Thursday, 19 September 2013

Bad housing policy is not just a New Zealand thing

Regulation of the housing market here is New Zealand causes all sort of problems but may be we should be grateful on one has, yet, put forward a policy like this one in the U.K.

Philip Booth writing at the IEA blog notes,
Last week, the Royal Institute of Chartered Surveyors (RICS) argued that there should be a limit on house price rises of 5 per cent per annum. If rises went beyond this limit, RICS suggested, the authorities should put restrictions on the mortgages banks could offer.

There would be several objections to this policy if it were to be followed in isolation. Sometimes house prices rise for good reason, and limiting price rises will make the market even less able to respond by building new houses and by turning commercial property into residential property. Secondly, if house prices are rising because incomes are rising strongly, or because of a previous recession, the only consequence of limiting rises to 5 per cent per year will be that people refuse to sell, as they will expect catch-up growth over the coming years. The UK is also not a single housing market: supply and demand conditions differ in different parts of the country. For the last 30 years, house prices have risen strongly in London and the South East, but less strongly elsewhere.

And if people are blocked from obtaining mortgages, even though banks are happy to lend, it will make it even more difficult for the young to get on the housing ladder. Further, people who are prevented from taking out mortgages may well take out more expensive and completely unsuitable forms of credit instead.
Surely the whole point of having a housing market is to signal changes in scarcity via changes in prices. It is these price changes that give incentives for the contraction or expansion of housing supply and demand. A rapid increase in prices would suggest the need for an expansion of supply, i.e. the building of more houses. If you limit price increases you limit the incentive to increase supply just when it is needed most.

But the main message here, a message with more general application, is to do with the danger that one set of bad regulations drives another set of bad regulations which ........ Booth explains,
The main problem with this proposal, however, is that its designers are looking down the wrong end of the telescope. We have the Bank of England making it more difficult for banks to lend money due to onerous capital requirements. It then responds to the problems this creates by unconventional monetary policy, inflating asset prices – including for houses.

Concerned about the extension of mortgage credit, the government then brings in the statutory regulation of mortgages – with a whopping consultation document of 500 pages. Then, worried about the difficulty people have getting mortgages, the government – seemingly oblivious to the policies in the US that caused the 2008 crash – provides mortgage guarantees (through schemes like Help to Buy) to people who can’t obtain mortgages on commercial terms. To cap it all, we have one of the most restrictive land-use planning policies in Europe. Even after a decade of stagnation of real incomes, house prices are still rising from levels far higher than in nearly all comparable countries.

In a vicious circle of regulation begetting regulation, we have a proposal to cap the house price increases caused by all the other regulations
May be a better approach would be to look at the regulatory mess we already have and pick it apart and reduce it down to those controls that are really necessary, thereby reducing the need to create new regulations to deal with the unintended consequences of the last set of regulations. Sometimes less really is more.

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