MARKET COMMENT
Could Prescott Puncture The Housing Bubble?

By David Kuo (TMFDragon)
July 22, 2002

Deputy Prime Minister John Prescott unveiled plans last week that could see up to 200,000 new homes released onto the market over the next five to ten years. Assuming that the plan is executed over the full ten-year period that would imply some 20,000 new homes per year would be constructed. The areas that have been targeted are Milton Keynes, the M11 Corridor, Ashford in Kent and the Thames Gateway region.

If we assume that the spread of new homes will be uniformly distributed over the four separate regions that would mean around 5,000 new homes for each region over the next decade. Since the average size of a new housing estate comprises approximately 200 homes of varying sizes, the Government's plans could see up to 25 new housing estates spring up every year for the next ten years in each of those areas. That's a heck of a lot new developments and would undoubtedly increase the supply of housing stock on the market. It is also possible that the Government's plans could cause a slow puncture in the house market bubble that has led to the recent dramatic increase in house prices. 

It is widely accepted that recent house price growth in the UK has been due primarily to the lack of supply of housing on the market. That would make sense given that constrained supply in the face of strong demand will normally be reflected by higher prices. However just exactly why supply is weak is not that easy to explain.

One would expect in a free market that supply would swell in order to satisfy increased demand. This however does not appear to be the case with the UK housing market. Instead housebuilders complain that local planners have been dragging their heels over the granting of planning permission for new homes. It has also been suggested that the lack of skilled labour, in the form of bricklayers, plumbers, carpenters, plasterers and electricians has delayed building work. There is also some evidence that buy-to-letters have soaked up surplus houses to cash in on, what they believe, to be lucrative rental yields. Additionally there is also a suggestion that high house prices tend to benefit housebuilders. For this reason it is not in the interest of housebuilders to oversupply the market.

So what should we make of the Government's plans for those 200,000 new homes and more importantly how could it effect the value of our homes?

The Government, whether rightly or wrongly, believes that the housing market has, somehow, failed to deliver affordable homes. This is especially true in London and the South East where demand for property far exceeds the land available to deliver that requirement for houses. There are also plans afoot by the Government to scrap the rights of council tenants to buy their own homes. However, any action by the powers that be to correct market failure, which it should be said is not readily apparent here, could result in some short-term distortion of the market.

It is quite possible that any sudden increase in the supply of houses could result in a corresponding fall in house prices. This is likely to hurt the buy-to-let speculators who will undoubtedly experience lower rental yields in the short-term as a consequence. For the long-term homeowner the situation is perhaps not quite as bleak. This is because whether you fork out rent to a landlord or make mortgage payments to a bank, you still have a roof over your head. In areas where demand for housing is likely to remain high and supply, by virtue of the scarcity of land is constrained, house prices will most likely be largely unaffected regardless of what the Government tries to do.