If the Housing Bubble bursts it’s because you over inflated it.

How can the bottom fall out of the housing market?

A lot of our business revolves around the construction industry so I try to keep informed of the industry news. Construction news recently published an article titled “How long can the housebuilder results boom last?” which got me thinking. Surely with all the people who require housing, there is almost no end to the amount of houses we need? Well, yes but demand isn’t the problem – nor is production yet (though it may be within the next decade due to talent shortage — for more on that see this article). The problem isn’t with the buildings themselves, so what is it?

People are worried about their financial security.

The council of Mortgage Lenders reported, “In total £10.9bn was borrowed across 58,100 loans in July, down by 13 and 14 percent respectively compared to June.” The possible interpretation being that people have less confidence post-Brexit than they did a month ago. The Construction news (CN) article quotes Jeffrey Matsu “There is still a fair degree of uncertainty that pervades the market, One of the key risks is that sentiment could change abruptly, which would trigger market volatility.” Outlining that the worries of homebuyers may not be completely unfounded. With this kind of climate can we really expect people to take risks with their financial future? – This may or may not be linked specifically to Brexit the CN Article continues that “much of the downwards pressure in the market should not be pinned on Brexit, but is actually more a symptom of a continued downward trend seen since the start of the year.”

Natural Slumping

Housing Prices have continued to rise for years with very few dramatic drops – just check out the graph which shows housing prices since 1975 :-

Housing Prices Since 1975 as provided by economicshelp.org

Housing Prices Since 1975 as provided by economicshelp.org

As you can see apart from a few small bumps when the economic climate was tough house pricing has had a steady increase (please note the above graph is adjusted for inflation so is actual increase rather than a result of inflation.) In this time affordability has had more significant fluctuations as shown by this graph:-

Affordability Index From Economicshelp.org

Affordability Index From Economicshelp.org

With the affordability showing a gradual decrease since 2009 it is possible that the market is not providing what people need (affordable housing) and too much of what we don’t (high-end Housing) which may be contributing to the gradual decline Mr. Matsu described “Started as February when activity was starting to slow down”

This means that….

First-time buyers can’t afford homes.

Time for another Graph:- as you can see there has been a massive increase in house prices since 1952 meaning that first-time buyers simply can’t afford them anymore.

 UK House Prices since 1952 (Unadjusted) From Economicshelp.org

UK House Prices since 1952 (Unadjusted) From Economicshelp.org



Couple this with the lack of housing options for those who cannot afford to own their own property and you begin to see the problem (last Graph I promise!)

House Building (Permanent Dwelling) Completions (From :Department for Communities and Local Government Website:- https://www.gov.uk/government/collections/house-building-statistics#2016

House Building (Permanent Dwelling) Completions (From Department for Communities and Local Government Website:- https://www.gov.uk/government/collections/house-building-statistics#2016

Figure 4 House Building (Permanent Dwelling) Completions (From Department for Communities and Local Government Website:- https://www.gov.uk/government/collections/house-building-statistics#2016
As you can see the number of houses overall has decreased but what is significant is that it shows the fall of local authority housing and the modest amount of social housing comparatively, this means that there are not enough housing options for people who cannot afford to own their own home.

Figure 5

Photo from Unsplash.com Contributor Maxime Bhm - https://unsplash.com/@maximebhm

Photo from Unsplash.com Contributor Maxime Bhm – https://unsplash.com/@maximebhm

So what can we do to prevent the housebuilder bubble bursting?
I’m not an expert but it seems to me that the government has some of the responsibility on this one. It is essential that policy reflects the demand for housing- but it must be the right kind of housing – less expensive housing that is affordable for those who need it. Housing is an essential need – in a simplified look at supply and demand we can clearly see that the demand is there but we now need a supply which allows an entry point for first-time buyers. I hope to see more of the “help to buy” Style schemes promoting certainty in the construction business and providing this much-needed resources.

 

The bubble doesn’t need to burst – if it does then that is because it was based on a faulty concept.

 

 

Sources:-

[1] https://www.cml.org.uk/news/news-and-views/market-commentary-august-2016/

[2] https://www.constructionnews.co.uk/data/industry-barometer/how-long-can-the-housebuilder-results-boom-last/10010674.article

[3] https://www.constructionnews.co.uk/data/industry-barometer/how-long-can-the-housebuilder-results-boom-last/10010674.article

[4] Economicshelp.org

[5]Department for Communities and Local Government Website – https://www.gov.uk/government/collections/house-building-statistics#2016

Written by Chris Boyle

Re-new Surface System’s Marketing and Business Development Executive.