House prices are as big a challenge as inflation in the Seventies and Eighties
05-07-2014
The best and most obvious solution to house price inflation is to improve supply, and it is a myth that Britain is overdeveloped
The best and most obvious solution to house price inflation is to improve supply, and it is a myth that Britain is overdeveloped
Jeremy Warner
Oh for a world of stable or falling house prices. Outside estate agents, property developers, second-home owners and buy-to-let landlords, it is hard to find anyone who unambiguously welcomes double-digit house-price inflation, the return of which was confirmed last week by the latest Nationwide survey.
If it makes you feel a bit wealthier, good for you, but it’s largely illusion, for only by cashing in and moving somewhere cheaper will you enjoy any tangible difference to spending power.
Otherwise, it brings only the pervasive grind of ever higher levels of debt to pay for the next step up on the housing ladder, and the troublesome worry about the welfare of one’s children, and how on earth they are ever going to be able to afford a roof over their heads. Politicians may be making a mistake if they think stoking house prices is the way to electoral victory.
With the Bank of England’s Financial Policy Committee belatedly showing signs of alarm over the latest boom, what can or, more particularly, should be done about it?
Before answering this, let’s first ponder why house prices are rising so fast and dispel one or two myths about the nature of the UK housing market. The causes are easily distilled down to just two — low interest rates and shortage of supply.
Neither of these are tackled by Ed Miliband’s naively inappropriate proposals for rent controls, as indeed is the case with all the other ideas he has put forward for market intervention to ease the cost of living.
These only target the symptoms, and by doing so, tend to make the underlying causes even worse. There is nothing more guaranteed to create a shortage than attempting to control prices.
To see this principle at its most extreme, go to Venezuela where price controls are de rigueur. If official prices ruled, things might not be so bad, but of course they don’t. To get the products at all, you have to pay way over the odds.
Besides, today’s housing “crisis” is largely one of the last government’s own making. To run an open doors immigration policy while failing to solve supply in the housing market was bound to create trouble. It ill becomes Mr Miliband and much of his shadow cabinet to complain. They could have done something about it, but didn’t.
In any case, the best and most obvious solution to house price inflation is to improve supply, as urged by the likes of Simon, Lord Wolfson, chief executive of Next.
The Government has chipped away at planning reform, leading to a significant rise in planned housebuilding. Slowly but surely, it is becoming easier to build. Even so, the reforms so far do no more than scratch the surface. What’s needed is something very much more radical.
As Lord Wolfson points out, it is a myth that Britain is already an overdeveloped country; giving over just an extra 1pc of all land to development — raising its coverage from 8pc to 9pc — would release 808 square miles for housing and non-agricultural endeavour, more than enough to cure the housing shortage once and for all.
Yet we have to be politically realistic about this. Planning reform is a protracted and difficult process, involving a myriad local sensitivities which cannot lightly be trampled on. Any big bang approach to housing supply is extremely unlikely, whichever political party is in power.
Policy is therefore left unduly reliant on demand-side solutions, which is always going to be problematic when attempting to maximize economic growth. Crack down on demand for housing, and inevitably you will end up restricting growth.
If one of the myths about UK housing is that we have run out of space, the other is that the UK housing market was the major cause of the banking crisis. It was not. Indeed, throughout the crisis, UK mortgage lending remained strikingly immune to default.
This might not have been the case were it not for record low interest rates, but then an awful lot of things would have looked much worse but for rock bottom rates. Whatever; the fact is that UK banks lost far more on overseas mortgage lending, particularly American, than they ever did on home loans back here.
Historically, UK mortgages have proved an extremely low risk form of lending, which is why banks tend to be so keen on them. Even Northern Rock, which engaged more enthusiastically than most in higher risk mortgage lending and used a very unsafe business model to sustain it, will not overall lose money once runoff has been completed. Small wonder that much of the increase in UK credit over recent decades — indeed, on some accounts the overwhelming bulk of it — has been focused on the housing market.
But although excessive UK mortgage lending may not of itself have been a cause of the banking crisis, it does seem to pose a threat to wider macro-economic stability.
What the crisis demonstrated was that countries with very high levels of household indebtedness tend to be particularly vulnerable to any collapse in economic confidence. High debt may explain why Britain had a much deeper recession than, say, France.
It also makes weaning the country off very low interest rates much more difficult, since any significant rise in rates is going to eat deep into disposable incomes, and therefore harm demand in the wider economy. Cheap money in turn only encourages more mortgage borrowing, further adding to household debt and wider economic vulnerabilities.
Personally, I think the situation is already serious enough to justify urgent interest rate action. As a pedant on such matters, I don’t much like use of so-called “macro-prudential tools”, because this is just credit rationing by another name and I can’t see how limiting demand for something is ever going to be a good solution.
We may have come to dislike ever rising house prices, but the return of mortgage queues would be even less welcome. All the same, the Bank of England is plainly preparing to give such tools a go, and in the absence of any credible supply side fix, I’m at least prepared to reserve judgment.
Experience from abroad is mixed. Cooling measures such as higher capital requirements on mortgage lending, tougher loan-to-value criteria, and the imposition of loan-to-income rules, have achieved some success in both Sweden and Singapore.
Again, much higher minimum deposits for second mortgages are said to have had a significant impact on speculative buying in Singapore, even if it has only pushed many Singaporeans into buying in London instead. Indeed, the policy has been so successful that local developers complain of a growing overhang of vacant property.
A hard landing in the housing market may not matter so much in a fast-growing surplus economy such as Singapore; it matters a lot for an economy as dependent on house prices for confidence as the UK.
Something has to be done to free the British economy of its addiction to rising house prices. To me, this now seems as big a structural challenge for the UK economy as high levels of ordinary price inflation were in the Sevemties and Eighties. There is ultimately only one solution, but we seem too cowardly to grasp it.