UK housing shortage threatens recovery, IMF warns

6 Jun 14
The International Monetary Fund has warned that imbalances in the housing market present a risk to the UK’s recovery and called for planning reforms to increase the supply of land for new homes.

By Richard Johnstone | 6 June 2014

The International Monetary Fund has warned that imbalances in the housing market present a risk to the UK’s recovery and called for planning reforms to increase the supply of land for new homes.

In its annual review of the economy, the IMF backed the government’s plan for deficit reduction, which managing director Christine Lagarde said had been implemented flexibly and was now at an appropriate pace given the economic recovery.

However, the report highlighted three risks to the economy. As well as rising housing prices, the global financial organisation said productivity growth remained below historic norms and external threats, such as further problems in the eurozone, remained.

Following her visit at the conclusion of the review, Lagarde said the UK had not been immune to the global financial crisis.

‘While there is still much to be done around the world to deal with the impact of the crisis, in many countries affected by the crisis we are beginning to see some good news. And the news coming out of the UK recently is almost all good.

‘Growth in 2014 is projected to be 2.9%, the fastest among the major advanced economies. At the same time, inflation has come down sharply. And so has unemployment, although it still remains high, at 6.8%. And while the recovery was at first highly dependent on consumption, there are now signs that the economy is rebalancing toward an investment-led recovery. This bodes well for the recovery.’

However, she added there is no room for complacency as productivity remained weak and house price inflation was increasing, which demanded a policy response.

‘With inflation below target and sizeable slack in the economy, we believe that monetary policy should remain accommodative, for now. But we also recognise that keeping interest rates low could further fuel house prices and increase risks to financial stability.

‘But rising house prices fundamentally reflect demand that greatly exceeds supply. Addressing imbalances in the housing market by alleviating supply-side constraints will require further measures to increase the availability of land for development and to remove unnecessary constraints on land use.’

Responding to the IMF’s assessment, Chancellor George Osborne said the forecast that the UK would be the fastest growing major advanced economy this year validated the government’s economic plan.
However the risks identified in by the IMF mean the country still needs to be made more resilient, he insisted.

‘That’s why we have to continue to work through our plan to eliminate the deficit and move this country into surplus; and why at the Budget I took steps to make sure we save more, we manufacture more, and we export more.

‘On unemployment the IMF note that it has fallen rapidly but remains too high. I agree – that’s why we’re cutting jobs taxes instead of increasing them, and it’s why our welfare reforms are vital in order to ensure that work always pays.

‘I also agree with the IMF that we need to remain vigilant for any risks that might emerge in the housing market. That’s why I have given the Financial Policy Committee new macro-prudential tools should they see a risk to financial stability – and as I’ve made clear that includes recommendations to me on the parameters of the Help to Buy scheme.

‘The only long-term answer to Britain’s housing problems is to build many more houses in this country,’ he concluded.

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