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Housing Policy Responses to the Credit Crunch and Economic Downturn Kenneth Gibb March 2009

Housing Policy Responses to the Credit Crunch and Economic Downturn Kenneth Gibb March 2009. Structure. Causes and evolution of the crunch Impacts on the economy and housing system Policy responses to the symptoms Social housing and residential-led regeneration

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Housing Policy Responses to the Credit Crunch and Economic Downturn Kenneth Gibb March 2009

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  1. Housing Policy Responses to the Credit Crunch and Economic Downturn Kenneth Gibb March 2009

  2. Structure • Causes and evolution of the crunch • Impacts on the economy and housing system • Policy responses to the symptoms • Social housing and residential-led regeneration • Longer term policy questions • Concluding thoughts

  3. Causes • Liberal monetary policy in the US • Housing booms across the world supported by housing market fundamentals • Financial market innovations (unbundling of intermediation; over design of financial instruments; off balance sheet investment vehicles) • Insufficient regulation/over reliance on self regulation

  4. Consequences • Moral hazard • Systematic under pricing of risk in financial markets • Lack of clarity on true asset values • Gross over leveraging of bank capital • Internationalisation of US bad debts • Growth of dependency on wholesale funding for supporting retail banking activity

  5. Systemic failure? • Early seizure of interbank lending activity • Differential response by central banks • Initial efforts to restore liquidity unsuccessful • Increasing number and presentation rate of distressed banks • Eventual emergence of worldwide panic, reduced by co-ordinated policy moves to restore confidence

  6. UK GDP Growth

  7. The Housing Market • Falling transactions in the owner occupier market • More expensive mortgage credit and higher access costs; fewer mortgage products on the market • Reduced mortgage lending (gross and net) • Falling house prices • Prospect of increased repossessions • Reductions in sales of new property and new build activity • How bad are these effects?

  8. UK Mortgage Lending

  9. Arrears & Repossessions

  10. Price Trends

  11. Market Transactions • UK residential transactions at 59,000 in September 2008, compared to 126,000 in September 2007 (source: HMRC) • Scottish new build completions 2008 could be as low as 12,000 (source: Homes for Scotland) if not lower • Housing Supply Task force (quoting Homes for Scotland) reckons 20,000 jobs lost directly in Scottish construction and another 26,000 jobs lost indirectly in the supply chain.

  12. Housing Market Prospects • Housing fundamentals remain strong despite economic forecasts • Market may suffer from continued speculation (of further house price falls) • Problems in the money markets need time to unwind • LIBOR is falling • Return to normality in 2010?

  13. Housing Policy (mostly): Responses to Symptoms so far • Pressure to resume lending to prospective mortgage borrowers and demands for forbearance on mortgage arrears • Additional funding for debt advice services (UK and Scotland) • Encouragement for RSL purchase of new private housing (UK and Scotland) • Extension of mortgage rescue schemes (UK and Scotland) • Housing capital expenditure brought forward (UK and Scotland) • Extension of shared equity schemes (UK and Scotland) • Increase in the house purchase stamp duty threshold • Reform of ISMI

  14. Housing Policy: Further Short Term Steps? • Short term: • Support for new build market through expansion of private renting? • Temporary suspension of requirement for S75 contributions? • Introduction of mortgage co-insurance/public support for MPPI? • Temporary moratorium on repossession? • More support for dealing with ‘distressed assets’?

  15. Social Housing Issues • Funding crunch for social landlords too • Land sales exemplify the perils of deflation • Unmet affordable housing need and supply targets • English RSLs’ exposure to land and unsold stock • Other ways to raise finance • Budget austerity and spending priorities • Strengthened demand for social and market rented housing • Loan guarantee fund?

  16. Residential–led Regeneration • City apartment market as driver for compact city, brownfield high density regeneration model • Big reductions in residential-led regeneration, private sector residential sector highly vulnerable • Land market decimated and phasing issues • Key role for social housing (e.g. LSVTs, ALMOs and big RSLs) and the PRS • Key roles for market intelligence, public land banks and whether the current model will work in future

  17. Long Term Policy Questions • Long term: • Introduction of capital gains taxation? • New types of flexible mortgage instrument? • Better consumer education and protection? • House price hedging? • Home equity insurance? • Other?

  18. Concluding Thoughts • Short term priorities are support to the housebuilding industry and strengthening of the safety net under existing owner occupiers • Support to housebuilding should be explored in the context of strengthening the market renting sector • Normality WILL return, but if we hate the downside of housing market cycles as much as the upside, why don’t we do something to avoid them? • Strategically, the quest to support ever marginal groups (in income terms) into ownership is ill founded • Economic efficiency and social justice would benefit from reform of housing tax and subsidy arrangements

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