his appointment hearing, the Governor of the
Bank of England noted that:
Certain asset prices, but more importantly measures
of credit growth, may also provide a useful signal about potential
risks to price stability beyond the usual inflation target horizon.
Indeed, experience has shown that imbalances fuelled by a credit
boom, which may manifest themselves in asset-price movements,
pose the greatest medium-term risk to the economy, because of
the powerful deleveraging process they induce when they unwind.[99]
50. Whilst house prices have risen rapidly over the
past year, the Committee heard evidence to suggest that such price
rises may continue. In its December 2013 Economic and Fiscal Outlook,
the OBR forecast national house price increases of 5.2 percent,
7.2 percent and 4.8 percent in 2014, 2015 and 2016 respectively.[100]
Robert Chote, Chairman of the Office for Budget Responsibility,
explained that the OBR's view was driven by market fundamentals—particularly
a lack of supply—and did not indicate a bubble:
There is an issue here about whether house prices
are rising and houses are expensive in some people's view for
fundamental reasons, that we have more demand and relatively inelastic
supply, rather than what you might think of a classic bubble,
which is, leaving those fundamentals aside, people see prices
rising and want to exploit the future rise in prices that they
expect. That is one reason why I do not think we would use the
"bubble" language.
In terms of policy effects and so on [...] there
are a variety of factors that are increasing demand, but we have
very inelastic supply. You would indeed need to have a very big
increase in house building to make enough of a difference to the
stock to be making a great deal of difference on the price side.[101]
Sir Jon Cunliffe also stressed the importance of
underlying market fundamentals, noting that "in the end,
the issue comes down to a structural imbalance between supply
and demand, which we have not managed to tackle."[102]
51. Economists appearing in front of the Committee
also broadly agreed that a shortage of supply was one reason for
high house prices. Alan Clarke, Director of Fixed Income Strategy
at London Scotiabank, believed that supply had contributed to
recent house price rises, noting that despite the recent economic
downturn, demand for homes had still outstripped supply:
[...] in the last couple of years we were not
building enough homes to keep pace with the growth in household
formation. We have migrant workers potentially coming from Bulgaria
and Romania and that will only intensify. Demand clearly fluctuates,
as it would do. Supply has been lacking [...]. In the deepest
recession since the war prices went down, but not nearly as much
as they could have done because supply just was not there. There
was not the excess supply and maybe that saved us from an even
worse downturn, but clearly it did demonstrate we do lack supply."[103]
Mr Hilliard, Chief UK Economist, Société
Générale, added that whilst increased demand from
policy stimulus would lead to a supply response, the response
would likely remain insufficient to prevent sharp house price
increases in the near future:
[...] what we are seeing in the short term is
that the stimulus from policy is driving up demand more quickly
than supply. That is why we are seeing such a sharp acceleration
in house price inflation and I think we should expect that to
continue in the short term. It is very uneven. I think we tend
to colour our judgment by being seated in London and seeing the
very sharp increases in prices here. Some regions are not experiencing
price increases at all yet. They will, but it is a demand-led
story that is going to bring forward some supply but I am not
confident it will bring forward enough supply to level prices
out quickly.[104]
The Chancellor also agreed that supply was a problem,
noting that "the answer for this country [...] is we need
more homes".[105]
52. When questioned on the causes of this undersupply,
Mr Clarke noted that planning constraints proved a problem, but
also that "we are a small island nation and there is only
so many houses you can build on the land that we have".[106]
Mr Hillard agreed that planning constraints were a problem, noting
that they had been "in place for a long time." However,
he disagreed that there was a lack of suitable land to build on
in Britain. 106
53. Paul Smee, Director General of the Council of
Mortgage Lenders, explained why the CML was more relaxed about
the prospect of a new housing boom. He believed that that constraints
in affordability caused by slow rises in real incomes, and the
new regulatory regime, would have an impact.[107]
Mr Clarke, whilst believing that house price rises would hit "double
digits",[108]
noted that recent rapid price rises could represent a temporary,
short term unwinding of pent-up demand:
There is an element of pent-up demand of three
years and that will get tired legs. I think you have new supply
coming on from Help to Buy. It is a slow process. You also have
people who may have bought a house at £200,000, the price
dropped to £150,000 and they were reluctant to sell at that
point and crystallise a loss. Now that house prices are getting
back to where they were I think you will see more supply of legacy
owners coming back on to the market and maybe giving an automatic
stabiliser.[109]
54. Data from the end of 2013 indicate that national
aggregate house prices have recently been growing at a rapid rate.
