House prices: The only way is up

News about the low number of new homes being built means the only way is up for property prices, says Chrstina Jordan.

The level of construction going on in your local area is often a good indicator of the state of the economy. When times are good you see scaffolding, cranes and building work filling city skylines, towns and villages. It may not be pretty but it's a sign of investment and optimism.

But with the roots of the recession in the mortgage and housing markets it's not surprising that construction and house building was one of the worst hit industries in the country last year. The number of applications from house builders to start new homes in the UK fell by almost half during 2008 compared to 2007 -- just under 107,000 applications were made, and that's the combined private and public sector figures, according to the National House-Building Council (NHBC).

Construction work on many city centre apartment blocks and mixed use schemes literally halted halfway through, as the money dried up.

Unfortunately this massive slowdown in new home building sits against a long-term backdrop of insufficient housing supply to meet the needs of the country, which has a growing number of households. In its Comprehensive Spending Review of 2007 the Government said that three million new homes would be built by 2020. That was already a stretch but it now looks extremely unlikely.

Within that target was the aim to be building at least 240,000 new homes a year by 2016 -- Government figures show that in 2007/8 the number of net additional homes reached 207,500 dwellings, and numbers have fallen since. It's worth pointing out that the Government has recently claimed that the three million homes was an 'ambition' not a target.

So if there are not enough homes for the number of people who need them, the laws of supply and demand says that prices will rise. OK, people need to be able to afford to buy and mortgage lenders (more than ever) need to limit the amount they will lend, which will provide some restraint. But there is still real concern that prices will rise above and beyond the reach of many, but not, of course, the rich or existing property investors.

The good news

However, there is some good news from the latest new build figures released by the Government last week. New build starts are rising and it looks like we have turned a corner. In quarter three of this year there were an estimated 25,820 housing starts in England, up 18% on the previous quarter and the third successive quarterly rise in (seasonally adjusted) housing starts. This is an encouraging sign.

Plus, just focusing on private enterprise housing starts shows even higher increases -- they increased 21% in quarter three compared to quarter two.

It's a step in the right direction, but the annual figures are still woefully low.

The not-so-good news

According to the Department for Communities and Local Government, annual housing starts for England totalled 83,080 in the 12 months to September 2009, down a substantial 35% compared with the 12 months to September 2008, and a massive 55% below their 2005/06 peak of 178,000. That's a big drop when we need to be building more, not fewer homes.

Annual housing completions are also down 21% to just over 122,000 over the last 12 months.

According to homelessness charity Shelter, if compared with annual calendar year figures, the last time house building dropped below 122,000 was in 1947 when the official number of homes built was 120,860.  

It says that we are simply not building enough homes to meet the huge growing need, adding that there are a quarter of a million households being formed every year, and more than 1.7 million households on council waiting lists. In other words, demand is far outstripping supply.  

The Royal Institution of Chartered Surveyors also noted that despite the recent rises in housing starts, the figures are still historically weak. It suggests that the total starts for this year will struggle to pass 90,000, "barely a third of what is required over the coming years given trends in household formation".

So, what about prices?

Many people believe that property prices may stutter or even fall in the next year or so, as the huge Government stimulus we have seen over the last year is reversed in the next 18 months, and as the impact of unemployment really takes hold.

But the shortfall in new properties has been referred to as a ticking time-bomb for first-time buyers over the medium term because of the danger that house prices will be squeezed higher by the lack of supply. If this happens property could become unaffordable to large sections of the population.

RICS is in agreement with Shelter that prices are in real danger of rising out of the reach of many first-time buyers in the medium term.

What next?

The house building industry clearly needs continued Government support to boost the number of housing starts, and the upcoming Pre-Budget Report will hopefully paint a clearer picture of Government intentions. The industry needs the current support schemes to be maintained to underpin the recent signs of recovery. This might include extending the Stamp Duty holiday up to £175,000 (due to end next month) to further encourage first-time buyers for example, and maintaining funding for the HomeBuy schemes already in place.

Labour and the Tories have both pledged to increase house building if elected next year, albeit via different methods. Whatever you think about house prices and which way they should go, there is the real possibility of a future shortage of homes for UK families if the three million target is not reached, and that's a situation nobody wants to see.

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