Brexit and the Housing Crisis

John Perry

George Osborne, before he reinvented himself as Rambo, when he was still the 'austerity chancellor', committed Theresa May’s government to spending a huge sum to prop up the housing market. The combined total of grants, loans and guarantees devoted to helping developers and homebuyers is set to exceed £42 billion between now and 2020 (similar to the cost of building four new Trident submarines). It’s supposed to achieve two things: build a million new homes and double the number of first-time buyers. An equally important but unstated priority is ensuring that house prices continue to rise. After the EU referendum, all three targets look much tougher.

Brexit already appears to have hit house prices, which – outside London and the south-east – have not yet recovered from the post-2007 slump. Osborne was desperate to create more market activity, but while the number of new mortgages has grown since 2010 (especially for buy-to-let landlords), there are still only about 600,000 first-time buyers a year compared with 800,000 a decade ago. Over the same period, the number of households with mortgages has dropped by almost two million, the fall especially marked among younger age groups.

Osborne might take the credit for a mild recovery in house-building: it grew by one-third in five years, a rate of increase that would bring the government close to its target of a million new homes in this parliament. In March, the big house builders endorsed the government’s aim. But their share prices plunged after the referendum and have only partially recovered, with some already announcing cuts in output.

In the past, when developers have stopped building because they don’t have enough customers, governments have intervened. Labour pushed an extra £1.5 billion into building rented homes during the last recession. In the early 1990s, the Tories paid housing associations to buy 18,000 unsold properties on the open market, do them up and let them. Philip Hammond, Osborne's successor, could do something similar. Osborne’s huge spending pot came at the cost of drastic cuts to investment in homes with affordable rents: the budget is now only £2 billion over the next five years. Hammond could, for example, announce that instead of spending more than £6 billion on ‘starter homes’ and shared ownership, neither of which will be an easy sell, he’ll put the money into below-market renting, where take-up is assured.

But Sajid Javid, the new communities secretary, would have to agree to the new programme and begin implementing it. Javid is a fan of Ayn Rand; he even showed the 1949 film of The Foutainhead to the Crossbench Film Society when he was culture secretary. According to Rand's followers, the US government was to blame for the collapse of the sub-prime housing market in 2007: ‘It used our tax dollars to dole out housing subsidies to otherwise unqualified borrowers.’

Javid faces a terrible dilemma, as he did when he was the business secretary confronted by the Port Talbot steel crisis. Does he continue to ‘dole out housing subsidies’ to a market in which they may have little impact, or does he opt instead for even more state interference, for example by converting the subsidies into grants to build homes to let at below-market rents? Rand would presumably advise him to do neither, but give all the money back to the Treasury. Hammond’s problem of how to pay for Trident would be solved at a stroke.


  • 20 August 2016 at 2:22pm
    Graucho says:
    The housing market in the U.K. is well and truly broken, Brexit or no Brexit. Every goverment scheme to date has simply poured petrol on the fire by encouraging demand and doing little about supply. A body like the Housing and Development Board in Singapore is required to get a grip on the matter. We don't have to do it in the same way, but a body whose aim is to put bricks and mortar together, rather than come up with more irrelevant schemes whose only effect is to shore up the lenders, the estate agents, the conveyancers et al is the only way forwards,

    • 20 August 2016 at 7:56pm
      John Perry says: @ Graucho
      I'm not sure that such a highly centralised system as exists in Singapore would work in the UK. However, local authorities and housing associations have the capacity to produce far more housing at below-market rents than they currently do - and could do so if there was a significant shift in subsy.

  • 21 August 2016 at 6:23pm
    Greencoat says:
    Is there no end to the fruits of mass immigration?

    • 22 August 2016 at 9:48pm
      John Perry says: @ Greencoat
      Migration adds to housing demand but not by as much as might be thought: it accounts for 37% of projected household growth. Given current low levels of housing output, there would still be a massive shortage if net migration fell to zero.

    • 24 August 2016 at 1:14pm
      Greencoat says: @ John Perry
      Hey - that's alright then! If only we'd known....

  • 23 August 2016 at 7:12am
    Graucho says:
    Housing is the nation's most expensive game of musical chairs. If 120 families are chasing 100 houses, 20 will not get a house. Prices will rise and rise until 20 of them are left out in the cold and 100 of them are saddled with a crippling debt that hamstrings their spending in the productive economy. It's a lose lose situation for the families and a win for the usurers.

