Bold housing market reform is still too bitter to swallow

The housing market plays an integral role in the UK economy; government estimates put the financial contribution at about £100bn annually. That's a nice round number, in-part because the process of moving home carries so many positive knock-on effects that it's hard to track accurately.

"A well-functioning system allows people to move into the right homes at the right time, enables households to put down roots in a community and supports labour mobility by making it easier to relocate for jobs," the government said as it announced reforms to the home buying and selling process earlier this week. 

The proposals themselves need some work – Andrew Groocock shared our view with the Mail earlier this week – but on a broader level, the package suggests that ministers understand the economic costs of our burdensome, unpredictable and expensive system. However, more meaningful solutions are too unpalatable for Downing Street to consider at the moment – at least that's how it appears.

Among the most efficient ways to get people moving up and, most importantly, down the housing ladder, would be to cut, remove or reform stamp duty, as the Conservatives proposed this week. Critics dislike the idea because house prices often rise in the short term and it's effectively a big tax cut for the wealthy. Proponents for reform like the Institute for Fiscal Studies say stamp duty is among the most economically damaging property taxes. Removing a tax rate of only 1% of purchases could increase housing transactions by as much as 10%, according to an oft cited study by Michael Best and Henrik Kleven, the latter a professor at Princeton.

Golden bricks

In reality, they are all correct. Yes, wealthier homeowners would save the most and benefit the most from any potential uptick in house prices, but the resulting improvements in mobility and economic activity would be substantial. Plus, any rise in house prices could be moderated by a broader reform of property taxes.

Understanding the issue but not liking the solution is evident throughout the government's housing policy. Alarmed by the collapse in housebuilding across the capital, ministers have exerted "pressure" on London Mayor Sadiq Khan to prompt a turnaround, the FT reported last month. The result is likely to be a lowering of the proportion of affordable homes that developers must provide when trying to fast-track planning.

This will be effective, but only to a degree. Profit-on-cost driven developers will make fewer losses per scheme, so will probably build more. However, developers following a return-on-capital employed (ROCE) model rely on so-called "golden brick" payments from housing associations for the affordable units, which provide up-front cash flow early in the build. Reducing the share of affordable units cuts that early cash. Plus, these developers now have more private units to sell into a subdued market, potentially adding risk, longer sales periods and higher financing costs.

I don't want to be overly critical – this would be a pragmatic, sensible move, but some of the unintended consequences mean that we're still talking at the margins when something much more transformative is required. More effective solutions, like reintroducing incentives for investors to buy properties off-plan – helping developers de-risk schemes earlier – would have a far greater impact. Yes, the immediate beneficiaries would be the investors purchasing those homes, but focusing solely on that misses the broader, substantial benefits that would follow.

Fragile and subdued

Leading indicators of housing market activity are falling deeper into negative territory, according to the latest RICS survey of estate agents. New buyer enquiries registered a net balance of -19%, the third consecutive negative reading. 

Agreed sales came in at -16%. Near-term sales expectations posted a net balance of -9%. The Budget looms large in commentary from respondents at the back of the report, with descriptions of a market in "paralysis": "A fragile and subdued market struggling under high property taxes with the potential for even higher taxes to come," says Knight Frank's Edward Rook.

The flow of new listings coming to the market came in negative for the second consecutive month, following 13 successive positive readings. The twelve-month sales outlook is now in negative territory for the first time since August 2023. 

The picture for the rental market is worsening; landlord instructions continue to fall, with the September net balance of -38% the most negative since May 2020. Predictably, a net balance of +23% of contributors envisage rents moving higher over the next three months. Rents are seen rising by roughly 3% at a national level over the coming year.

In other news...

Riyadh Looks to Cool Property Surge to Lure Expats From Dubai (Bloomberg).