One could argue forever about whether house prices are too high or not. Or even about whether they are affordable or not.
Assume that interest rates will never rise. Then assume that unemployment won't rise either and that real wages won't fall, and you can make a perfectly reasonable case to suggest that, at current levels, in terms of the percentage of an income required to service a mortgage, house prices are perfectly affordable.
But for those who want to buy homes, and in particular those who want to buy them for the first time, this doesn't really matter. Why? Because even if they are affordable (and I don't accept that they are) houses aren't accessible. The mortgage market remains very tight and anyone without a good deposit and a high stable salary has only a very limited chance of getting a mortgage.
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This week, figures from the Council of Mortgage Lenders showed that gross mortgage lending in September was down 7% on last year and is now at a ten-year low. No mortgage, no house.
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I don't expect this to change for a long time to come. Given the scale of the financial crisis, banks aren't going to have either the capital or the will to lend at 2007 volumes for a generation.
That means that increasing numbers of people are going to be looking for houses to rent. All agents report a rise in the number of would-be tenants they are seeing and there are regular reports of rents going up.
The rising rents might not last given the low level of transactions in the market. The last time this happened, thousands of sellers turned landlords and rents fell dramatically. But the shift by young people from buying at any cost to renting probably will last.
This isn't necessarily a bad thing. The costs of moving are now so high (think stamp duty) that if house prices aren't rising fast and people aren't making the equity they need to oil the financial wheels as they move on, they can't afford to do it very often.
So, it makes sense to rent when you are young and save to buy one "lifetime" house at a later age. It particularly makes sense when prices are static or falling.
But if the kind of people who would once have bought are now going to rent, who is going to provide them with the flats and houses they need? Outside the social housing sector, the UK has long been dependent on the small private landlord (the buy-to-let landlord) to provide housing.
However, I wonder if this is good enough. Some small landlords are excellent, some are awful. Most suffer from lack of scale (they don't have full-time handymen at their beck and call) and from cash flow problems: when the purchase of a new boiler requires several months' worth of rent to be set aside and there is a mortgage to be paid, not very many tenants get
new boilers.
But regardless of whether buy-to-let is a good or bad thing, it still isn't able to provide for a market shifting en masse to needing good long-term rental property. For that, we need the institutional sector.
You'd think getting them in wouldn't be a problem. What insurance companies and pension funds want more than anything is long-term reasonable yielding assets (and residential property yields about 4.5% net at the moment) to match their liabilities. That's why they constantly overdose on bonds. But property provides much the same thing. Manage it well and you can get a perfectly good yield with the security of owning a very long-term asset. And, if you build specifically to let, the end price of houses is by the by: what matters is the rent.
So why aren't more institutions in the market as they are in Germany? Partly because the leases are too short they prefer the commercial sector where they can lock people in for five to ten years. And partly because they haven't been there in the past and no one is incentivising them to look at the sector.
But it wouldn't be hard to change that. First, the government could introduce a new long-term leasehold say five to ten years, with the right to decorate interiors as you like included. Then, it could offer a few incentives to housebuilders to build-to-let, in conjunction with investment funds. That would be better than continually supporting build-to-sell as it does now via shared ownership schemes and the like.
Should the government get such a thing right, it might not only improve the quality of life of the average tenant, it might also stop another bubble developing. If people have the security of living in long-term, high-quality rental property, they might not be quite so driven to destroy themselves with debt as they were in the run up to 2007.
It might not be connected, but note that Germany, where the institutions are active in residential housing, is pretty much the only place that hasn't had a nasty property bubble in the past decade.
This article first appeared in the Financial Times
