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Special Measures: Is housing
policy at a turning point?

Tuesday 29 October 2013!
Ruth Davison, Director, Policy
and External Affairs, National
Housing Federation
Josh Miller, Senior
Economist, RICS
Strategic Society
Special Measures: Is housing policy at a turning point?

Is it time for a second nominal anchor in the U...
Setting the record straight!
On September 13th, RICS published a discussion note entitled:
“Is it time for a second nomina...
Some context
Two major changes with respect to central banks’ view of asset prices:
1)  ‘Conventional wisdom’
!  Pre-crisi...
Some context (continued)
2)  Institutional change
! FPC put on statutory footing April 1 2013 (Financial Services Act 2012...
What did we say then?
1)  The BoE/ FPC will be tested by events sooner or later, such as another house
price boom
2)  Mark...
What could an explicit policy preference look like in practice?
1)  Choose a well regarded national house price index
2) C...
What is an appropriate tolerance threshold?
1)  We suggest a 5% annual growth threshold; this figure is a starting point f...
Which macroprudential tools?
1)  Currently the FPC has recourse to the Countercyclical Capital Buffer (CCB)
and the Sector...
What purpose would an explicit policy preference serve?
1)

It would help anchor private sector expectations around the
po...
Health warning!
1)  This is not a panacea to end all financial crises
2)  This policy idea CAN NOT be implemented as a sta...
Toby Lloyd, Head of Policy,
Shelter
Until there’s a home for everyone

A home for your children
The impact of the housing shortage and what must be done

Toby...
Housing markets have detached
themselves from the economy

Source: Nationwide

2
Housing markets have detached
themselves from the economy

Source: DCLG, GLA

3
Housing markets have detached
themselves from the economy

Source: Nationwide

4
Housing markets have detached
themselves from the economy

5
What impact is this having?

6
Source: ONS

7
A decade of growth and change in renting
Change in % of all households,
Census 2001 - 2011

8

Change in private renters’ ...
Impact on families and poverty rates
!  Two in three renting families
want to own but don’t think
they’ll ever be able to ...
Social impacts of instability
Community participation in Camden 2008
90"
% of residents by tenure

!  Reduced sense of hom...
Economic impacts of unaffordability
•  One in five businesses regard house prices as a
constraint to business expansion in...
Economic impacts of unaffordability

Average rents as a proportion of average incomes
by London constituency Source: Rento...
Time for bold solutions…

13
Solutions:
!  Better renting now
-  Stable Rental Contracts
-  Improve standards and conditions
-  No letting agent fees

...
Reversing decades of under supply

15
Reform as well as investment

16
Not just policy radicalism, making
the case differently

17
Matt Griffith, PricedOut
!
!
!
!
!
!
Strategic Society Centre!
32-36 Loman Street!
London!
SE1 0EH!
www.strategicsociety.org.uk!
@sscthinktank!
inf...
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Special Measures - Is housing policy at a turning point

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Published on

October 29th, 2013

A public debate on the new radicalism emerging in UK housing policy.

Speakers at this event will include:

Ruth Davison, Director, Policy and External Affairs, National Housing Federation
Josh Miller, Senior Economist, RICS
Toby Lloyd, Head of Policy, Shelter
Matt Griffith, PricedOut
Chair: James Lloyd, Director, Strategic Society Centre

Twitter: #specialmeasures

“Build more homes” has become a universal political maxim, but few expect the UK’s housing shortage will be fixed during the next decade.

However, more stakeholders are now abandoning the notion that housing policy can be left to market forces, and a growing interest is observable in radical, unorthodox policy interventions to address the effects of housing under-supply on both households and the economy.

Recent examples of such ‘special measures’ proposed include:

A ‘cap’ on annual house increases;
Rent controls in the private rented sector;
A ban on new-build homes being sold to private landlords.

Politicians also appear more willing to consider unconventional positions: both the London Mayor and Leader of the Opposition have floated “use it or lose it” rules for undeveloped land.

Amid signs the public are also less inclined to view rising property prices as a good thing, the conditions now appear to be in place for manifestos in the 2015 general election to adopt the most radical policies on housing seen in decades.

