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Housing Market

Home… and away

If you think the UK is lagging behind other countries with its new build programme... you are right, says Andrea Kirkby.


Prince Regent Square Germany: Set within a peaceful courtyard this exciting new project offers 10 apartments enjoying an open space in the form of a garden, balcony or roof terrace.

It’s widely accepted that we have a housing shortage in the UK. For decades, housebuilders, housing associations and councils have not built enough homes for our population, and though housing starts have picked up recently they remain far below the 250,000 houses a year that we need to build.

Not everywhere is in the same boat. All European countries has seen a decline in housing starts since the financial crisis of 2007-8, but few show such a stark shortfall. What have other countries done differently, are there lessons to be learned for the UK?

The Deutsche difference

If there’s one country whose housing market looks very different from the UK’s, it’s Germany. Owner occupation is a minority taste, while the private rented sector accounts for well over half the market, against only 20 per cent here; meanwhile, house prices have tended to decline over the long term, only recent years showing a departure from this trend. (That’s partly a result of a long term decline in the population – which has, however, recently been reversed.)

The way the market is supplied is also very different. You might think that Germany has a big social housing market – but you’d be wrong; although government is highly involved in housing, it’s through subsidies and managing the supply of land, not through a direct building programme.

Whereas much development land in the UK is in the hands of developers, in Germany it’s more often held by municipal authorities, who regularly release land for development to increase the housing supply. Since municipalities’ funding from central government is awarded on the basis of the number of residents in the area, they have a vested interest in making it possible for new arrivals to move in. Many individuals buy a plot from the authorities and commission a builder to construct a home; prefabrication is common, so this is not a particularly complex procedure. Large developments, such as the Hamburg HafenCity (which will almost double the amount of city centre space in Hamburg), are usually municipality rather than developer led.

High subsidies for building have been cut back since the 1980s, but there are still several types of incentive, including a generous tax treatment of private landlords, who are allowed to offset any losses on rented property against their total income, unlike UK landlords who can only offset rental losses against property related income. There’s a depreciation allowance that landlords can claim, too, giving enhanced net returns in the early years after purchasing a new rental property. Since the private rented sector represents about half the total market, subsidies for landlords are an effective policy instrument. There are also incentives for landlords to turn their properties over to social housing, the tax break effectively refunding the difference between the social rent and market rent over a certain period.

Figures from the Cologne Institute of Economic Research showed that Germany in 2010 had 50 hectares of development per 100,000 population, while the UK had only 15 hectares. Given those figures it’s not surprising that Germany is building three times as many homes as the UK, even though its population growth is lower.

Germany: Housing construction permits issued
Year         2000      2003        2009      2013
Number 450,000 250,000 160,000 250,000

A recent change has been the entry of institutional landlords, from 2000 onwards. With its long term rental periods and relatively low property prices Germany has attracted investors looking for stable, bondtype yields – rather than, as in the UK and Spain during the boom, driven by capital appreciation prospects –and several funds are now listed on the stock market.

French figures

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While France seems to have avoided a major property bust of Spanish proportions, lack of economic recovery has pushed newbuild numbers down. Housing starts held up well during the early part of the financial crisis, but have fallen back over the last couple of years. Figures from FIEC (the European Construction Industry Federation) show French new building fell by 17% in 2012 and a further 4% in 2013. Even so, at 335,000, 2013 completions were more than three times UK levels, despite the fact that the two countries have relatively similar populations.

High levels of new building weren’t a boom-time flash in the pan. An average of 320,000 annual starts from 1980 to 2010 covers two property market cycles, and while social housing has helped when the private sector was in crisis (for instance in 2008, when it accounted for a quarter of the total), it’s the private sector which has accounted for the lion’s share of investment. How has France managed to sustain such high levels of new building?

One answer is that like Germany, France encourages investment by private landlords in new building. Though France has a higher percentage of home ownership than Germany, at 54 per cent (still well below the UK’s 68 per cent), it retains an important private rented sector. Perhaps the most characteristic feature of the market is the series of programmes promoting investment in rented housing, named after the ministers who evolved each scheme – Perissol, Besson, Robien, Borloo, Scellier, Duflot. These offer significant tax breaks for the purchase of new (and in some cases refurbished older) housing, but only on condition that the properties are long term investments (the current Duflot scheme requires nine years’ retention). Several of these schemes have also specified the type and location of property that qualifies – they are, to that extent, highly dirigiste.

There are also a number of schemes resembling the UK’s Help to Buy and offering subsidised loans; unlike Help to Buy, they have mainly been targeted at lower income families and first time buyers rather than being more generally available.

The various rented housing schemes have had a mixed reception. In some towns, the rental market was quickly saturated and later investors found it impossible to rent their properties, consequently losing their tax advantages. The schemes have even been accused of distorting the market, and increasing the level of rentals in some areas. However, it appears likely that they have worked, in terms of increasing the housing stock.