Mortgage availability, and the demand for mortgages, have both
increased. The growth in house prices has drawn considerable public
attention, particularly regarding whether the activity yet represents
a speculative housing bubble. Witnesses explained rising prices
by drawing attention to pent-up demand and the limited supply
of housing within the UK, and to the likelihood of a limited short-term
supply response to rising house prices.
55. The danger is that it will be difficult for
the Financial Policy Committee to identify when a speculative
housing bubble may have begun. Such a bubble, driven by increasing
lending to households, would be a risk to the UK economy. As the
Governor has told us, "experience has shown that imbalances
fuelled by a credit boom, which may manifest themselves in asset-price
movements, pose the greatest medium-term risk to the economy,
because of the powerful deleveraging process they induce when
they unwind." House prices are therefore a class of asset
price which requires careful attention by policymakers, given
their historic and continuing influence on the UK economy.
Exiting Help to Buy
56. The Treasury Committee has previously been critical
of the Government's Help to Buy: Mortgage Guarantee scheme. In
its Report into the 2013 Spending Round, the Committee concluded
that the role envisaged by the Chancellor for the FPC was not
as strong as it first seemed:
Following Committee scrutiny it transpires that
the so-called "double lock"—whereby we initially
understood that the FPC would have a veto over the continuation
of the scheme after three years—is not a lock at all. Our
understanding is that the government of the day, if it chose to
extend the scheme, could do so despite any objections raised by
the FPC. The Government should provide more precise information
on the operation of the so-called "double lock" and,
in particular, re-examine the case for giving the FPC an explicit
veto over the continuation of the scheme.[110]
The Committee also concluded that "without a
corresponding supply response, the scheme could serve merely to
drive up house prices,", as well as expressing concern regarding
"the appropriateness of the taxpayer acquiring contingent
liabilities" and the possibility of the taxpayer footing
the bill for losses. The Committee also expressed concern about
potential for political pressure for the scheme to continue.[111]
57. At the time of the Autumn Statement, the Chancellor
again described the FPC's assessment of Help to Buy: Mortgage
Guarantee at the end of the scheme as a "lock", stating
that "the Financial Policy Committee have a lock because
the scheme, even if someone wanted to, cannot be extended without
their consent." However, when questioned on the ability of
the FPC to veto the scheme, the Chancellor clarified that the
FPC would act only as advisor, albeit an influential one. He said:
Ultimately, I think decisions about housing schemes,
which after all use the Government's balance sheet, are decisions
for Government and for Parliament. We have not handed over the
responsibility and the accountability for that to the Bank of
England, but the Bank of England, of course, have a very powerful
advisory role and have specific instruments in the housing market
space that they can use around capital requirements and the like
and mortgage standards. What I would say is, of course, if the
FPC were to provide us with advice we would do well to pay attention
to it.[112]
58. The Help to Buy: Mortgage Guarantee has a three
year life, at the end of which a future government has the option
to extend the scheme. At that time, the Government has also undertaken
that the Financial Policy Committee will be asked to give its
assessment on the impact of the scheme on financial stability.[113]
The Help to Buy: Equity Loan schemes also have a three year life
from a start date of 1 April 2013.[114]
When questioned on the end of Help to Buy, Paul Smee, Director
General of the Council for Mortgage Lenders, noted that there
was a risk of a 'cliff edge' at the end of the policy:
I have been talking for some time about the need
for a proper exit strategy that avoids this cliff edge, both under
the mortgage guarantee and equity loan, which can give rise to
unusual activity toward the end of the scheme and then no activity
thereafter.[115]
Nigel Terrington, Chairman of the Council for Mortgage
Lenders, noted in a speech in November 2013 that the need for
scheme exit design was "driven by the experience of previous
schemes" and that "careful planning can avoid this mood
swing."[116]
59. Mr Smee said that tapering the scheme at its
end was one potential solution[117].
