Why government must act to stimulate UK housing construction
“The general shortage of UK housing, highlighted in Boris Johnson’s call for an additional 400,000 London homes in the next ten years, creates an excessive demand for more residential property,” writes Christopher Down, Chief Executive, Hearthstone Investments. “A lack of suitable homes being built has created pockets of significant price inflation, which in turn undermine what is otherwise a very stable asset class for investors. A shortage of new homes in key areas combined with general house price inflation in the market also tends to create negative news items, and indeed the alleged ‘housing bubble’ has blighted sensible debate in the residential market for years.
“The reality is that housing (owned or rented) is still within reach of most individuals in most areas, thanks partly due to the fact that adjusted for inflation UK house prices are substantially below their peak – down by 17% since February 2008. However, UK wide we need approximately 200,000 homes per year to be built and recent years have delivered only around 100,000. This is a fundamental demand and supply driver which must be corrected if UK housing is to be accepted as an asset class based on its income and inflation proofing characteristics – rather than a speculative House Price Index growth story. That acceptance is, in turn, vital for stimulating continued investment in the sector by large-scale institutional investors.
“The importance of scale cannot be over-emphasised. Savills estimate that over £200bn of new investment is required in the next 5 years to fulfil demand for rented accommodation alone, and so the government is right to introduce initiatives that encourage the formation of investment funds, such as the PAIF (Property Authorised Investment Fund) tax structure and the changes to Stamp Duty Land Tax in 2011 which reduced the cost of establishing these large scale buy-to-let or build-to-let portfolios. However, there is still an emphasis on owner occupation in government policy which does not match the likely source of new investment into the sector. House builders are generally not going to be motivated to over-supply, and will tend to optimise margins on their land bank rather than to try and fully meet all available demand.
“Despite the presence of initiatives like First Buy, it is unlikely that any increase in first-time buyer sales alone will have a meaningful effect on UK house building. If the scheme were fully utilised and delivered 3.5bn of new equity loans representing 17.5bn of overall new house purchases, it would still only represent 74,000 new homes over the scheme’s lifetime – compared with an annual requirement of 240,000 homes. For the last three years not even half this number has been built. The real volume of new investment will come from institutional investors, some of whom from overseas are already circling UK residential as a maturing asset class ripe for investment.
“The announcement that the Government has made a firm commitment to address the vast under-supply of private-rented accommodation in the UK with the initial £10 billion loan guarantee is a welcome move and will go a long way in providing a much needed boost. However, this too must also be met with controlled investment in the broader UK housing market. Government attention on this side of the financing equation needs to also focus on the areas that matter to investors, such as market data, planning timescales and use categories, legislative stability and long-term commitment. More can also be done to encourage UK pension schemes to invest in the sector given the benefits of diversification, inflation linking and long-term growth on offer.
“Coupled with existing first-time buyer stimulus, if this new initiative is fully realised then we may actually see overall construction begin to meet effective demand, something which will stabilise house price growth and stimulate growth in previously stagnant regions. Both of which addressing the scaremongering over market bubbles which tend to restrict new investment, creating the vicious cycle.”
This is a guest post by Christopher Down, Chief Executive of Hearthstone Investments
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