8 Sep 2015
From Nimbys to Imbys: Solving the Intergenerational Housing Crisis
How do we get out of this housing crisis?
Housing has been in a crisis for the last 30 years. It was a top 10 concern with the electorate in May, with both voters and politicians agreeing there's a serious shortage of homes. Yet the current Chancellor of the Exchequer, like his predecessors, keeps the house price bubble growing. Politicians of all colours ignore the long term supply and demand imbalance, keeping younger people off the housing ladder while creating blockages at the other end, where older people are trapped in oversized, inconvenient family homes.
People remain proud to be NIMBYs and boast to their friends and relations how much money they've made from ever rising house prices.
How do we get out of this housing crisis?
- Of course we need to build more homes, replacing NIMBY with IMBY. More homes for first time buyers and families looking to move up. More homes to rent built on an industrial scale. More affordable homes of all types for all age groups.
- It's time to end demand side gimmicks and interventions. Help to Buy 1 and 2, Help to Buy ISAs and the ill-advised extension of the Right to Buy scheme make matters worse by artificially raising house prices or hamper those capable of playing a role in supply.
- We need lots more adaptable, small homes for last time buyers (report: PDF, 1.07 MB), funded through downsizing or shared ownership. And expanding the lifetime mortgage market, with better distribution and more flexible products.
- Regulators and lenders need to work together to provide consumers with innovative, flexible loans with a different risk profile from the bog standard 25-year mortgage.
1. BUILD MORE HOMES, NOW
Housing starts in the last 12 months were just over 136,000, down 32% from the 2007 peak and some 100,000 short of what we need. The top 10 house builders are only building around 85,000 per annum collectively. We can't create the volume of houses we need by conventional means. Builders face shortages of materials, labour, land, and financing. Planning is getting easier but we need to step up the pace of change and get building on brownfield sites included in the green belt.
We need to adopt a modular approach to house building. Applying patient institutional capital here will reduce the build-to-sell and build-to-rent costs. Modular building is quicker and more efficient, delivers the same or higher standards of building as traditional methods, but with greater certainty.
Cities need to be bigger and vertical living is inevitable. Vertical living must include students, single people and retirees.
80% of 18-24 year olds want to own a home in ten years' time. But renting must become a perfectly acceptable lifestyle choice. So let's end the cottage industry of fragmented ownership by buy-to-let investors with little vested interest in the need for high quality, long-term investments. Renting will become a huge institutional market creating 20,000 to 30,000 homes a year. We've started in places like Walthamstow and Salford by creating new, quality, purpose built stock from scratch and at scale.
2. DON'T LET RISING INTEREST RATES STIFLE THE MARKET
Rates may start rising next spring, increasing the mortgage outgoings of people who bought at rock bottom interest rates. There's likely to be a big surge in re-mortgages, with increased competition between lenders and many of the more innovative products may disappear. New borrowers may think twice about the interest payments on an average £500,000 home, hopefully leading to house price increases stabilising.
The world is awash with money – at least at an institutional level. A practical solution is to build more affordable homes using institutional money rather than letting prices drift up beyond consumer's affordable levels.
We've already put our own long-term money to use, financing the building of homes through CALA Homes, Places for People and urban regeneration projects in Salford, Canning Town and Bracknell.
3. DEMOGRAPHIC CHANGE MEANS WE NEED MORE FLEXIBLE BORROWING
Over 40% of young people go to university, leaving with an average student debt of £35,000 to £40,000. Young people then have to rely on the 'Bank of Mum and Dad.' to stand any chance of raising a mortgage deposit. So the average age to start a first mortgage is now around 38.
We're also starting families later. Mothers are having their first child around thirty; so many families will still have mortgages in their 60s.
This all means people rarely keep the same 25 year mortgage throughout life. Mortgage loans are revised and extended, especially as an estimated 42% of marriages will end in divorce.
What we need are longer or open mortgage terms. Borrowers in their 40s and 50s are struggling to prove to lenders that they will have sufficient income going into their retirement years.
People may never get to 100% ownership before the need to de-cumulate again through downsizing or lifetime mortgages. Equity release is a $15bn market in the US, but in the UK, lack of product innovation and distribution means it's only a £1 billion market. Yet it's got the potential to grow to £10 billion a year.
Last time buyers can stimulate the housing market. Over 60s have seven million spare bedrooms, equivalent to 2.6 million family homes. This represents 10 years of housing supply based on Government targets – or 20 years based on current completions.
By encouraging last time buyers back into our towns and cities, as outlined in our letter to David Cameron, we can drive urban regeneration as they spend their windfalls from rightsizing. Older people don't' want rural isolation: they're seeking the three Fs of friends, family and facilities.
4. WE NEED TO CARRY ON IMPROVING REGULATION AND ADVICE
The financial crisis made regulation tougher and advice harder to obtain. More recently, the relationship between regulators and firms has got better. The regulator's Mortgage Market Review (MMR) didn't create the tough rules we originally feared as the regulator listened to our concerns, implementing changes that were good for the industry.
It's right that everyone now applying for a mortgage has to get advice. Intermediaries now have a 69% share of new mortgages compared to just 46% in 2009, with the share of banks falling fast. Our own mortgage club, for example, arranged £40 billion of mortgages in 2014, representing one in five of all UK mortgages.
We've now got better regulatory protection for consumers. But now we need to make advice more available again for all types of financial services products to improve household resilience.
I've been writing about The UK's broken housing market for a number of years now. Progress has been made, but at a glacial rate. Good things don't happen by accident, so government needs to work with the housing and financial services industry now to create an action plan for change. We're one of a group of companies who have written to the Chancellor about using long term capital to invest in infrastructure (PDF, 270 KB) and it's important that a similar collaborative approach is taken over housing issues.