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Yesterday I was watching breakfast TV as usual when the story about forcing homes to be rated for energy efficiency ran. After a fairly inept performance from the housing minister (Seriously, when was the last time any member of the Labour party actually said something that ANYBODY agreed with?) left me shouting at the TV I started thinking about the problems with the housing market generally.

The whole energy rating fiasco will help contribute to the problems faced by everyone attempting to buy or sell a house since it will be included in this ridiculous “seller’s pack” that seems designed to provide more work for surveyors and estate agents (along with, now, insulation salesmen). We have a very well established system of conveyancing in this country, which works well (by and large), but is creaking in the face of modern life with its increased labour mobility. However, and this is something that the Government should take account of - just because something is old it doesn’t mean that it’s no good (this is a valuable lesson I’ve picked up from both my training in law and my work in IT - if anyone thinks that IT is all about “newness” then try looking at encryption algorithms where the best are always those that have been used and reviewed).

As far as I can tell, the problems with the housing market are thus -

• Buyers require an incredible amount of information about the property (due to large sums involved).
• The time taken between agreeing a sale and actually exchanging is unacceptable, leading to additional costs
• The costs of actually performing the sale are too high
• Chains can break down, leading to the loss of other sales due to no fault of the parties directly involved
• First time buyers are unable to get on the property ladder due to excessive prices generally
• Key personnel (teachers, nurses &c.) are unable to get housing in certain areas such as London
• Many homes in rural areas are purchased as secondary/weekend homes by city-dwellers, pricing locals out of the market

The “Information Pack” is intended to remove the problem of information discrepancy (ie, the seller has 100% knowledge, the buyer has 0%) which I think is the key problem that needs to be solved. One thing that seems to be overlooked in producing this is why this happens and why the buyer needs quite so much detail about the property they are buying.

Most of the requirements on information that a house buyer needs are not necessarily required by the buyer himself, but by his mortgagee, who needs to ensure that they are taking adequate security against the loan. Will the mortgagee be forced to follow the information that the seller has provided? Where will liability rest should any mistakes (or fraud!) be committed?

I recently finished the book “The Undercover Economist” in which Tim Harford discusses the problem of buying and selling used cars - where the primary problem is one of an information discrepancy which causes a loss to both parties and it’s worth reading the book for the explanation behind this (the rest of it is eye-opening as well!). The way that this information gap has been resolved is that sellers of cars have become more trustworthy, thus reducing the need for a buyer to have quite as much information - fewer second hand cars are sold privately and more by established organisations. The buyer has more confidence as a result - should something go wrong the car can be returned (an organisation with larger premises and more stock is more likely to be there in future - as Harford explains, this is the reason that banks have impressive buildings themselves) and therefore the buyer doesn’t need as much information in advance.

My solution to the housing market problems is to take the same approach - instead of buying from a private person through an intermediary (who takes a cut of the money and creating imperfections in the market (interestingly, another book, “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything” discusses how real-estate agents take advantage of their own knowledge of the markets, without always getting the best deal for the seller)) a buyer could buy from an established organisation who takes on more of the risk of the sale. The first step to introducing this would be to remove the notion of “stamp duty” on property and allow property sales to be tax free, in themselves (although obviously profits would be taxed).

What I forsee is a housing market where an individual sells his property to a large organisation (likely to be a bank, or house-builder) and is then free to purchase any other property he wants. The organisation then can do what it wishes with the property (within planning laws) and most likely sell it (or rent it) to another individual (obviously some profit would be involved). Once this happens though, the selling organisation becomes responsible for flaws (under standard consumer protection laws). The result is, almost immediately, that the housing chain is broken and the information discrepancy problem is removed. Costs and timescales of performing the sale will also fall - especially if the organisation selling the house is also the one lending the money (this is also the way that car sales work).

One final thing that would solve most of the other perceived problems with the current housing market is if the Government itself had a semi-autonomous organisation participating in this process - there could be limits set against this and specific goals to be achieved (extra help for first time buyers, extra help for teachers in certain locations &c.).

There are issues with such a system, of course, and one that I can see immediately is that it may encourage a “land grab” by a few large organisations - instead of reselling the properties to individuals they would keep them in stock or as an investment. There are ways to avoid this (I’d prefer not legislating against it) but it would only happen if the increasing value of property was larger than the returns to be made by selling (plus mortgage interest of course) or renting - of course the cost of maintaining property plus the associated annual taxes (council tax could be levied against the OWNER of a property) would help in this.

I’m sure there are other flaws with such a plan which will occur to me later… In the meantime, comments?

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