We risk a collapse in house prices because a rigged market means private developers are not building enough
There is a saying in economics sometimes used to justify tax cuts: “a rising tide lifts all boats”. Its premise is simple: that an improved economy benefits everyone, and that a government’s monetary and economic policy should, therefore, focus on broad economic efforts that increase prosperity for the benefit of both the rich and the poor. poorer. But what if you don’t have a boat to start with?
This is a question worth asking when it comes to the government’s current approach to house price inflation. During the pandemic, the average UK house price soared 10.2%, the highest annual growth rate seen since August 2007 before the global financial crash. According to the Halifax Home Price Index this week, that puts annual home price inflation at its highest level in nearly seven years. The average UK house price is now £ 261,743, a new record high.
Such inflation is seen as a good thing for homeowners (although it’s just as safe to say that many buyers are currently paying too much), but what about first-time buyers who can barely muster a down payment? ? What about the 4.5 million households stranded in private rentals because they cannot afford to buy their own homes? Or the 1.6 million households languishing on social housing waiting lists? All they can do is try to stay afloat while homeownership is further out of reach by policies that make it more expensive.
A guide to today’s talking points, straight to your inbox
The rise in UK house prices is directly enabled by the reduction in government stamp duty as well as a new high loan worth 95% of mortgages that were introduced as part of their plan to economic recovery against coronaviruses.
And it looks like a tipping point has been reached. The Bank of England has now publicly expressed concern and is monitoring our booming housing market after the lockdown. Sir Dave Ramsden, the deputy governor responsible for markets and banking, told the Guardian that he and his colleagues at Threadneedle Street believe “there is a risk that demand will outstrip supply and that will lead to a recovery more widespread inflation. pressure. “If prices continue to rise above wages and interest rates rise from their historically low position of 0.1 percent, this could put financial pressure on homeowners in the future.
Josh Ryan-Collins is the author of Why can’t you afford a house and responsible for finance and macroeconomics at the Institute for Innovation and Public Utility at UCL. He agrees that there is cause for concern. “The UK is a pretty strong candidate for another massive drop in house prices,” he said. I. Indeed, prices continue to inflate well beyond wage growth, thus becoming disconnected from the rest of the economy. “We had two huge ones in the space of about 30 years. We had a big one in the late 1980s and we had another after the financial crisis. “
“If interest rates go up,” he adds, “we could be in a very fragile situation because people are taking on more debt to get up the real estate ladder, to get bigger. “
As tempting as it may be to see a collapse in house prices as a much-needed leveling, it would hurt those with the least the most: first-time buyers with small deposits who bought at the top of the market and those with the least. who have high loan to value mortgages. Meanwhile, wages are not rising at the same rate, which means these inflated house prices are anything but affordable, but people are paying them because they desperately want to escape the precariousness of a largely unaffected private rental. regulated.
Ryan-Collins argues that the government’s current housing policies are a “very short-term approach” to stimulating the economy. “The main form of stimulation here is getting into debt. We are seeing an increase in mortgage credit pouring into a relatively inelastic housing supply and as people’s debt levels rise relative to their incomes, which will end up having a depressing effect on income. People may have less money to spend because more of their income goes to pay the interest on their mortgage. “
However, a crash is not inevitable. Especially since interest rates remain low. The very notion of collapsing house prices rests on the idea that what we are seeing now is a “boom” and not that house price inflation – sustained, as it has been. in recent years – by various government policies – is here to stay.
“This is nothing new,” says Ryan-Collins. “Governments have adopted the strategy of inflating the housing market with policies that attempt to expand home ownership since [Margaret] Thatcher. This is a win-win solution for policymakers as these policies are popular with the electorate and they also support the short-term recovery of the economy as the UK economy is heavily dependent on house prices. There is a vested interest that they do not fall.
A crucial point, according to Ryan-Collins, is that while the government subsidizes the demand for housing, the supply in the UK is in the hands of private developers who “have very little incentive to build at a rate commensurate with the demand for housing. ask, as that would shrink the market. prices. ”To solve this problem, we would need what he calls“ the supply of non-market housing ”which could quite obviously be achieved through the kind of ambitious public housing construction program that charities such as that Shelter repeatedly ask. “It’s not in the government’s plans – they remain committed to market supply.”
In short, our housing market is rigged. Developers amass land and wait for it to rise in value before starting to mine it. When they build, it is not in their best interest that the supply of new housing really meets the demand, as that would drive down prices.
There aren’t enough requirements for them to build really affordable homes either, so when there are new offers, this isn’t the kind we need the most. As Ryan-Collins points out, a massive public housing construction program is the most obvious solution to our housing crisis. But the government will not go down this path because of our economy’s heavy reliance on homeownership to keep the wheels of financial services running.
The rising tide of house price inflation in the UK is not benefiting everyone. In a well-functioning housing market, people would be able to choose between genuinely affordable housing to buy, safe and secure rental in the private rental sector, and social housing if that is what they need. Right now, we don’t have those options.
Vicky Spratt is IHousing Correspondent