This public debate will take stock of the new radicalism in debate on how public policy should respond to the effects of the housing shortage, and ask:

What are the key effects of housing under-supply for households and the economy? What policy responses are possible?
Why are we seeing new interest in unorthodox housing policy interventions now?
What are the lessons from overseas when governments have tried unorthodox measures?
How can we ensure that the new ideas and ‘special measures’ proposed are given a strategic direction and focus?

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Transcript of "Special Measures - Is housing policy at a turning point"

  1. 1. Special Measures: Is housing policy at a turning point? Tuesday 29 October 2013!
  2. 2. Ruth Davison, Director, Policy and External Affairs, National Housing Federation
  3. 3. Josh Miller, Senior Economist, RICS
  4. 4. Strategic Society Special Measures: Is housing policy at a turning point? Is it time for a second nominal anchor in the UK? Managing house price inflation with macroprudential tools Josh Miller joshuamiller@rics.org Senior Economist Royal Institution of Chartered Surveyors www.rics.org/economics 29th October 2013
  5. 5. Setting the record straight! On September 13th, RICS published a discussion note entitled: “Is it time for a second nominal anchor in the UK? - Managing house price inflation with macroprudential tools” Media interpretation: “RICS calls for 5% house price cap to prevent market bubble” However, in this note: • We did NOT use the word “cap” at all • We did NOT advocate any form of direct price controls • We did NOT claim the market was a “bubble” • We did NOT reference any government schemes (help to buy, FLS) This was a paper on financial stability and modifying the policy framework to manage future housing bubble risk 29th October 2013
  6. 6. Some context Two major changes with respect to central banks’ view of asset prices: 1)  ‘Conventional wisdom’ !  Pre-crisis thinking (‘mop-up’ doctrine): a)  central banks should take a passive role during an upswing in asset prices; b) and then only respond by easing monetary policy if a crash in prices follows !  Post-crisis thinking: a)  Central banks should take an active role during an upswing in asset prices b)  But use ‘macroprudential tools’ rather than monetary policy What are macroprudential tools? Measures regulate the banking sectors approach to credit, liquidity and capital 29th October 2013
  7. 7. Some context (continued) 2)  Institutional change ! FPC put on statutory footing April 1 2013 (Financial Services Act 2012) •  FPC now has formal responsibility for financial stability AND new macroprudential tools to achieve it •  !Come the next housing boom, it is NOT a question of ‘if’ the FPC will intervene, it is a question of ‘when’ •  The FPC can not credibly sit on the sidelines 29th October 2013
  8. 8. What did we say then? 1)  The BoE/ FPC will be tested by events sooner or later, such as another house price boom 2)  Market events will force the BoE/ FPC to take action and deploy their macroprudential tools, whether they like it or not 3)  In other words, the BoE/ FPC will be forced to reveal their policy preference with respect to house price inflation i.e. the rate of house price inflation that triggers action, whether this preference is well understood by the public or not 4)  The real question is: should this preference be known by the wider public? 5)  We argue the case for transparency; an explicit policy preference 29th October 2013
  9. 9. What could an explicit policy preference look like in practice? 1)  Choose a well regarded national house price index 2) Choose an appropriate tolerance threshold 3)  When annual house price growth exceeds that threshold, gradually tighten mortgage focused macroprudential policy (until the house price growth falls back below that threshold) Sound familiar? Not a million miles away from inflation targeting; we have a 2% inflation target set on the Consumer Price Index, and when inflation is forecast to exceed 2% in the medium term, interest rates begin to rise Two further issues: A) What is an ‘appropriate’ tolerance threshold? B) Which macroprudential tools? 29th October 2013
  10. 10. What is an appropriate tolerance threshold? 1)  We suggest a 5% annual growth threshold; this figure is a starting point for discussion, not a definitive conclusion 2)  Why 5%? In the long run, average nominal house prices should rise in line with average nominal incomes; this has averaged about 3% annually since BoE independence (June 1998) and inflation targeting (October 1992) 3)  But there are extra complications…supply constraints 4)  The income impact on prices of supply constraints amounts to 0.6 i.e. 10% increase in incomes raises house prices by 6% more than they should do in the absence of these constraints (DCLG) 5)  As a result, 3% income growth will boost prices in the UK by an additional 2% (3*0.6 = c.2%). Therefore, a sensible threshold may look like 5% (=3%+2%) 6)  We are open alternative threshold suggestions 29th October 2013
