New JRF analysis – Frozen housing market faces ‘worst of all worlds’ downturn unless Government acts now

The housing market is facing a ‘worst of all worlds’ situation as rising interest rates and high inflation create the conditions for a housing market freeze unless the Government acts quickly.  

A new report by Rose Grayston, Toby Lloyd and Neal Hudson for JRF describes a market where building stops, transactions stall, cash rich investors swoop in to buy up properties, rents continue to spiral and vulnerable homeowners are stuck in unaffordable homes. This will have serious consequences for the economy without seeing a corresponding fall in house prices.  

The report says that measures used for previous housing crashes won’t work because of the particular economic conditions today. It urges the Government to act in a way which will not only get the market moving, but start to put right the problems which are excluding younger generations from owning their own home or finding genuinely affordable homes to rent.  

The authors argue that it is possible that we can emerge from this downturn with a fairer, more accessible and more sustainable housing system if different policy levers are used. The implications of the current housing downturn include:  

• A collapse in housebuilding as housebuilders mothball sites to avoid selling in a falling market. [1] 

• Transactions falling as homeowners avoid selling while waiting for prices to rise. 

• Investors swooping in to buy up homes for holiday lets or short-term lets using cash, while first-time buyers relying on mortgage finance are frozen out of the market. [2] 

• Vulnerable groups struggling with increased housing costs – including private renters, low-income mortgage holders, shared owners and those who have recently bought through Help to Buy. 

The report sets out a plan of action that addresses the immediate impact of the current housing downturn while, at the same time, creating the conditions for a fairer and more economically productive housing system in the long-term.  

The Government should include the following simple measures in the Budget on 15th March: 

• Keep housebuilding going by empowering and funding councils, housing associations, charities and community groups to acquire stalled sites from developers and redesign schemes to include more affordable housing, which can be built quickly as prices fall. [3] 

• Increase the Stamp Duty Land Tax surcharge on investor purchases to give an advantage to those seeking to buy a home to live in. [4] 

• Remove tax breaks on short-term lets, which currently give landlords a £7,500 tax free allowance on rents, to discourage landlords from switching from long-term lets to other types of rentals. 

• Levy council tax on homes in new developments 18 months after planning permission has been granted whether built or not.

• Support households struggling with higher costs by unfreezing Local Housing Allowance (LHA) so it meets the cost of local rents and establishing a new version of the Mortgage Rescue Scheme launched in the wake of the Global Financial Crisis, which would fund social landlords to buy the homes of mortgaged homeowners in distress. 

To address the structural changes needed for a fairer housing system, Government should:   

• Consider replacing council tax and Stamp Duty with an annual property tax paid by the owner rather than the resident, in order to moderate future house price rises.  

• Diversify the development sector and launch an ambitious new programme of powerful development corporations to lead a new generation of high quality, mixed tenure developments. 

• Give councils the ability to apply to declare Housing Pressure Zones where they can set the rules about who can buy properties in particular areas. This could be used to restrict investor activity where high demand for second homes or low demand is fuelling exploitative lets. 

Darren Baxter, Principal Policy Adviser at JRF, says:  

“We are facing a housing downturn that will put vulnerable families and our country’s economic prospects into serious difficulty. The Government must confront this head on and recognise that past approaches will not work this time. 

“Instead, the Government must tackle both the short-term fallout from the housing downturn we find ourselves in and the deeper problems within our housing system. By acting now, and doing both at the same time, Government will ensure we are better placed to come out of this downturn with a fairer, more secure and more affordable housing system in reach.” 

Toby Lloyd, one of the report’s authors, says:  

“House prices have been far too high for decades – pushing homeownership out of reach, distorting our economy, and making it harder to provide affordable homes to rent. As we enter another downturn, we must not waste the opportunity to lower house prices to a much more affordable level – and keep them there.” 

Notes to Editor

1. Developers including Bellway, Barratt and Taylor Wimpey have already reported lower reservation rates for new build homes, along with higher cancellation rates. Persimmon also saw a reduction in sales. 
2. The Bank of England reported that mortgage approvals for house purchase were 46% below their pre-pandemic average in December (this average is based on 2014-19).
3. This could be delivered by recycling imminent underspends on Homes England grant programmes into new social housing supply.
4. The surcharge should at least double but could increase further if needed in order to effectively disincentivise speculative investment.