Reimagining the Landscape Through new Housing Systems
Drawing on a detailed analysis of past housing market downturns and current market conditions, a recent report by the Joseph Rowntree Foundation has argued that the downturn is likely to manifest in four key areas. Housing Industry Leaders breaks down the four main points of the report.
The UK has entered a housing market downturn sparked by higher inflation and interest rates. This already has far-reaching consequences for people, the housing system, and the broader economy.
Historically, long-term interest rate changes have had seismic shifts in the housing market, the broader housing system and the policy framework. After more than a decade of ultra-low interest rates, the return to more normal rates is already affecting the market. Mortgage approvals fell 33 per cent in November 2022 compared to the same month the year before, and the OBR forecasts that house prices will fall by 9 per cent over the next two years.
Joseph Rowntree Foundation’s ‘Reboot: building a housing market that works for all’ report makes a case for a coherent strategy of funding and policy interventions to address the immediate challenges of a downturn and initiate fundamental reform of the UK’s housing market.
Groups Of House Owners Are Struggling Massively With Mortgage Costs
One of the four critical areas explored was a slowdown in housebuilding, as softening house prices are already triggering a rapid downturn in housebuilding activity. It was stated in the report that volume housebuilders are in a much more powerful position than they were at the start of the last housing market downturn, with higher profits, lower levels of debt and substantial cash reserves.
Developers will avoid selling into a falling market and seek to ride out the downturn and wait for house prices to recover, suppressing the new housing supply. This risks further entrenching the dominance of the volume developers and their speculative business model.
Housebuilding will be further impacted as housing associations cut back development pipelines. This will undermine their ability to play the counter-cyclical role that has supported housing supply in previous downturns.
The investors’ market has had an essential effect on the downturn as modest price falls and tighter mortgage conditions risk the creation of a cash buyers’ market. Those with existing capital can swoop in and buy property for letting as private rentals, short lets or other suboptimal uses, or can simply leave the homes empty while waiting for house price growth.
Unfortunately, this has a negative impact because it means that there is a housing shortage and people who need homes the most will struggle to find one. These housing market conditions, in combination with higher inflation and interest rates, are already placing significant pressure on household finances.
Rising costs will impact specific groups of owners, such as those on low incomes, shared owners, and those who have recently bought through Help to Buy. These groups could find themselves struggling with their mortgage costs but are unable to move easily to a more affordable home, feeding through to reductions in consumer spending that could lengthen the economic recession.
Continuing, the report explains that both social and private renters are under even greater pressure as they have been coping with worsening affordability for years and are now also facing rapidly rising rents and other costs, alongside restricted social security support.
Policymakers Must Understand Both The Short And Long-term Pressures
In addition to lower housebuilding levels, Joseph Rowntree Foundation revealed that we are likely to see lower market transactions in general due to price anchoring behaviour and relatively few forced sales. This would sustain stagnation and could feed into a more generalised economic recession.
A stagnant, low transaction housing market offers fewer opportunities for first-time buyers and for those seeking to move for work and will increase the pressure on private rents in employment hotspots, which are likely worsening already high rent inflation.
In combination, these challenges suggest that we are heading for a period of market stagnation – a situation in which the housing market faces serious difficulties but is unlikely to undergo a dramatic crash.
Policymakers face a challenge to understand both the immediate pressures and the longer-term dynamics of the housing systems and design policy responses that can address both successfully.
The report recommends policymakers to sustain the supply pipeline and construction activity; support housing associations, local authorities, and community-led housing groups to deliver more affordable housing; sustain capacity and output by funding affordable housing providers; disincentivise mothballing by reforming Compulsory Purchase compensation rules; and impose a holding cost on developers to give them the incentive to complete or sell schemes.
Longer-term, recovering from a downturn is a huge opportunity to grow new models of housing development, diversify the housebuilding sector, and permanently increase the share of new supply made up by social rent and other genuinely affordable homes.
Public Investment In Infrastructure Is Crucial
To achieve this, the report expresses that the government should task Homes England with diversifying the housebuilding industry by growing the self-build and community-led housing sectors.
In addition, Homes England must be encouraged to deploy their Building Lease model to compel partners to build out sites under a publicly approved masterplan and timetable in exchange for planning certainty.
Large schemes should be supported through public investment in infrastructure, tax changes and government guarantees to leverage private and philanthropic finance.
The government should also launch an ambitious new programme of powerful development corporations to take over stalled projects and coordinate large-scale developments, with improved Compulsory Purchase powers to allow efficient land assembly and access to long-term finance via the Public Works Loan Board.
HM Treasury’s ‘best consideration’ regimes and claw-back rules should be reformed to allow public land to be invested for the long-term public benefit.
Reforming Our Housebuilding Sector Is Essential To A Better Housing System
Going forward, we must reform the rules governing housing supply to build a more resilient and sustainable housebuilding sector because inadequate housebuilding is both a cause and consequence of wider dysfunctionality and reforming housebuilding will be central to building a better housing system.
In the short term, this new approach to housebuilding will support the reduction of mothballing of sites during the market downturn, allowing housing funding to be used to redesign schemes to include more social and affordable homes to replace lost demand for market homes.
While, in the long term, this more balanced approach will support less volatile demand for skills and materials, driving efficiencies in the construction sector and helping to manage the economic impacts of future market downturns.
