Philosopher John Locke is credited as being the first to postulate the so-called law of supply and demand. He argued that the free-market economy should set interest rates because government regulation could have unintended consequences. He wrote that "The price of any commodity rises or falls, by the proportion of the number of buyers and sellers."

Nobel prizewinning economist Kenneth Arrow argued that markets are never ideal. He said that “you cannot get a full understanding of the behaviour of any part of the economy without understanding its reaction on other parts.”

The UK property market is a perfect example of how imperfect the market is. Demand clearly exists but the supply of housing does not rise to meet it. In addition, targets are set but never achieved. In part, this is reflected by ever-higher prices, but it is evident that emotion, confidence and a multitude of other factors are also at play.

Following the populist rule of “something must be done”, governments cannot resist interfering, but consequences are often different to what was intended. For example, an attempt to raise more money by increasing stamp duty on higher priced residences has not achieved the revenue expected.

Trading volume has fallen, and many homeowners have increasingly turned to extending their homes, rather than buying larger ones and releasing stock. In turn this has also led to increased prices of building materials as well as a shortage of trained builders. Trying to reduce house prices by changing tax rules for “consumer landlords” has simply resulted in an increased use of corporate wrappers, which will reduce tax revenue. 

In the midst of all this, the latest Housing White Paper from the government, well-meaning though it is, has landed with a resounding plop. It remains to be seen what will actually be done and what the consequences will be, because it raises more questions than it answers. However, there is insufficient space in this article to deal with all of its contents, so I’ll restrict myself to a few.

Although there are many sweeteners and incentive schemes for first-time buyers, I think that there is an implicit recognition that generation rent is not only here to stay, but will continue to grow in 2017 and beyond. Younger people (aged 25-34) are more likely to rent privately than to buy with a mortgage. In fact, figures show that in 2004-05, 24% of those aged 25-34 lived in the private rented sector. However, by 2014, this had increased to 46%. Over the same period, the proportion of 25-34 year olds buying with a mortgage decreased from 54% to 34%, highlighting how the majority of this group of borrowers rented, a continuation of a trend first identified back in 2012-13.

Recognising this trend, there will be more protection for tenants, both re-deposits, longer tenancies and against rogue landlords. (The Times noted that 28% of private homes let in England are “non-decent”). Hopefully this will mean an improvement in the quality of existing housing stock.

At long last, modular homes will become more common. The limiting factor will be the traditional reluctance of lenders to provide mortgage funding. There is a vague promise to provide downsizing incentives and this is something that needs to be accelerated in order to release under-utilised housing stock. This should encourage older people living in large homes to sell, but where is the stock of retirement places providing facilities for active individuals?

In conclusion, I couldn’t really put it better than Dr Frances Hollis (Emeritus reader in architecture, London Metropolitan University) who wrote the following in The Guardian: “A paradigm shift is needed to solve the housing crisis. Building a quarter of a million new homes a year is not a sustainable solution. This is a small island. Instead, why don’t we intensify the use of the existing building stock, half of which sits empty at any one time? Tax breaks could encourage the elderly to share large family homes with lodgers, simultaneously reducing loneliness and the need for care. And championing home-based work would result in fewer people going out to work, and therefore reduce the need for workspace. Excess light industrial and commercial space could then be converted into desperately needed housing.”

By Benson Hersch, CEO of the ASTL


A version of this article was published in the February 2017 edition of Mortgage Strategy