Mortgage Advice Centre

The government have various targets for building new houses. These targets are based on predictions which expect the number of households to increase in the next few decades.

Government Targets

240,000 House a year until 2016.

Curently, the government have a target to build 240,000 houses a year. However, this target is not being met, even during the boom only 150,000 new houses were being built. In 2008, this number fell close to 100,000

3 Million New Homes by 2020.

The government hope that by building 240,000 houses a year, there will be 3 million new homes by 2020. However, as the Chairman of Barrett, Marc Clarke says this is a highly ambitious target which will not be met in current circumstances. Industry analysts feel the home building industry will not recover until 2011 at the earliest. At current rates of building it is more likely just 1.6 million new homes will be built by 2010

Reduce Environmental Impact of Housing

Britain’s 26 million homes account for 27% of the UK’s carbon footprint. THe Government hopes new homes will be carbon neutral and therefore will help to reduce the environmental impact of housing. However, to be effective, it will be necessary to improve insulation and technology of the existing housing stock, which makes up most of housing in the UK

References

• Housing Targets look unlikely at Times
• Governments housing targets impossible at Telegraph

The past two decades have seen many politicians embrace the idea of a ‘property owning democracy’. Even the French President Nicole Sarkosky recently promised to increase home ownership rates in France (typically a country with low ownership rates).

With the help of Mrs Thatcher in the 1980s, the UK has one of the highest rates of homeownership in the World. But, since the recent housing crash, it is worth examining the extent to which home ownership really is desirable for society.

Problems With Home Ownership

Geographical Immobility.

The process of buying and selling is lengthy. Increased rates of home ownership may make it difficult for unemployed to move to other areas. Although it is controversial, an economist Andrew Oswald argued higher rates of home ownership could increase unemployment because of lack of labour mobility.

This geographical immobility is heightened in a period of negative equity. People with negative equity are much more unwilling to move.

Government Subsidies contributed to the Housing bubble and Bust.
In America the government tried to expand homeownership amongst lower income groups through the two government sponsored mortgage giants Freddie Mac and Fannie Mae. These government subsidies helped fuel a boom in subprime mortgages which later led to default rates of upto 25%.

However, it is not certain whether the problem is low income or poor mortgage advise. In a different mortgage scheme Community Advantage Programme (CAP) people on low incomes were helped to get a mortgage, but the default rate was only 25% of private sector subprime mortgages. There is no reason why low income groups cannot pay mortgages.

Wealth Creation.

Housing is often seen as a good way for people to save and generate wealth. In times of rising prices this is easy to see. But, falling prices exposes the risks in putting all your eggs in one basket. House prices may have fallen less than share prices. But, many who bought houses recently are experiencing the financial pain of negative equity.

Economic Volatility

Rising house prices encourages equity withdrawal and higher consumer spending. Falling house prices wipes out this source of spending, leading to lower spending. This increases economic volatility.

Housing as Investment

In recent years there has been an increase in the number of people seeing housing as an investment rather than place to live. In the UK, buy to let renting has become more popular. This has increased housing turnover. It has particularly affected certain areas popular with investors such as rural areas and Central London. It increases housing volatility and made house prices expensive in certain areas.

Housing and Social Benefits.

It is argued housing is a merit good (one with positive externalities for the rest of society). It is argued that homeowners have:

• Greater interest in the wellbeing of their local area
• Have stronger interest in local community groups.

However, homeowners may become more liable to NIMBY approaches to building new houses. It is argued it is so difficult to build new houses because existing home owners don’t want to see an increase in supply of housing which reduces the value of their own homes.

Also, it depends on the type of renting. On the continent, Germans and French typically rent for long, stable periods of time. Evidence suggests that these renters behave similar to homeowners.

To What Extent Should Home Ownership be Encouraged?

Individuals have their own motivation to buy a house (savings on future rents, more security e.t.c). Because this desire to own a house is so strong there really isn’t any need for the government to encourage it any further. If the government starts subsidising homeownership, there is a danger it can distort the market encouraging booms and volatility.

The greatest task for the government is not to encourage homeownership, but to reduce house price volatility,  and deal with shortages of housing where the problem is acute.

Some may even suggest the government should try to encourage renting as it makes the economy less volatile and dependent on the fortunes of the housing market. The current recession is a strong reminder of how much the housing market can cause a recession.

But, at the same time, efforts to reduce home ownership rates are likely to be problematic. When it comes to homeownership, the governments best strategy is to take a neutral approach neither favouring homeownership or discriminating against it. Also it seems the real issues is not whether people own a home, but the stability and foresight of the banking sector.

References

• Shelter or Burden at Economist
• UK Housing Market
• Future of UK Housing Market

Next year, the government will have to borrow at least £175bn. If economic forecasts prove worse than Treasury predicts, borrowing could be even higher.
The large scale government borrowing has raised the prospect of future tax rises and spending cuts.

What this means is that in 2010 and 2011, the government will bring in tax increases such as (putting VAT back to 17.5% and 50% income tax) Also future public spending will be limited. The combined impact of higher taxes and lower spending will be implemented during a period of weak economic recovery. There is a danger that the policies necessary to reduce the government’s debt burden could push the economy back into recession.

With output and global trade falling so much, tax rises could have an adverse impact on spending and further deflate the economy. Therefore it is more likely that the MPC will be keeping interest rates low for a long time.

I expect the economic recovery to be weak so combined with higher taxes, there will be pressure for monetary policy to remain reflationary.

The prospect for interest rates also depends on the impact quantitative easing has. If quantitative easing causes inflationary pressure to occur sooner than expected, then interest rates will rise. But, if quantitative easing fails to create inflation because of the depth of the recession, we could be seeing a long period of very low interest rates (similar to Japan in the 1990s)