What To Do About The Property Crash

Not so many months ago, there were tens of thousands of builders scurrying around building new houses as fast as they could, and then, suddenly, it stopped.

Some might think that this stopped in early October when Lehman Brothers collapsed, but the brakes had been applied long before that. Here in Cambridge, there was a common pattern. Developers were scurrying to get planning permission, but with no intention to build in the near future. On existing developments, the scaffolding disappeared, as no new houses got started. Now, what we have is a plethora of "For Sale" and "To Let" signs.

A simple explanation of what happened would be to say that we now have enough houses.

A better explanation would be to say that we now have as many houses as people can afford to buy. Another still is that we already had as many houses as prospective property owner-occupiers could afford to buy, but we no longer have property investors, pouring their money into new build housing, because they've finally discovered that the property market does not just go up!

We now have an interesting situation:

    • we have is a large number of complete or near comple houses which are either for sale, or for rent

    • we have a vast number of people who want somewhere to live, but can only afford social housing rents

    • we have an idle building industry (a massive waste of talent and equipment)

    • we have many half-finished developments, leaving those who have bought with the double nightmare of negative equity and living on a building site

We have a crisis, which I would say is also an opportunity. The question, which I will seek to answer is: how do we best embrace this opportunity and address the many issues that we face in our disfunctional property market?

I'll contrast two options:

    • A short-term tactical approach of using government borrowing to create a 'floor' in the property market by buying up excess housing for

      • My first thoughts on this are that it is aimed at maintaining the status quo. If we remove enough of the excess, supply will fall below demand, property prices will recover, and some building will re-commence. Further into the future, I'd expect that this will not create stability, as it retains the windfall gains in high demand areas during a boom, and also adds a new factor to the equation which is an expectation that the government will buy up surplus. As a consistent policy, it may well solve our social housing shortage, but I fear that on deeper analysis it will not make home ownership affordable and low-risk for all. Worst still, a new period of sustained economic growth would yet again divert investment to property speculation, and away from the zero-carbon living investment that we need to ramp up and maintain.

    • A systemic approach using government borrowing to underwrite various Land Covenant schemes that have been developed by the SFR Group.

      • These are flexible, thus allowing them to be matched to the local conditions (some areas of the country are affected worst than others). They reduce the risk of home ownership, buy reducing the speculative (land rent) component of a mortgage, and can be specifically used to help those who were unlucky to have bought a property recently, rather than propping up the whole market, to the benefit of land speculators, banks, and land dynasties, such as those who own masses of the most valuable land in London.

Features of a good solution:

    • It helps those who are unfairly affected, such as those who bought a home recently.

    • It may help some investors who are now in mass negative equity on a number of buy to let properties. They could avoid bankruptcy, but should, in exchange lose out on future windfall gains.

    • It doesn't involve massive, unfunded government borrowing

    • It should look to the future, and seek to avoid another debt-based property bubble from bursting.

    • It should not detract from our need to address urgent and serious environmental challenges, confidently. Moreover, it should not divert investment to unsustainable wasteful products as economic recovery progresses. It should be part of a sustainable approach to the economy.

If you're keen to get your head into this before I finish this article, then here's another article that suggests that propping up property prices is a bad idea: http://finance.yahoo.com/techticker/article/152178/Best-Way-to-Fix-Housing-Market:-Let-Prices-Fall-(Fast).