Priced Out has identified three key areas policy makers must urgently address to restore housing affordability:

• Increase the supply of newly built homes
• Restrict house price inflationary pressures
• Rethink unhelpful government property market schemes

Increase Supply of New Homes

In 2002 the government commissioned The Barker Review of Housing Supply, the first independent review of the UK housing market to be conducted by an economist. The report comprehensively exposes the underlying cause of above average house price growth to be the long term undersupply of new housing in the UK and the housing market's inability to respond to market forces.

Priced Out welcomes the advent of the Barker Report and government moves to reform the planning system with the aim of reducing the obstacles to the supply of new homes and making the market more reactive. Priced Out also welcomes the recent rises in the rate of building.

However we believe the government's target for new home building, an additional 50,000 homes, does not go far enough to address the problem. This figure puts it below Barker's proposal of 70,000 additional homes a year to actually reduce the UK's usually high long term house price inflation to 1.8% and even further from the 120,000 needed to reduce our inflation levels in line with the EU average of 1.1%.

The government should be much more ambitious with its house building targets aiming to reduce long term inflation to that of our European neighbours. 

Restricting inflationary pressures

Whilst lack of supply of new homes may be the underlying cause of house price volatility in the UK there remain a number of other issues which have fuelled this house price boom. Priced Out has identified the following key factors which have helped drive house prices to the extreme's they have reached today;

• Unusually low interest rates combined with rising mortgage credit availability
• Disillusionment with other investment classes (savings, shares, pensions)

Low interest rates have created the illusion of increased affordability despite rising prices actually making homes less affordable. Until interest rates are pegged for the entire length of a mortgage this short term "affordability illusion" can easily evaporate.

Upper limits on mortgage borrowing based on salary would have acted as a safety valve preventing borrowers from taking on excessive debt and fuelling the house price boom. Unfortunately such limits do not exist and commercial realities have led to borrowers being offered larger and larger mortgages to meet spiralling costs.

Since 31st October 2004 the Financial Services Authority has been responsible for regulating the sale of mortgages. Currently regulation leaves determination of the level of debt borrowers can assume up to the individual mortgage lender with their only requirement being to document their policy and that they have considered whether the customer can afford to repay the debt at the offered interest rate (and with the new rate at the end of any discounted period).

Priced Out does not believe this is an adequate safeguard, neither for protection of borrowers nor for the overall health of the housing market.

We believe that the FSA should require lenders to consider affordability of a mortgage under a more explicit formula not determined by individual commercial entities but by the regulator itself. This formula should consider their ability to repay under a variety of interest rate scenarios (not just today's unusually low rates), should enforce upper limits on lending to salary multiples and most importantly should consider the effects of credit availability on the UK housing market in general.

Additionally given the dramatic increase in activity in the Buy To Let sector we believe it is now time for Buy To Let mortgages to be regulated by the FSA.

Rethink government housing subsidies and schemes

Whilst we applaud the good intentions behind government schemes to help out home buyers we believe some serious questions should be asked as to their overall helpfulness.

Shared Equity and Key Worker Schemes (HomeBuy and Key worker living)

The fact that these schemes exist at all are a fundamental admission from the government that high house prices are causing serious economic damage.

We believe the government's response should be focussed on improving the affordability situation for everyone and not subsidising individuals who it "prioritises". Any response which targets individuals is merely papering over the cracks of a significantly bigger problem.

Consider this... every recipient of one of these schemes who buys a home on the open market is most likely keeping some other unsubsidised family out of the market.

This brings us to the most important question, why should tax payers subsidise current house price levels when they are causing so much economic damage?

Priced Out want the government to focus on the core issue of house price affordability and stop subsidising current house prices with public money.

Residential property in SIPPS

Priced Out congratulates the government for taking to difficult but correct decision to abandon the introduction of residential property into SIPPS.

REITs

Priced Out welcomes the REITs scheme if it leads to increased investment and building of new property. However if it simply encourages the transfer of existing housing stock into REITs schemes this would be a most unwelcome development.

We would be interested in hearing from the government their expectations of the impact of REITs schemes in this regard.

Summary

The government needs to act now to return house prices to affordable levels and prevent further damaging house price booms from occurring in the future;

• Government needs more aggressive home building targets
• FSA should determine mortgage affordability criteria instead of individual lenders
• FSA should regulate Buy To Let loans
• Government should not subsidise current house price levels
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