Friday, June 21

House prices are falling in UK



The housing market is dead. Britain’s biggest mortgage lender, the Halifax, says that prices fell in April by 3.1%, the biggest monthly drop in almost eight years.

Newspapers bury this disastrous news way back in their editions for fear that it will spread gloom and despondency.

We need to wean ourselves off this way of thinking. Falling house prices are not disastrous, and only in a country with such a perverted relationship with bricks and mortar could they be seen as such.

In Germany, they scratch their heads in bemusement when they hear Britons boast of how the value of their house has soared.

The Germans are right. Ever-rising house prices are a curse. They are bad for social mobility. They are bad for young people. And they are bad for the economy. The billions that are spent pushing up property prices could be more productively invested elsewhere.

We should make the tax system less biased and start a mass public-sector housebuilding programme

Imagine for a second that the next time you went to the train station the rail operating company had unexpectedly cut fares by 5%. Or that when doing your weekly shop you discovered that the supermarket had slashed your normal bill by £10. Would you think this was an unwelcome development?

Daft question. Of course you would be happy, because your money would go further. Conversely, you would be less than chuffed to find more of your pay being spent on getting to work or putting food on the table.

That’s why there are no headlines in the papers screaming “Boom-boom Britain: joy for commuters as rail fares rise by 10% for third year in a row”, or Good news for families as supermarkets add £10 a week to the average shop.

The papers stand up for their readers when they think they are being gouged by train companies and supermarkets. They stick up for buyers rather than sellers.

But different rules apply to property. If the average house price had risen rather than fallen by £7,000 in April, that would have been front-page news and hailed as a sign that all was well with the economy. The papers tend to side with owner-occupiers rather than the buyers of property getting the rough end of the deal.

This fetishisation of rising house prices is relatively recent. For the first 25 years after the second world war, a combination of mass housebuilding and strict controls on credit meant that the cost of property rose only modestly.

But since 1970, financial deregulation, much lower levels of housebuilding and a tax system heavily weighted in favour of owner-occupation have meant demand for housing in parts of the country has tended to outstrip supply.

There have been four big house-price booms the early 1970s, the late 80s, the mid 00s and the mid 10s. None of them have ended well.

The biggest and longest bust was in the early 90s, when people who had bought at the peak of the late-80s boom were clobbered by 15% interest rates and rising unemployment. Record levels of home repossession were the result.

But since the market collapsed in 1995, housing has become more and more expensive. Owner-occupation rates have fallen from a peak of just under 70% to less than 64% in the past 15 years, as young people have found buying a home of their own unaffordable. Rents have risen, making it harder to save for a deposit.

So bad is the intergenerational imbalance between the property haves and have-nots that the Resolution Foundation thinktank wants each person in Britain to be given £10,000 when they turn 25.

This would certainly help young people stump up the money for a deposit on a home especially outside London and the south east, where prices are a lot lower but in the absence of an increase in housing supply it would be bound to drive up prices.

One definition of inflation is that it results from too much money chasing too few goods, and that’s a perfect description of what has happened over the past decade. Thanks to the Bank of England and the Treasury, there has been plenty of cheap money knocking about. The Bank’s quantitative-easing programme is essentially a giant money-creation scheme, and the proceeds have been recycled into mortgage lending. George Osborne did his bit with help to buy, a subsidy for first-time buyers that further inflated prices. Giving every 25-year-old £10,000 would have a similar impact.

Weaning Britain off its obsession with rising house prices won’t be easy. The economy now only has two settings: strong growth when the housing market is buzzing and owner occupiers feel confident enough to borrow against the rising value of their homes; and much weaker growth when the housing market is dormant. There is a strong temptation for policymakers to reignite the housing market when, as now, the economy is spluttering along.

A second problem is that for many people their house is easily their most valuable asset, and they are relying on being able to downsize when they retire. That makes a large chunk of the population highly resistant to policies that might drive down prices, such as higher property taxes or changes to planning laws.

With unemployment at its lowest level for more than 40 years and interest rates at 0.5%, the chance of a house-price crash is currently remote.

More likely, prices will stay where they are while incomes catch up. Property will become cheaper as a result.

This breathing space should be exploited to make the tax system less biased in favour of owner-occupation and to start a mass public-sector housebuilding programme.

After repeated boom-bust cycles, it should be clear that an economic model that cannot function without repeated injections of property inflation is built on the shakiest of foundations.