  11. 11. Which macroprudential tools? 1)  Currently the FPC has recourse to the Countercyclical Capital Buffer (CCB) and the Sectoral Capital Requirement (SCR); 2)  Both of these tools essentially enable the FPC to require the banks to set aside more capital than they would otherwise do, shrinking the available lending pot 3)  The CCB is economy wide, the SCR has a sector focus 4)  In addition, the FPC has recourse to monetary policy as a final straw 5)  However, we argue rather than having a monetary policy backstop, the tool kit can be broadened with additional mortgage focused macroprudential tools such as caps on LTVs ratios, LTI ratios and amortisation terms 6)  Caps on LTVs and LTIs are the principle tools used in other countries to manage their housing markets, so its stands to reason that they should at least form part of the backstop in the UK 29th October 2013
  12. 12. What purpose would an explicit policy preference serve? 1) It would help anchor private sector expectations around the policy goal FPC’s !  thereby going some way towards limiting excessive risk taking by the household and banking sectors and the build-up of financial imbalances i.e. debt !  If the private sector expected the BoE/FPC would step in at the 5% mark (or whatever the threshold is), they would build that assumption into their own plans and behaviour; they would be less compelled to join the herd 2) The extra transparency would legitimise the FPC’s actions !  thereby enhancing its credibility as an independent unelected body ! Credibility is crucial for an independent unelected body; if it is perceived to be lacking legitimacy, it runs the risk of being short lived. 29th October 2013
  13. 13. Health warning! 1)  This is not a panacea to end all financial crises 2)  This policy idea CAN NOT be implemented as a stand alone ! it carries its own set of risks (principally, limiting upward price discovery may exacerbate housing shortages) 3) It therefore needs to be part of a package of measures than address these risks ! housing supply issues and reform on the planning system would need to be revisited 29th October 2013
  14. 14. Toby Lloyd, Head of Policy, Shelter
  15. 15. Until there’s a home for everyone A home for your children The impact of the housing shortage and what must be done Toby Lloyd Head of Policy Wednesday, 30 October 13 1
  16. 16. Housing markets have detached themselves from the economy Source: Nationwide 2
  17. 17. Housing markets have detached themselves from the economy Source: DCLG, GLA 3
  18. 18. Housing markets have detached themselves from the economy Source: Nationwide 4
  19. 19. Housing markets have detached themselves from the economy 5
  20. 20. What impact is this having? 6
  21. 21. Source: ONS 7
  22. 22. A decade of growth and change in renting Change in % of all households, Census 2001 - 2011 8 Change in private renters’ household composition English Housing Survey 2007 -2011
  23. 23. Impact on families and poverty rates !  Two in three renting families want to own but don’t think they’ll ever be able to afford !  Fewer than one in 10 renting families ‘value the flexibility of renting’ !  44% of renting parents feel their children would have a better childhood if they had more stability !  Fewer than half of renting families can save more than £50 a month 9
  24. 24. Social impacts of instability Community participation in Camden 2008 90" % of residents by tenure !  Reduced sense of home !  Lower community engagement and voting !  Educational impacts 80" 70" 60" 50" 40" 30" 20" 10" 0" Private renters Social renters Owner occupiers 10
  25. 25. Economic impacts of unaffordability •  One in five businesses regard house prices as a constraint to business expansion in their region •  Rising to 44% of London firms 11
  26. 26. Economic impacts of unaffordability Average rents as a proportion of average incomes by London constituency Source: Rentonomy 12 London rents and wages Source: ONS, DCLG
  27. 27. Time for bold solutions… 13
  28. 28. Solutions: !  Better renting now -  Stable Rental Contracts -  Improve standards and conditions -  No letting agent fees !  Better intermediate options soon -  A permanent middle market -  More diversity of housing options to suit diverse economies !  Better supply…. when? -  More and better new homes 14
  29. 29. Reversing decades of under supply 15
  30. 30. Reform as well as investment 16
  31. 31. Not just policy radicalism, making the case differently 17
  32. 32. Matt Griffith, PricedOut
  33. 33. ! ! ! ! ! ! Strategic Society Centre! 32-36 Loman Street! London! SE1 0EH! www.strategicsociety.org.uk! @sscthinktank! info@strategicsociety.org.uk! ! The Strategic Society Centre is a registered charity (No. 1144565) incorporated with limited liability in England and Wales (Company No. 7273418).! !
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