Recent headlines on the front pages of the national newspapers such as ‘Millionaires push house prices to a record high’ have focussed on rising house prices, in London especially. House prices have shot up at the fastest rate for more than two years. It’s something we’ve been talking about a lot over the past few months but with the year drawing to a close it seems we are reaching a stage when we are pricing many people out of the market.Record City bonuses and a shortage of suitable properties have meant that competition for houses has rocketed. Many house sales are now to overseas investors looking to get a foothold in the London market. In certain areas, es- tate agents are even suggesting a system of sealed bids to secure the highest prices for London properties in prime locations. On the face of it, this seems like good news. But not when you consider that the housing market is overheating and first-time buyers are being priced out. Even those on the first rung of the ladder are becoming disillusioned about the lack of properties to upgrade to. The Bank of England has signalled that a base rate increase is due before the end of the year and that we should not assume that this will take the pressure off inflation. Some commentators have suggested that we will see one increase in November and another in December. I’m not so sure this will happen. It’s a dead cert that we will have at least one increase but I think the Monetary Policy Committee will suck it and see over the first quarter of next year before it thinks of raising rates again. Any rise in rates usually takes at least 18 months to filter through so its effects can be seen in the economy and none of us want to see knee-jerk responses to spiralling house prices. If rates rise too much it will have a massive impact on middle income earners but probably won’t affect people in million pound pads much. And the government could have a problem if rates rise at a time when it is negotiating public sector wage increases. But if we are predicting that rates will rise and home owners will feel the squeeze, why is it that Halifax has said that 67% of home owners on two and three-year fixed mortgages are moving to trackers? This indicates that consumers are not as worried about rate hikes as we imagine they are. Even if rates go up by 0.25% this would mean we are continuing in the the low rate environment we have seen in general over the past 10 years. If base rate goes up much more it will hit the 5.5% point which is where the government probably feels comfortable. Although this means inflation will probably be curtailed it also means most people won’t have a lot of money to splash around. The timing of any rises is key as a chancellor seeking to be Prime Minister is thought to be unlikely to risk making an unpopular move. House prices are rising due to a shortage of desirable properties so you would think we would be seeing a considerable increase in new-build developments. Instead, many developers are complaining about hitting a wall on properties above 250,000 due to Stamp Duty. While the government is raking in a fortune, Stamp Duty is having a dampening affect on people’s aspirations. Don’t forget that 250,000 is a lot of money for most people and Stamp Duty together with legal fees and moving costs add up to a considerable amount to raise to buy a home. Also, property developers have said that the layers of bureaucracy they must deal with when developing properties is making their lives difficult. Lenders are working with builders to subsidise the cost of loans, offering competitive rates which builders often cut further in an effort to encourage people to buy. Clever builders sit on land banks which they release only when demand is reaching a peak. They can sit on these for up to three years. Setting up subsidiary companies and applying for planning permission is common and home owners often find that the land opposite them which they thought would remain a greenfield site is instead suddenly filled with Bob the Builder’s team. FTBs will face housing shortage until Stamp Duty problem is addressed Over the past three years developers have put up more apartments than detached homes. But many flats remain empty and unsold while buyers compete for the small pool of houses. Cramming all necessary buildings into the smallest possible urban space might preserve some green fields but it does not take into account the desires of home buyers. Despite unprecedented enthusiasm among developers for building flats, buyers inconveniently continue to show a preference for houses. Abolishing Stamp Duty as a source of revenue for the government could solve the problem of the shortage of properties just below and just above the lowest Stamp Duty threshold. Continuing to prevent people from buying houses when they want to will hinder the economic development of the country. Neither the government nor the Opposition are in favour of cutting off their favourite cash flow which brings in more than 4.5bn. But at least the Liberal Democrats are proposing a change. Unless the government implements change at this level or addresses the problems of local councils not allowing sites for development we will see a serious shortage of homes next year. And although the government is fond of saying this isn’t its problem, it is one that has been stacking up for more than 30 years. The government has attempted to solve part of the problem with its HomeBuy scheme and in particular, new-build Homebuy, encouraging the use of public sector land to be used for this initiative. As with shared ownership schemes, new-build HomeBuy allows buyers to buy further shares in their home over time in units of 10% based on the market value of the property at the time. Rent is charged on the remaining share which is owned by a housing association and payable in monthly instalments. The market has reached the position whereby we have a vast array of products designed to meet the needs of those people interested in new-build HomeBuy. But I’m not sure we will see a significant rise in the proportion of new-build homes suitable for first-timers. With demand escalating – especially given the rise in people splitting up and needing separate homes – I’m sure this shortfall will never be resolved.
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