THE BLOG

You Cannot Change the Basic Laws of Supply and Demand

01/08/2013 12:41 BST | Updated 30/09/2013 10:12 BST

As the government rolls out the next stage of its help to buy scheme, it has pooh-poohed the contention that there will be a housing bubble - claiming that it would somehow suspend the laws of supply and demand by exercising care in selecting appropriate candidates. So while large-scale investors have taken a keen interest in new social housing developments, the government continues to focus on funding properties that already exist.

Finally, however, whilst on the BBC's Andrew Marr Show last Sunday, Vince Cable conceded that there was a real risk of spurring on another housing bubble by stimulating demand while supply is constricted. It is basic GCSE economics: demand + lack of supply = upward pressure on prices.

What's worse is that the extended scheme doesn't just apply to new housing but to existing properties as well.

Promoted as a good thing by the government in statements regarding recovery, rising house prices supported by what can only be described as government sponsored sub-prime debt will no doubt lead to the resumption of the old status-quo: Rapidly rising house prices supported by highly leveraged borrowing. The only difference this time is that if it goes pear-shaped, the government will have to bail out mortgagees and not mortgagors. Surely this is not where we should be heading.

For the 73% of people who own their own home, rising house prices is good news. But for the remaining quarter of people who are seeking to access the market for the first time, or for people who are living in rented accommodation, the outlook is grim. Savills Estate Agents has predicted that house prices will broadly keep pace with inflation but wages are likely to fall short of this mark. As a result, affordability will increasingly price those on low and medium incomes out of house buying.

You may wonder why I, as someone who holds a substantial interest in social housing, care that the value of our portfolio goes up. Simple, it makes our job harder to do.

Houses4Homes is on the acquisition trail; buying and developing new housing to supply to the social rented sector at reasonable cost. To date, encouraging builders and developers to participate in our development program has been relative easy. After all, few alternative opportunities have been available. But rumours of 'better times ahead' are like glue on the road for a marathon runner. Developers and builders begin to sit tight in anticipation of another housing bubble and rising property prices.

What's the answer? We will have to up the ante, substantially.

In June 2012, the government rolled out a debt guarantee scheme for the private rented sector. With a guarantee on debt via the bond market of up to £10billion, this scheme has had a very poor take up. Why? Principally because no one has yet been able to get this scheme to work.

When we list on the Alternative Investment Market, Houses4Homes will be able to raise retail bonds. With a government guarantee backing these bonds at up to 80% loan-to-value and for a term of 30 years, we have the opportunity to rapidly increase our acquisition rate and thereby meet the scale requirements of institutional investors.

However, there is a problem.

The scheme, as currently structured, offers no allowances for development risk. It is predicated on the financing of existing stock and not the building of new houses. By adding no new housing supply to a market already starved of reasonably priced rented housing, the scheme will do nothing to reduce rent levels.

Houses4Homes will deliver reasonably priced housing by buying out the product of large developers; the only ones that can afford to participate at the moment. We'll face a supply bottle neck. In fact, we already do with just 100,000 new social sector homes built in the last year.

Both the Help to Buy scheme and the Private Rented Debt Guarantee scheme focus on the housing that has already been built rather than supporting the building of much needed new homes. House prices will rise as demand outstrips supply and the property owning democracy wins yet again.

Back to Vince Cable and his appearance on the Andrew Marr Show where he stressed that the real challenge lies in increasing the supply of new social housing. For this to happen the government will need to offer far greater support to the sector.

My team and I have already demonstrated to the institutional market that investing in social housing rental developments is safe and sustainable. It looks like we now have to do the same job with the government.