A nation of estate agents?/wikipedia
A few months ago, several news organisations announced a “JOBS BOOM” as unemployment dropped from 7.8% to 7.7%. Many of the new jobs created were in estate agents, which grew by nearly 10% in just three months. However, we should be careful of building our economy (again) on the sand castle of the housing market.
First of all, just to be clear, I have nothing against anyone who works in an estate agents. Most people in the UK are doing their best to make ends meet and find work. In an age of zero-hours contracts, falling real wages, and the spectre of daily sign-ons for the unemployed, I can't say I'd not be tempted. However, what we should be focusing on is what an economy of estate agents means, and why it is problematic.
The boom in estate agents comes from a flurry of activity in the housing market. This in turn is reacting to the Coalition's flagship housing policy 'Help to Buy', a scheme to provide broad financial help to those seeking to buy a house. This week, the second round of Help to Buy was brought forward by the Chancellor, much to the ire of its critics.
So, what is wrong with Help to Buy?
Right from the outset, people were asking why government decided to stimulate demand rather than supply. That well-known bastion of radical economic analysis, the IMF criticised the scheme for the high risk of pushing up house-prices in the absence of measures to boost the supply of homes. They followed the Office of Budget Responsibility, the Bank of England, and the Treasury Select Committee. Fears of a housing bubble emerged recently, with the Chancellor responding to criticism from Labour and the Lib Dems by granting the Bank of England extra powers to prevent such an event.
Another criticism is that, for the first time, the state will have a direct stake in house prices. If a Help to Buy house is repossessed, then the state is liable to compensate the lender for up to 15% of the value of the house if the property was sold on at a loss. A report from Fitch earlier this year concluded that 87% of homes repossessed since the start of the crisis were sold at a loss. In terms of numbers, in 2004 there were 77 000 Repossession Claims issued by the Ministry of Justice, by the height of the credit crunch in 2008, this had nearly doubled to 143 000. So, in any future recession, the state is likely to directly lose money from under-writing Help to Buy – the estimates for the first round of Help to Buy was up to £130bn of mortgages being guaranteed by the State. To see what this might look like we only have to turn to the US.
In the US housing market state-backed mortgage providers Fannie Mae was set up in the 1930s, split in the 1970s into Fannie Mae and Freddie Mac, and then later privatised. The cost of bailing out these two mortgage giants was an estimated $190bn, with the US government backing 90% of mortgages in 2007. The role of Fannie Mae and Freddie Mac in pioneering the securitisation of mortgages, and their stoking of the sub-prime crisis, should give the UK pause before plunging into the mortgage business.
Most telling for the results of Help to Buy is that whilst employment in estate agents is now 100 000 greater than its 2008 peak, employment in construction is lagging behind by more than 300 000 below its peak. Something is wrong here. Why are we pumping money into the trading and exchange of housing rather than building housing?
The immediate answer is that the aim of 'Help to Buy' is to stimulate the market in housing, get it growing again, which will make it more profitable for developers to build housing. However, there is a deeper political commitment to home-ownership in UK politics.
Since the Thatcher revolution of the 1980s, the UK political establishment on the right, and then the left, have been committed to creating a home-owning nation. For Conservatives, this meant a democracy linked to property and wealth, rather than to socialist ideas of citizenship. For Labour, home-ownership and the growing of the housing market gave them a way to grow the wealth and assets of the poor, rewarding the aspirational, and removing the need to redistribute wealth.
On top of this, housing and property investment started to eclipse pensions. Now that a greater proportion of the retiring population will depend on income from the housing market, governments are faced with a problem of how to create a stable housing market without reducing the income of pensioners.
From an economic point of view, the link between a healthy economy and home ownership is less clear than you'd think. About a year in an article for openDemocracy, I pointed out that three of the countries in Europe with the highest rates of home ownership were: Greece, Ireland, and Spain. By contrast, Germany has a relatively low rate of home-ownership and the biggest rented housing sector in Europe.
Cost of living crisis
Even taking the rise in employment into account, these are now being swallowed up dramatically by housing costs. Last month rents reached £1 below their all-time high of £744 a month. Shelter calculated that if the cost of food had risen by the same level as housing, then the average cost of a weekly shop would be £453. A report last week noted that in 2008, home-owners paid £4200 a year more on housing costs than renters. Now renters pay £864 a year more than home-owners.
At the same time, social housing, long in steady decline, is now almost frozen. Public funding to social housing providers was halved within months of the 2010 election, prompting credit agency Moody's to cast doubt on the social housing sector's ability to repay loans. By the end of 2011, new social housing building had collapsed by 97%. What new social housing there is is increasingly being charged for at 'affordable rent' (80% of market price), a laughable policy in London where a two-bed flat in Southwark would cost £44 000 to rent. This is a stark time for social housing. Commentators are now asking if social housing will even exist in the future.
However, councils are now able to start building homes again thanks to changes in council housing finance. The sting in the tail for councils was that in order to start building, English Councils had to take on £29 billion of new debt – a figure more than paid for through Right To Buy receipts and negative subsidy. A study for the Local Government Association said that councils at present could provide 15000 new homes in 5 years, but that without the debt cap this could rise to 60000. Almost all councils haven't built homes since the late 80s, and need time to build up their capacity and staff do actually get building again. Even 60000 homes over five years is a small number compared to the estimated shortfall of at least 300 000 homes a year.
Estate agents don't just deal with buying and selling property. They are increasingly involved in rented housing as a lettings agent. Back in July, I went to observe a day of action by Hackney Renters, a campaign group for private rented tenants, against lettings agents and estate agents. Outside the Foxtons on Hackney's Mare Street, activists played 'housing monopoly' and spoke to passers-by about their experiences. I can't say anyone I saw had anything good to say about the roll of estate agents in rented housing.
Recent reports on housing in London have also ventured into the thorny issue of overseas investors buying housing in the UK. The Centre for London estimated that just under 75% of new homes in London in 2012 were purchased by overseas investors. Estate agents dealing with London developments often sell housing 'off-plan' to overseas buyers. The problem being for Londoners that this new housing will probably be private rented (insecure and unaffordable), or left empty, and contribute little to the easing of the housing crisis, and may also push housing costs further higher.
The state we're in
We should be wary of building ourselves up on the housing market yet again. Housing is a basic human need, gambling with it can only lead to disaster. Instead of stoking up a housing bubble in a desperate hope to jump-start the economy, we should be focusing on how we can provide for these needs. Whether you rent, own, build, buy, or share, it should be about your need and not you means. The time to cheer will be when the number of houses increases by 100 000 in three months, not the trade in housing.
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