Mortgage advice

Mortgage lenders and house builders are more concerned with rebuilding their balance sheets than in building the number of new homes the UK needs.

Some facts for you;

  • UBS, the ‘financial services’ company, have been fined $1.5 bn for rigging markets.
  • HSBC have been fined $1.9 bn for laundering money from drug cartels.
  • The new Governor of the Bank of England will be paid an additional £250,000 per year to cover his housing costs.
  • Over the next 20 years there will be 232,000 new households formed each year in the UK
  • In the middle of 2012 mortgage lenders lend half as much money in mortgages as they did in the same time in 2007
  • Private house builders built under 100,000 new houses in 2011
  • UK companies currently have cash reserves of over £700 billion

What does this all add up to?

Evidently there are deep problems in the UK banking industry and the UK house building industry.

Mortgage lenders are less keen to lend. Here is a graph of the amount of money lent for mortgages in the UK over the past 5 years;

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Not only has there been a dramatic decline in the amount that is being lent for mortgages, there appears to be some stablization. We seem to be in a new equilibrium, a new normal. There is just a lot less money being lent out to people to buy houses.

This is having the expect impact on house building. Here is a chart of the number of houses that were build by private house builders (i.e. by private businesses not by housing associations or councils);

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Again, we see a dramatic reduction in the numbers, and an apparent stablization of the numbers. This appears to be the new normal. Less money being lent out, fewer homes being built. Here is a chart showing the two trends together;

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There is little prospect of any of this improving. As Robert Peston, the BBC’s Business Editor, recently wrote;

“Banks are trying to shrink the loans and investments on their balance sheets, relative to the capital they hold as protection against losses.”

A similar movement is taking place in the house building industry. Taylor Wimpey, one of the largest house builders in the UK, said in their annual report;

“we continue to prioritise margin performance ahead of volume growth”

This is understandable. As a trade publication put it,

It has been a long road back, but the UK house-building sector is finally starting to make money again. The top 20 house builders have returned a healthy aggregate profit in 2012 of £538.7m – four years ago, they lost almost £4bn. In 2008, as the housing bubble burst spectacularly, the house-building sector imploded with such force that the survival of many of its biggest names seemed unlikely.

This chart shows this return from the brink (data from here). It shows the combined profits of the 5 largest house builders in the UK and quite how badly they were doing a few years ago.

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The sector is now making profits, although modest ones. However, they are doing so through a model that focuses on getting large profit margins through building (relatively) small numbers of houses.

For the country, this is a terrible equilibrium to have hit upon. We are not building enough houses to keep up with the number of new households being formed. We are not building anywhere near enough houses. The longer we build too few houses the harder it will be to build enough houses for these households.

The irony is that if policy makers could come up with a clever investment vehicle to fund the building of these new homes it would be exactly the kind of thing that non-financial corporations would be interest in investing in, and this in turn would be exactly the kind of thing that would stimulate growth in the economy.

Build baby build

People are living longer and more people are living alone. That means that there are more households being formed than previously. That means we need more houses or flats for people to live in.

To be specific there will be 232,000 households per year formed over the next couple of decades in the UK.

Where will these new houses and flats come from?

The answer in Britain since the 1980s has been that private enterprise will build them.

But there’s a problem with that, they aren’t building enough houses and they don’t show any inclination to build enough houses, especially given the effect of the credit crunch.

Here is a graph of the number of houses built by private enterprise since World War 2.

You can see that it is very rare that in a given year there will be more than 200,000 units built by private house builders in the UK.

And that is just the overall situation. The house building industry has been hit very hard by the credit crunch, as you would imagine for an industry that relies on credit at so many stages of its business. For example, people buy homes using mortgages and developers often buy land on credit.

In response to these shocks the largest house builders, much like the banks, are repairing their balance sheets. Jules Birch reports that Taylor Wimpey are “continuing prioritisation of margin improvement ahead of volume growth”, and IPPR’s recent housing report includes quotes from executives of major house builders saying things like ‘our focus is to rebuild our margins’ and, on the prospect of increasing overall output, ‘we’ll double in size, but halve the margins, so what’s the point?’

This is a big concern because the major house builders in the UK account for a lot of the houses built. Although I would not go so far as some in criticizing the lack of competition in the industry, the list of the biggest house builders in the UK does not change much from year to year.

Here is a chart showing the number of units built by the largest developers over the past couple of years. These numbers are taken from their annual reports.

Again, you can see the continuity from year to year and the relatively small numbers compared to what is needed given the demand for housing.

The traditional policy response to this apparent and worsening impasse has been to reform the planning system to try and make it easier for developers to build houses. The latest example of this is the National Planning Policy Framework.

This is insufficient for several reasons not least the fact that housing developers profit from the current levels of supply and that communities can still stall developments, within or without the planning system, if they are sufficiently organized.

It is worth saying that we consistently saw more than 232,000 new units built each year in the UK in the past, when Local Authorities also built houses.

This chart illustrates that point. It shows the total number of new houses built each year. The difference between the blue line and the red line is the number of social housing units built.

Journalists, housing advocatesacademics and politicians have all called on the government to support housing associations to build new houses by variously guaranteeing bonds or altering the quantitive easing measures currently being pursued by the Bank of England.

Certainly, government action is necessary since the private house builders  will not deliver the number of new homes that we need as things stand.