Amid all the noise around UK housing policy, it is worth taking a step back and asking a deeper question about our property market. Yes, another bubble would be damaging for the UK economy and especially those individuals who miss out come the inevitable crash. But even modest real house price growth might not be a good idea. What if, after accounting for inflation, we stopped house prices from rising at all?
This is particularly relevant as the market is on the up again. There has been near-consensus from commentators (if not coalition ministers) that the second phase of the Help to Buy mortgage assistance scheme will feed a house price bubble. Due to go live in January 2014, the scheme will substantially support risky borrowing with a high loan-to-value ratio, deep into the existing housing market.
One suggestion for dealing with rising house prices was made last week by the Royal Institute for Chartered Surveyors (RICS). Their research made the case for a house price cap to be managed by the Bank of England’s financial policy committee.
I have been arguing for some time that a long term goal of housing policy should be stable real house prices - that is, house prices that remain the same, taking inflation into account.
Right now, they are fundamentally asset prices governed by expectations of future rises or falls, and the motivations of asset owners seeking returns from their investments. At the same time, however, housing is also a consumption good where occupiers seek to reduce their costs. House prices are also fundamentally redistributive, and not in a good way – rising prices increase wealth for one generation at the direct expense of the next.
A chronic lack of affordability can lock millions out of the housing market and create wider economic dysfunction in labour and savings markets. This is amplified by speculative investment in housing and by the fact that the UK is simply unable to produce the sustained levels of housing supply required to stabilise the housing market.
Rising real house prices compound these problems but falling real house prices risk market stagnation. More generally, only stable real house prices leaves the housing market neutral with respect to the rest of the economy and helps reduce speculation.
The goal is for a reason: to help normalise the UK’s self-defeating and damaging relationship with asset-based housing equity (though this will take far more than just stable house prices). This was a policy also articulated by the Joseph Rowntree Foundation’s housing market task force. They correctly focused on the damaging consequences of the privileged tax position home ownership enjoys in the UK.
If the ambition is to achieve stable housing prices, we must ask how can it be made real and should it be a target or a cap that triggers action?
First of all, it is difficult to choose a cap or ceiling for any given level of “excessive” price growth. Any cap chosen would have to take into account general inflation and the wide regional variations that exist across UK housing markets.
Second, while the Bank of England can in principle deploy additional capital requirements, on the key variables of loan to value and loan to income ratios, they can only ask banks to voluntarily set ceilings. Previous experience since deregulation of mortgage lending suggests that lenders, brokers and purchasers are very good at overcoming and otherwise getting round these sorts of constraints.
A long-term ambition to smooth out house prices around general price inflation seems a more modest but realistic ambition. But even that may also require more extensive use of interest rate management and even counter-cyclical fiscal policy through housing taxation (with the latter, it seems, being generally politically off-limits). A credible commitment to seeking this goal would undoubtedly help dampen expectations and would be firmed up by evidence of a willingness to act to stabilise house prices.
Finally, treasury minister Danny Alexander has claimed that the UK was a “million miles away” from a bubble and therefore we should not be so excited about Help to Buy. However, the point is that the conditions are supported by the nature of this policy and the key variable: housing supply.
While housebuilding is now thankfully recovering from its very low levels of recent years, this will not be enough to dampen price inflation even if we reach the peak levels of the previous boom. We need to sustain much higher levels of house building.
Alongside a normal demand-side we also urgently need long term measures to allow more housing to be built – and that raises its own set of insider-outsider and otherwise less tractable problems. The alternative is a future of socially damaging cycles of wasteful boom and bust.