A viewpoint is emerging in some circles that the Government’s proposals to increase the level of construction of large scale infrastructure (thus speeding up the planning and other processes enabling these projects to get under way more quickly) is a practical and potentially effective way of helping the economy get back to a greater level of economic activity. It is a viewpoint shared by many that some long term activity can only help the economy as it is bumping along.
There is, however, increasing confusion when it comes to the intermittently stated aim of some politicians to include private house building in this infrastructure approach when it is fundamentally a different issue.
Should residential private house building be artificially boosted by a change in the planning approach or artificially boosted by fiscal reductions, changes in 106 agreements, or other means, this will have a detrimental affect on the existing housing stock and therefore the overall economy in the medium and long term.
Whilst in the short term there is a boost to local employment and the associated spin offs, in the medium and long term the effects will often be to prolong the fundamental imbalance between supply and demand in the housing sector.
Progress is made within the wider property sector overall (which is arguably the biggest economic sector in the UK) when there is a slight excess of demand over supply such that there is a consequential small uplift year by year in residential property prices.
This provides a huge positive outlook for an area as a whole including all the associated spin offs for home improvements, the DIY sector, carpet and furnishing companies, as well as for local builders with new kitchens and bathrooms, house extensions and a natural demand and desire for house builders to build new properties without artificial stimulus.
Using artificial means to help flood the market with new homes does not help the economy. Invariably, these are built by large building companies with individual or collective lobbying power in Westminster. This additional supply actually stifles the rest of the market by removing the excess supply or extending the period of supply over demand for housing.
This results in a longer period before house prices can fully stabilise, those in negative equity can move or people have a positive approach in order to contemplate other economic activity, such as home improvements etc.
This prolongs the imbalance of demand and supply and unless you are a shareholder in, or work for, one of the new home building companies, every new home built is an increase in the oversupply in relation to the existing demand.
You don’t boost an economy by perpetually boosting supply just because it is easier to influence. The Government has to boost demand to create a thriving property sector and this in turn will help drive forward the rest of the economy into a new sustained era of prosperity.