Decisive action is essential to tackle Britain’s housing market problems
August 30, 2011
The report by the National Housing Federation (NHF) published today warns of the dire state of the UK housing market. As a result of ‘a chronic under-supply of homes’, we are likely to see a fall in people owning their own homes over the next decades with a forecast that the average house price in England will ‘rise by 21.3% over the next five years from £214,647 in 2011, to £260,304 in 2016’. For some, this will come as good news.
The BBC reported that over a million first-time buyers are in negative equity from purchasing a house before the credit crash. However, for many more, such as the low paid and the young, it is extremely bad news. Various trackers record that average house prices have risen somewhere between £60,000 and £120,000 over the last nine years, or between 60% to 100% of their initial value, a bubble which is completely out of sync with slower rises in economic growth and incomes. Further such inflation is a cause for alarm and it seems that many factors underpin this housing inflation bubble.
Both the market and successive governments have evidently not responded adequately to this failure. In relation to the supply of housing, the BBC reports that, ‘according to Ms Davison of the NHF, the number of new homes built last year was the lowest in peacetime since 1923. House prices are 25% higher than they were five years ago, 117% higher than they were a decade ago, and eleven times average earnings’.
While the Bank of England’s independent monetary policy committee successfully used interest rates to keep general price inflation around the 2% mark for the majority of the last decade, that central plank of UK macroeconomic policy provided easy credit which underpinned a bubble of asset prices and an explosion of debt. These constitute major weaknesses for the UK economy.
Beyond these medium term problems related to housing supply, there are also deeper changes that will increase long-term demand. As a nation, we are marrying later, in fewer numbers with less marriages lasting till death (download the first excel spreadsheet for data). These all increase the number of households and therefore add to the demand for housing. Beyond these societal changes, the UK has undergone large population growth in line with global population trends. Specifically from 1997, the population has increased from 58.3 million people up to 61.8 million people in 2009. This is not simply due to immigration; it is also a result of the boost to fertility from Labour’s policies to reduce child poverty.
The recent rise in net migration represents a continuation of the long standing trend. Despite the desire of the Tories for net migration to be ‘reduced to sustainable levels, down from the hundreds to the tens of thousands a year’, this scale of net migration into the UK seems likely to continue for the foreseeable future. A high percentage of migrants come in from Europe and, as Cameron has ruled out any attempt to leave the EU, there seems no reason to expect a change to this demand on housing. These demographic changes result in an increased demand for housing which the market has so far failed to respond to.
The government must take action to stop the housing bubble worsening. The Housing Minister Grant Shapps stated that ‘despite the need to tackle the deficit we inherited, this government is putting £4.5bn towards an affordable homes programme which is set to exceed our original expectations and deliver up to 170,000 new homes over the next four years.’However, the NHF stated that the state fund allocated to housing ‘represented a cut of 63% on the previous programme of government spending’. The other component of government action has been a slashing of regulation.
The NHF welcomed this move but the National Trust has been critical, warning of ‘urban sprawl’. The tradeoffs between both the sustainability and quality of housing on the one hand and increasing housing production on the other are not easily resolved. Overall though, there are clear ethical and economic reasons for state action to change the present dysfunctional nature of the housing market.
The moral necessity for state action is evidently apparent. David Orr, chief executive of the NHF, said: “home ownership is increasingly becoming the preserve of the wealthy and, in parts of the country like London, the very wealthy. And for the millions locked out of the property market the options are becoming increasingly limited as demand sends rents rising sharply and social homes waiting lists remain at record levels.”
It is estimated that ‘4.5 million people are currently stuck on social housing waiting lists’. The UK’s low and medium earners are already being hit by state cuts, rising inflation and the VAT tax hike to 20%. Those who cannot afford house prices are also being hit by rising rental prices, up by 4.9% in the year before May. For the government to allow housing prices to boom yet further would compound the challenges facing the less well off and compound the sense that people are most definitely not ‘all in it together’.
There are important economic reasons to prevent another bubble. Such an inflationary bubble does not have productive benefits but only exacerbates economic inequality. The economy cannot grow by simply selling increasingly expensive houses to each other. Such an unsustainable model of growth is illusory. The bubble also draws in savings which could be better allocated to productive investment or consumption which actually has a productive outcome and creates jobs.
Given the coalition’s plan to cut the deficit by fiscal cuts, monetary policy will likely have to compensate for this deflationary pressure over the next four years, ie interest rates will likely remain low. These low interest rates will simply suck people back into borrowing to be able to afford a house at a time when UK is already heavily indebted.
While The Daily Express hailed the 21% expected boom in house prices expected over the next five years as ‘“fantastic” news for the property market’, anyone with half a brain should realize that it is not. A re-inflated housing bubble would not represent a solution but instead be an economic time bomb lurking below the surface of the economy. It would be better to tackle the root problem of insufficient supply; government action must tackle the fundamental problems head on to prevent this housing crisis getting worse.