Will New Coalition Policies cause House Property Prices to Shoot Up?
We are in weird place with property at the moment. On the one hand the media and some economic pundits are suggesting a ‘double dip’ recession which they believe will cause property prices to fall, and on the other hand, we have developers who are desperate to build and can’t. And finally, we have buyers out there who can’t find finance due to tight lending restrictions. So what will happen in the next six months? In the next year?
The new build market is a good one to study to help answer this question as from an economist's perspective, it is as close to a ‘perfect market’ as you can get. Developers build and sell homes according to demand and how much they cost to build. When demand is high and supply is scarce, prices go up and they make more profit, but when demand is low, they simply reduce their production, charging what they can to manage cashflow requirements and to make some profit.
At the moment, demand is low, so they aren’t typically charging the 10-20% premium they would when the market is busy. Normally as the market picks up, they would increase their production and provide more homes. However, this may not be possible thanks to new government legislation.
According to Steve Lees, Marketing Director of Smart New Homes, the government has created “a policy vacuum, which is a nightmare scenario for the industry”. What has happened is that the Coalition government has stopped the need for house building targets and changed the planning process to require, for example in villages, 90% of the population to approve the application – irrespective of whether the homes are needed by locals or not.
Steve goes onto say “with a consultation paper not due out until late October 2010, and primary legislation unlikely to be in place before November 2011, house builders are increasingly concerned about the total lack of any planning policy framework”. Steve doesn’t think the ‘new homes’ bonus scheme put forward by the Housing Minister Grant Shapps will work either. “Matching council tax on new homes - totalling approximately £8,500 per property - is widely seen as not enough money to counter a rising tide of nimbyism.”
Will locals really object to schemes for much needed homes in their area? Apparently so. According to Cala Homes, they have had to apply for a judicial review as they can’t appeal to an issue relating to a scheme in Winchester without policy guidelines.
Whether it’s talk of the market dipping or a real planning issue caused by Coalition housing policies, it’s clearly having an impact on the number of properties being built and new registrations coming forward. According to the NHBC, current building rates haven’t been this low since the 1920s. May to July 2010 figures from the NHBC do show that registrations were up by 38% year on year, but last year was a bad year for building and we are still estimating that we will only build 100,000 properties in 2010 when we should be building 240,000 plus to accommodate the growing number of people living alone and especially our ageing population.
In summary, if government policy is currently hitting the supply of new build market stock, certainly the government cut backs in October will only hold back the number of buyers further and if we do double dip, even fewer homes will be built? In view of the fact that we are short of homes for people to live in, as soon as the economy does start to rise, we can’t assume that developers will be in any mood, have the appetite, or even have local consumers' support for increasing the number of new builds further. Less stock and higher demand will only lead to one thing: a rise in prices.