The European Commission Warns on UK Housing

In a review of the UK economy released earlier this week, the European Commission offered advice on the state of the UK housing market, and what should be done to address some of its problems.

Suggestions to cool down the market include adjusting the help to buy scheme and raising council tax on more expensive property. The property tax on smaller properties is significantly higher than larger ones from a relative standpoint. The property roll, which records property tax levels, has not been updated since 1991, and therefore doesn't reflect existing price differentials. Nor does it take into account price increases overall.

The UK was urged to monitor house prices and mortgage indebtedness, and take action as appropriate. To meet increasing demand, the supply of new houses was also encouraged.

This sage advice comes on the back of the latest Nationwide Price Index report showing an 11% price increase in May over the same month last year. According to Nationwide, the continued rise in property prices in areas showing strong economic recovery has not been influenced primarily by Help to Buy. In London only 4% of purchases in quarter 1 of this year were Help to Buy assisted. In fact, the majority of Help to Buy mortgages were granted to those buying in the North of the country, and 45% of those were on properties valued at around £125,000 or less.

Instead Nationwide suggests that continuing low interest rates and an improving economy is driving the boom in house prices. First time buyers are getting on the ladder, accounting for 48% of purchases in March. The same report notes that the ratio of prices to earnings for first time buyers was now at 4.7, which it last reached in 2008. The average house price is now £186,512, at its highest since October 2007.

The first quarter has seen a moderating influence, in the shape of a reduced number of mortgage approvals. According to the Bank of England just under 63,000 mortgages were approved in April, the lowest figure since July 2013. This is credited to lenders changing their criteria in advance of the introduction of the Mortgage Market Review, which came into effect at the end of April.

The Mortgage Market Review (MMR) puts the emphasis on lenders to ensure that applicants take out a mortgage they can genuinely afford. Not only must you prove your income, you also need to confirm your spending and show that you can still make repayments on interest rises up to 7%. Lenders no doubt vary in the amount of detail they want, but a close assessment of 3 months of bank statements seems to be part of the standard criteria going forward. This new and more ruthless assessment of applicants is an antidote to the carefree lending seen not so long ago, and will in all probability dampen the market to an extent. But as the regulation has just arrived, its effectiveness as a 'cooling' agent remains to be seen.

The European Commission's 'interventionist' comments on the state of the UK market led Business Secretary Vince Cable to remark that although the country had a problem with house price inflation, he felt that 'we don't need the EU to tell us what's going on here.' The perception that the Commission is dictating UK economic policy may only fuel the anti EU sentiment so recently demonstrated by UKIP's strong results in the European Parliament elections.

From the Bank of England's perspective the housing market is the highest risk to financial stability, and it is prepared to take action to maintain that stability with all the means at its disposal. This could include introducing even higher capital requirements for mortgages, insisting that the government change Help to Buy, or simply raising interest rates (a debateable option, as it may have a negative impact on other parts of the economy). The Bank's Financial Policy Committee will meet in June, and is expected to discuss tougher mortage criteria along the lines of loan to value and affordability ratios.

What is the government doing to build more houses? Successive governments have failed to address the shortfall in new housing, it's an historical issue. In 2009 only 115,000 new houses were built. You have to go back to the 1920's to find a figure that low. Of course the financial crisis hobbled lending to house builders and exacerbated the situation further.

Now the government is pushing forward with initiatives like the 'Get Britain Building' investment fund. This is a £570 million fund to kick start building on existing development sites and those either stalled or on hold. Surplus public sector land will be sold to make way for another 100,000 new homes. Grants are being made available to local councils to encourage home building, and to bring empty homes back into occupancy. There are reportedly over 250,000 homes in England that have stood empty for more than 6 months. There is also a move to ease building regulations in order to make the house building process a little easier. Bodies like the Chartered Institute of Housing and the National Housing Federation are being actively involved in creating a go ahead housing policy.

Back in 2007 a target of 240,000 new homes per year by 2016 was set. The financial crisis obviously dented this aspiration, and it's only perhaps now as we emerge from the economic doldrums that the numbers can start to climb again. In 2013 a total of 122,590 homes were started, but only 109,370 completed. In the first quarter of this year the homes started comes in at 36,450, and those completed at 27,670. Still some way to go then before we get anywhere near meeting the demand. But until that demand is met, the rules of the market will apply, meaning that scarcity will continue to drive ever higher prices. And I think we could have probably worked all of this out well before the European Commission shared it with us.