He suggested that a method of doing this would be to "increase
the cost of accessing the scheme, which would make the source
of funds under Help to Buy less attractive to lenders, so they
might cease to put loans into the scheme."[118]
Mr Smee also warned that any taper should begin "before three
years, so that the scheme can close after three years."[119]
60. The Committee has previously concluded that
the Help to Buy: Mortgage Guarantee scheme could produce negative
distorting effects on the housing market. Our judgement has not
changed.
61. In addition to this, the Government's Help
to Buy: Mortgage Guarantee scheme may have further distorting
effects on the UK housing market when withdrawn. The Treasury
should examine the impact of an abrupt end to this scheme, and
act in advance to mitigate market distortions before they arise.
The Government should explain now what the exit strategy from
Help to Buy: Mortgage Guarantee will be in order better to influence
expectations. The Bank of England may need to adjust the timing
of its regular annual review of the Help to Buy: Mortgage Guarantee
scheme accordingly.
93 "House Price Index, October 2013," Office
for National Statistics, 17 December 2013 Back
94
"Nationwide House Price Index, Q4 2013," Nationwide,
3 January 2014 Back
95
Bank of England, Credit Conditions Survey, 2013 Q4, pp3 Back
96
National Institute of Economic and Social Research, National Institute Economic Review No. 227,
February 2014, pF50; Barrell, R. and Davis, E.P. (2007), 'Financial
liberalisation, consumption and wealth effects in 7 OECD economies',
Scottish Journal of Political Economy, 54, 2, pp. 254-67. Back
97
National Institute of Economic and Social Research, National Institute Economic Review No. 227,
February 2014, pF51 Back
98
Oral Evidence by Sir Jon Cunliffe to the Treasury Committee, Appointment
of Sir Jon Cunliffe as deputy governor of the Bank of England,
14 October 2013, Q25 Back
99
Treasury Committee, Eighth Report of Session 2012-13, Appointment
of Dr Mark Carney as Governor of the Bank of England, HC 944,
Ev39 Back
100
"Economic and Fiscal Outlook", Office for Budget Responsibility,
December 2013, p 84, table 3.5 Back
101
Q24 Back
102
Oral Evidence by Sir Jon Cunliffe to the Treasury Committee, Appointment
of Sir Jon Cunliffe as deputy governor of the Bank of England,
14 October 2013, Q27 Back
103
Q32 Back
104
Q33 Back
105
Q164 Back
106
Q33 Back
107
Q299 Back
108
Q109 Back
109
Q117 Back
110
"Spending Round 2013," Treasury Committee, Third Report
of Session 2013-14, HC 575, 11 September 2013, p 31, para 56 Back
111
"Spending Round 2013," Treasury Committee, Third Report
of Session 2013-14, HC 575, 11 September 2013, p 31, para 55 Back
112
Q22 Back
113
Written Ministerial Statement 'Publication of Help to Buy: mortgage
guarantee scheme rules and fee', 8 October 2013 Back
114
"Budget 2013," HM Treasury, March 2013, pp 38-39, paras
1.101-1.102 Back
115
Q278 Back
116
Speech by the CML chairman Nigel Terrington at the CML Mortgage
Industry Conference & Exhibition, 6 November 2013 Back
117
Q305 Back
118
Q291 Back
119
Q306 Back
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