The bubble ain’t over ’til it bursts

Since 2008 it has been presumed that preventing a drop in house prices will keep us out of recession. What if it is holding us back? 

The idea that the UK could rely on ever rising house prices to fuel an endless debt-led boom has now been well and truly obliterated. Indeed, to those of us who were teenagers when the crunch finally came in 2008, it seems totally unexplainable how such a peculiar obsession could have become a national addiction. Nevertheless, it seems as though the entire nation is waiting on tenterhooks for a boost to house prices as a signal that the UK’s economy recovery is back. The government certainly seems to agree and by pursuing policies such as Funding for Lending it risks a new housing price bubble. It is time that we as a country acknowledge that, far from helping the economy, spending a disproportionate amount of our household income on housing is damaging the UK’s trend rate of growth by soaking up all the growth in household incomes. The true solution to a sane housing market would be to end rigid planning policies, such as the greenbelt, which artificially inflate house prices and entrench regional divides in wealth.

British families face some of the highest housing costs in Europe, with only Danish and Greek households spending a greater proportion of their household budget on housing.  Both Greece and Denmark are anomalous as Greek household incomes have plummeted due to their membership of the Euro and the Danes have the largest houses in Europe. Moreover, despite their price, British houses are not the second, or even third, largest in Western Europe. Indeed, British houses are in fact the smallest in Western Europe. The average floor space of newly built homes in the UK is 76 metres2, compared to 113 metres2 in France and 137 metres2 in Denmark. British families spend far more than the average European on housing costs when by all rights we should be spending far less. What if high house prices are not the fuel that will ignite a consumer-led boom, but a dampener that will permanently reduce the purchasing power of the average household? By absorbing such a disproportionate amount of the average household budget, compared to our European counter-parts, high and rising house prices are reducing, not boosting, the ability for households to spend money on the non-housing related areas of the economy.

But why are British houses so much more expensive than the rest of Europe? The answer is that the British housing market is a classic example of supply not fulfilling demand; we (as a country, not necessarily a government) do not build enough houses. Targets for who to blame for this problem are numerous. The obvious target would be that successive governments have not built enough houses since the 1970’s. Looking at a graph of housing completions, this view would seem to be vindicated, as the number of housing builds shrank considerably in the 1970’s and all but died out under Margaret Thatcher in the 1980’s. However, this leaves the question of why the private sector has not come to fill the gap? Thatcher’s flaw was not that she didn’t revive the number of council housing builds; it was that she relied on the private sector to make up the slack whilst retaining rigid planning restrictions on where houses can be built.

Blame must therefore also be partially shared by Clement Attlee for nationalising planning law in 1948 and creating the greenbelt. In a 2008 paper, Paul Cheshire and Christian Hilber estimated that the ‘shadow tax’ imposed by regulations on office prices in London were far higher than any other European city; more than 800% in the London West End compared to 300% in Paris and 50% in Manhattan. Though could Attlee really have foreseen the far-reaching consequences today? The most likely target for blame for the current debacle is therefore Tony Blair. Blessed with buoyant public and household finances, Blair could have boosted housing supply, either by freeing the market or by building more houses. Instead he did worse than nothing, allowing both household and government debt to both spiral under his watch whilst doing nothing to boost housing. It joins the list of many areas that Blair’s legacy can be seen as a failed opportunity at best and national vandalism at worst.

The government, recognising that the planning system is an anchor on the UK’s economic growth, has committed itself to a complete rewrite of planning law. Its new National Planning Policy Framework (NPPF) distils 1,400 pages of planning guidance into just 52, though the most distorting element remains mostly in tact: the greenbelt.  Most people are horrified by even the proposal of a small expansion of housing into the greenbelt. In truth, very little of the greenbelt consists of arboreal landscapes and forests open to the public. 60% of the greenbelt is intensely farmed and almost all of the privately owned greenbelt land is closed to the public. In 1999 John Prescott made the famous double entendre “The green belt is a Labour achievement; and we intend to build upon it.” Well why not? There may well be some areas that we wish to have a ban on development, such as Sites of Special Scientific Interest (SSSI’s) or Areas of Outstanding National Beauty. However, the greenbelt itself is an arbitrary line designed to do nothing else but constrain the demand for cities. It should be blindingly obvious that it has not succeeded in controlling any city’s insatiable appetite for growth (particularly London), in fact, its only effect has been to cause housing prices to explode (again, particularly the case in London).

However, rapid change, or ‘shock therapy’, may well be a solution more lethal than the disease. Lower house prices in the long term will help but a rapid drop in house prices will cause millions of households with mortgages to go bankrupt. So called ‘shock therapy’ may instead more comparable to an electric chair. Some short-sighted free marketeers may simply dismiss this criticism as the ‘risk’ element of the market, but if households are pushed into higher house prices by the government and then suffer a drop in house prices due to government decisions, then it ought to be considered a government failure, not a market failure.

Nevertheless, even if it is unclear what transitionary policies the government should be following it is at least straightforward to see what policies the government should not be following. Policies, such as the Funding for Lending scheme, which seem certain to ensure that the house price to household income ratio will rise, are an example of a flawed policy and attempting to solve this through even greater government involvement, such as Mark Carney’s proposed 5% annual cap on house price increases, will inevitably fail as they are intent on covering up the symptom of the problem, not the problem itself.

Will Archdeacon

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