Spanish speculators

New development in San Sebastián de los Reyes, Madrid: Two and four bedroom apartments with two car parking units, high quality finishes, large common areas and services.

Not all European markets have escaped the thrills and spills of a major property recession. Spain has probably done worst of them all, owing to fall-out from the massive housing bubble of  2000-2007.

In 1996-8, Spain was building an average 350,000 homes a year. At the top of the boom, in 2006, that had increased to 865,000 – as much as in the UK, France and Germany together; but by 2013, supply had entirely dried up with just 35,000 homes being built and even fewer permits being applied for, though it appears the cycle is now stabilising at this much lower level. An excess inventory of some 600-700,000 homes is likely to continue to deter builders for some time to come.

What caused the boom? In part, it was fuelled by cheap loans – as were housing bubbles elsewhere – and Spain, having joined the euro, was unable to hike its interest rates to try to control speculative excesses. Cheap loans not only encouraged owners to borrow, they also encouraged builders to incur huge debts in order to fund speculative developments. There have been estimates that as a result of those debts, as much as 50 percent of Spanish developers are ‘zombie companies’, able only to service their debts but not to repay them, or to make a profit. Evidently, these companies are not going to boost their activity – which would involve increasing their cost base – any time soon.

But there was also another factor – foreign investment in the housing market, mainly though not exclusively on the coast.  (There’s a warning here for the central London market; once the foreign capital tail starts wagging the residential property dog, prices tend to run ahead of what the local market can justify.) That led to a situation where the Spanish housebuilding industry was focusing a large proportion of its output on that market, and building in tourist-heavy areas rather than in areas where Spanish buyers wanted to live.

With a home ownership rate above 80 per cent (ownership was encouraged by the government in the 1960s and 1970s), and a very limited social sector, the Spanish market didn’t enjoy the benefit of a strong rental or social housing sector to pull back prices. Even social housing has traditionally been delivered via subsidised owner occupation rather than through social housing; only recently have rental subsidies been created, broadly similar to housing benefit in that they are paid as a subsidy to private sector rentals.

What’s intriguing about the Spanish boom and bust, though, is that the law of supply and demand doesn’t seem to have worked. Spain was not a country with a high rate of population growth, and already had high home ownership before the start of the boom, so neither high household formation nor a swing from renting to owner-occupation was responsible for the over-development that occurred. The boom was driven by speculators, and by the demand for second homes both for foreigners and by Spaniards; its legacy is a huge number of empty homes, which were built for the high end of the market and consequently are unaffordable for first time buyers and lower income families.

Now, research from the London School of Economics shows that Spain is seeing its lowest birth rate in the last 60 years (and to be cynical, over 80 per cent of 18-24 year olds now living at home doesn’t give much hope of the birth rate rising!); the number of first time buyers is falling by two per cent a year, and the dearth of young homebuyers is exacerbated by low salaries and high youth unemployment. The laws of demand and supply might not have worked too well in the boom, but seem to be prolonging the bust.

Demand, supply and affordability

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It is intriguing that the two countries with the highest homeownership – the UK and Spain – have dysfunctional housing supply, but at opposite ends of the spectrum; Spain has built vastly too many houses while the UK has never managed to build enough.

It certainly appears from the evidence that those countries where the government attempts to manage housing supply are able to match supply and demand better over the long term than those where a laissez-faire attitude leaves housing supply to the mercies of the market. Classical economic theory doesn’t appear to work in the housing market; although France has one of the highest rates of second home ownership and one of the higher rates of housebuilding per 1,000 residents, it is also among the three least affordable markets in Europe, according to Deloitte’s Property Index.

The big difference between the French/German model and the British one is that while UK governments have introduced subsidies for housing, they haven’t targeted or focused them. British subsidies are also indirect, focusing on the consumer, whether owner-occupier or (in the case of housing benefit) tenant, rather than being paid to investors or developers. Funding for Lending gave banks money to lend to mortgage borrowers. It might have been better applied by financing developers’ land banks and work in progress directly.

However, whatever individual schemes are created, it’s a cultural change that the UK really needs if housebuilding is to take off. Germany and France both see housing as a social good rather than a profit opportunity; it was the get-rich-quick culture of escalating property prices that drove Spain into a vertiginous boom and vindictive bust. While buy-to-let landlords in Germany and France have tended to look at properties as a source of long term income streams, British buy-to-letters too often buy properties at marginal or even negative gross yields focusing instead on the prospects for quick capital appreciation.

While the government needs to think about better ways to stimulate housebuilding – because what’s been tried simply hasn’t worked – perhaps we also need some thinking about how to refocus investors away from quick capital gains towards longer term investment.

And that might take some doing.

EU starts per 1000 citizens, 2013:
France 5.04 Average 2.7
Austria 6.10
UK 2.32
Germany 2.99
Spain 1.24
Source: Deloitte


February 14, 2015

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