The housing market is booming, but don't expect the Tories to do anything about it
03-14-2014
The Chancellor is not about to put the brakes on the housing market, especially after all he’s done to get it going again
Desirable land and buildings in legally trustworthy jurisdictions are a peculiarly, virtually uniquely, durable form of wealth Photo: Alamy
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By Jeremy Warner
Since the Second World War, there have been three major booms and busts in the UK housing market, together with a number of smaller ones. It is now apparent beyond much doubt that we are embarked on a fourth. What started in London is fast spilling out into the regions. Another bust is not yet certain, but the beginnings of a boom are already well established.
Mortgage approvals are surging, sealed bid auctions are returning, nationwide house price inflation is once again approaching double-digits and price to income ratios are back in the danger zone. It’s here we go again time.
It used to be the UK economy’s propensity to repeated bouts of ordinary, goods and services inflation that was thought its greatest curse. Today, the fault seems rather to lie in an endemically dysfunctional housing market, with prices again running way ahead of earnings growth.
You might have thought that by now the UK would have learned its lesson; plainly not. In fact, the big takeaway from the last bust has been precisely the reverse; just sit tight, and with a helping hand from the Government and the Bank of England, the housing market will always eventually come storming back.
In preparing for next week’s Budget, Chancellor George Osborne is unlikely to be much concerned with the long-term consequences of another runaway housing market. Instead, he will be focused like a laser on what might revive his dwindling election prospects.
Polls are stuck on a Labour lead that if repeated in a general election would give Ed Miliband and his party a substantial overall majority.
There’s still time for that to change; an opposition lead of such magnitude is not unusual this far out from election day. David Cameron enjoyed something similar at the same stage ahead of the last one, but it didn’t persist. All the same, the Tories have a lot of catching up to do. In the City, there are already long faces. An outright Labour victory, which would be a disaster for enterprise, looks all too possible.
Much of the economic data are going Mr Osborne’s way as things stand and seem to support his “steady as she goes” strategy. The plan is working, he insists, but we need more time to complete the job. Unless Ukraine or some such other crisis blows up in his face, Mr Osborne has every reason to think the strategy remains on track.
Fiscally and politically, the Chancellor is in any case stitched up like a kipper. There is no scope for pre-election giveaways in a consolidation plan that is already two years behind schedule. Theoretically, he could cut more and tax less, but the compromises of coalition politics make this all but impossible.
The Chancellor is on record as saying he wants to do more to rebalance the economy to exports and investment, so we can expect minor tax breaks for manufacturing and exporters, limited action on business rates and perhaps something in the way of relief for energy intensive industries weighed low by high input costs.
But as for pre-election, overtly vote winning giveaways, don’t expect fireworks. More than five years after the crisis began, the deficit is still running at 6.8pc of GDP. There is nothing to give. One thing we can be certain of, however, is that the Chancellor is not about to put the brakes on the housing market, especially after all he’s done to get it going again.
From the International Monetary Fund to the OECD and the massed ranks of academia, economic opinion has been almost universally hostile to the various measures the Government has put in place to re-stimulate the mortgage market.
Be that as it may, the policy has worked just as the Government hoped. Mortgage availability has improved out of all recognition compared with a few years back, and first time buyers are returning, notwithstanding high prices. This, in turn, is helping to underpin growth.
Curiously, it is only comparatively recently that economists have come to appreciate the wealth effect that rising asset prices have on consumption and therefore demand.
In the 1980s, macro-economic forecasting took no account of it at all, which is one of the reasons the UK Treasury came to miss the Lawson boom. The effect is particularly acute in the UK, where according to the Office for National Statistics, nearly 60pc of the country’s £7.3 trillion net worth is tied up housing.
If these prices are rising, people feel wealthier and they spend more. It’s no accident that the economy’s fortunes have turned with the housing market, or that in countries such as Ireland and Spain, where prices remains deep in the doldrums, growth is continuing to prove so sluggish.
In other respects too, the UK’s various attempts to re-stimulate the housing market can be judged a success. By increasingly the availability of mortgages, “funding for lending” and “help to buy” have succeeded in generating a not insignificant supply-side response. There are a whole lot more houses being built than two years ago.
There’s also a party political reason for wanting to get the housing market functioning as it was, which goes right back to Margaret Thatcher’s “right to buy” policies in the 1980s. Since the turn of the century, home ownership in Britain has declined markedly, a trend that has accelerated since the onset of the financial crisis, especially among the young, who feel themselves frozen out of the market by high prices, scarce credit and poor employment prospects.
The void has been filled by buy-to-let landlords. Rents have been progressively bid up, with the taxpayer left picking up the tab through the housing benefits bill. This has more than doubled to £20bn over the past 15 years. Nearly 5m working households now access some form of housing support.
These trends present a major challenge for the Conservatives, for as Policy Exchange has pointed out, people living in private rented or social housing are a good sight less likely to vote Tory.
There is little mystery as to why the wealthy down the ages have always invested so heavily in property: desirable land and buildings in legally trustworthy jurisdictions are a peculiarly, virtually uniquely, durable form of wealth. All else, including the very greatest of business dynasties, is transitory beside it.
Population growth and increased prosperity mean that demand for property can only deepen. Deny people access to it and society becomes inherently unstable.
Housing ownership lies at the very heart of middle-class aspiration; Conservatives must always strive to ensure demand is sated.
Attempting to limit that demand through property taxes, rent controls or credit rationing won’t work, quite apart from being morally questionable, and can never be part of a conservative solution. What’s required is a much bigger supply-side response.
I don’t necessarily disagree that this might ultimately require major programmes of public building in places where people want to live and work. In a market still hugely constrained by planning laws, private developers can frequently have a vested interest in limiting supply.
Yet if public building is combined, rather in the way it is in Singapore, with automatic sale into private ownership, some obvious objections to such an approach fall away. Whatever the answers, weaning Britain off its addiction to the boom and bust of the housing market has to be made an all-consuming political objective. Short-term electioning, which ultimately nobody is fooled by, must be replaced with some radical long-term thinking.