  • 23 August 2016 at 2:36pm
    Jerry Lobdill says:
    Brexit can best be understood as a good idea by reading the book "Killing The Host”, by economist Michael Hudson.

    One opinion expressed in the article above: "According to Rand’s followers, the US government was to blame for the collapse of the sub-prime housing market in 2007: ‘It used our tax dollars to dole out housing subsidies to otherwise unqualified borrowers.’” is complete nonsense and exactly the kind of smokescreen the real perpetrators love to publish.

    Read Hudson’s book.

    • 23 August 2016 at 10:56pm
      John Perry says: @ Jerry Lobdill
      Just to remove any doubts, I did not quote Ayn Rand's followers approvingly. The so-called 'sub-prime mortgage crisis' in the US was undoubtedly driven by private mortgage companies and those who bought and sold mortgage-backed securities. While it's true that government-sponsored companies Fannie Mae and Freddie Mac were also complicit, the crisis would have occurred quite happily (or unhappily) without them.

    • 24 August 2016 at 1:18pm
      Greencoat says: @ John Perry
      Everyone here seems to be saying it doesn't matter if we make a problem even worse than it aleady is.

      Do they really manage their own affairs on that basis?

    • 24 August 2016 at 1:57pm
      Alan Benfield says: @ Greencoat
      I'm having a little trouble in working out where that comment comes from: most posters here seem to be trying to discuss the housing crisis sensibly. A large part of the housing crisis derives from the overheated market in the UK, which is driven by a scarcity of housing people can afford (as John Perry points out). This is a result of successive failures in government policy starting with right to buy in the 80s and compounded by governments since.

  • 23 August 2016 at 4:14pm
    Sadiq says:
    "Brexit already appears to have hit house prices, which – outside London and the south-east – have not yet recovered from the post-2007 slump."

    Good for Brexit.

    • 24 August 2016 at 9:30am
      Bartleby says: @ Sadiq
      This is silly. Prices have dropped because people are poorer (or perceived to be likely to be poorer, which is much the same thing). If you cut the price of something by 20% but take away a third of the buyer's money, it's no more affordable than it was in the first place.

      It's affordability and not price that needs to change. You can't solve a housing crisis with a recession!

    • 24 August 2016 at 1:24pm
      Greencoat says: @ Bartleby
      Who took away a third of everyone's money?

      When did this recession begin?

      Why should anyone be 'perceived to be likely to be poorer'?

      Please enlighten us.

    • 25 August 2016 at 1:20pm
      Bartleby says: @ Greencoat
      I'm giving a simplified example to illustrate the point that a drop in price doesn't make something more affordable if the buyer has less money. I'm not suggesting either 20% or a third are accurate figures!

      If you don't think the economy took a massive hit as a result of Brexit, I've nothing to say to you. I understand that some people think it's worth the pain, but simply to deny the fact is just fantasy. We've seen the first drop in interest rates for seven years. It's not a coincidence!

      Perception of poorness? Take a look at the collapse in consumer or business confidence figures after the referundum. People think, or at least fear, that the economy is tanking. I'm not saying that people should have these perceptions but it's a fact that they do.


    • 25 August 2016 at 3:19pm
      Timothy Rogers says: @ Greencoat
      Let me enlighten Greencoat (who loves to parse commonplace expressions to death, presumably in the interest of finding a logical or factual flaw and who is "us", the spokesman for who knows whom - I'm doing a Greencoat here) on point Nr. 3. If middle-class and working class income (wages or salaries) are stagnant while prices rise at the rate of inflation or, in sectors of the economy, at rates far greater than the general inflation rate, then people know and are acknowledged (or perceived) to have relatively less to spend than they did at the outset of the period of income stagnation, i.e., poorer. This has applied to housing for at least 30 years. Really a difficult concept to grasp? In the US the recession began in 2008 and has not yet been fully reversed. Income stagnation began well before that.

    • 25 August 2016 at 8:54pm
      John Perry says: @ Timothy Rogers
      Quite so. A recent report by the Resolution Foundation shows that while working-age real incomes grew by £32 a week (7 per cent) between 2002 and 2015, real housing costs grew by £21 a week (32 per cent). As a result, two thirds of the income gains were swallowed by rising housing costs. In London the picture is much worse: real household income fell by £29 (minus 4 per cent) while real housing costs grew by £36 (29 per cent).

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