UK property sector an imperfect market, writes Benson Hersch


The UK property sector is an imperfect market and the housing white paper has raised more questions than answers

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: “The price of any commodity rises or falls by the proportion of the number of buyers and sellers.”

Meanwhile, Nobel prizewinning economist Kenneth Arrow argued that markets were never ideal, saying: “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 sector is a prime example of an imperfect market. 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 from intentions.

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 turned to extending their homes, rather than buying larger ones and releasing stock. In turn, this has 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 greater use of corporate wrappers, which will reduce tax revenue.

In the midst of all this the housing white paper, well meaning though it is, has landed with a resounding ‘plop’, raising more questions than it answers. Here are just a few of those questions.

Generation rent

Although there are many sweeteners and incentive schemes for first-time buyers, there is an implicit recognition that Generation Rent is not only here to stay but will continue to grow.

Younger people are more likely to rent privately than to buy with a mortgage. In fact, government figures show that, in 2004/05, 24 per cent of those aged 25-34 lived in the private rented sector; by 2014 this had almost doubled to 46 per cent. Over the same period, the proportion of that age group buying with a mortgage fell from 54 per cent to 34 per cent.

Recognising this trend, the white paper brings more protection for tenants, with re-deposits, longer tenancies and measures against rogue landlords. Hopefully, this will improve the quality of existing housing stock.

At long last, modular homes are set to become more common. Of course, the limiting factor will be the traditional reluctance of lenders to provide mortgage funding.

There is a vague promise of downsizing incentives; this needs to be accelerated to release under-utilised housing stock. It should encourage older people living in large homes to sell. But where is the stock of retirement places with facilities for active individuals?

In conclusion, I cannot put it better than emeritus reader in architecture at London Metropolitan University Dr Frances Hollis who, in a letter to The Guardian in February, wrote: “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, therefore reducing the need for workspace. Excess light-industrial and commercial space could then be converted into desperately needed housing.”

Benson Hersch is chief executive of the Association of Short Term Lenders