Building for tomorrow
A focus on house prices in the short-term could be masking greater problems in the future
The past year has seen a great deal of discussion about the property market. Most attention has focussed on the impact that the credit crunch has had on house prices and sales volumes. For most people though, it is the longer term future of the market that is of greater concern and when we consider this longer term that we find the current situation may be storing up a larger problem for the future.
Number of new homes slashed
Since the onset of the credit crunch, activity in the new-build sector has slowed to a near standstill. The second quarter of 2008 saw a 56% fall in new house building levels. In Edinburgh the drop was even more severe with just 161 homes started compared to 674 during the second quarter of 2007.
The drop in activity is hardly surprising. Developers are facing rising construction costs whilst the value of their end product – property – has started to come down. Whilst this drop may not present problems in the immediate future, if the number of homes being built remains constrained the impact on the market will be significant.
More properties needed to house a growing population
The number of households in Scotland is projected to rise by an average of 17,600 per year until 2031 and these people will, of course, need somewhere to live. In mid-2007 the Scottish Government stated an intention to tackle this by increasing the number of properties being built in Scotland from an average of 25,000 per year up to 35,000. Instead the number of homes being built has been slashed, and from a level already insufficient to cope with a growing population.
If we are unable to stimulate new-home building activity we will again see demand for property far exceeding the available stock of homes and this in turn will lead to rapid rises in house prices. Whilst this may sound like good news for investors and homeowners the reality is this would lead us back to a situation where first-time buyers are priced out of the market. In the absence of new entrants to the market, high levels of inflation will again prove unsustainable.
Sustainable growth the key to a healthy market
What will benefit the market in the long term is not a return to rapid growth followed by sharp falls in house prices, but a situation where house prices grow at more modest but sustainable levels. To achieve this it is vital that we see activity in the new-build sector being simulated so that not just more homes, but the right sort of homes, are built to satisfy the country’s needs.
With this, and a return to moderate, responsible lending we can start to move towards a situation where house prices rise at a lower but more stable rate which ultimately will benefit not just those involved in the market today, but also those looking to get on the ladder years from now.