In October of 2008, many UK homebuilders businesses were decimated due to the peak of the financial crisis.
Previously their focus had been to produce condominiums (flats to you and I) and this wasn’t just by chance, it was a government led initiative. Predictably this caused an oversupply of these types of unit, but at the same time, the credit crisis dictated that they were unable to refinance the large debts that many of them carry. Running the numbers, it became increasingly unlikely that they would turn a profit on the homes they had already built, so they started to mothball projects, hence much of the construction stopped dead.
There were of course many out there that assumed that the halt in construction would tip the scales of supply and demand back in favor of demand and the boom would pretty much pick up where it left off.
Does everyone remember the Barker Review? It was a 2004 Government-commissioned report that warned of the desperate need for more new homes. Kate Barker, is a member of the Bank of England’s monetary policy committee and she discovered that the rate of new builds during the 90s was 12.5% lower than during the 80s. Her recommendation was to increase new home production from 125,000 homes a year to 245,000, almost double!
According to Ms. Barker, the increase of homes coming onto the market would be enough to slow house price growth to the European average of 1.1% (after inflation), instead of the 30 year average of 2.4% that we had been enjoying.
In my opinion the real error here was that The Barker Review focused purely on supply, and took demand for granted, what would happen if people couldn’t buy?
And that question was answered with the credit crunch, and subsequent collapse of the UK mortgage market: People may want to buy but may no longer be able to find the means to do so. Couple that with lengthening dole queues, and falling wages and you are left with very little tangible demand in the market.
The Bank of England has done its best, slashing interest rates from 5% to 0.5% and introducing a quantative easing program, injecting £125 Billion into the economy. Each of these measures should take around nine months to impact the economy in real terms (according to Mervyn King), and it would appear that there are signs this is now kicking in, with interest from buyers increasing (tentatively) over the summer.
The Short Term Picture
Demand, and I mean tangible demand, for UK property has probably improved due to the interest rate cuts from 10 months ago, but may well begin to wane at the start of 2010 (nine months after the last rate cut in March). The full impact of the BOE cash injection is still to be judged.
Supply has dropped off too, as vendors with over-inflated expectations of their home value take them off the market. Supply may well rise sharply if a large proportion of those those sellers simultaneously try to take advantage of a seeming market recovery.
The Long Term Picture
The Barker Review seems to have drawn its conclusion by analyzing only the supply of the UK property market. Taking demand for granted as perpetual, and assuming the boom years would last forever – quick riches, constantly improving access to credit, rapid population growth, increases in the affluence of the young etc – Do you want to remind her that every bust follows a boom or should I?
Moving forward it is too tough to call to say whether the original recommendation for 245,000 new homes each year will still be relevant. The factors influencing demand as well as supply may be very, very different moving forward.