Our Housing Minister must be congratulated. Today’s Observer carries a front page article under the heading Minister pledges to end the housing price rollercoaster. Mr Shapps acknowledges that the rapid increases in house prices we have witnessed over the last decade have caused considerable pain for those seeking to enter the owner occupied market. Effectively many young people are completely shut out of the market by a combination of high prices and tight lending criteria – stringent deposit requirements in particular. Those without access to the ‘bank of mum and dad’ are further disadvantaged. They may be looking at heading into early middle age before being able to purchase a property. The remedy for this problem in Mr Shapps’s view is a housing market characterised by ‘house price stability’. The ideal, from his perspective, would be house price inflation of 2%, which is outstripped by the growth in real wages. This, of course, means housing becoming progressively cheaper in real terms.
This is all good stuff. It could turn out to be a defining moment in UK housing policy. I have not been hugely complimentary about much of the policy relating to housing that has emanated from the Coalition government so far (for example, here and here). Most of the proposals relating to rented housing have been deeply problematic, for a host of reasons. But in tackling the problems of the owner occupied sector – which of course spill over into the rental sectors – Mr Shapps gives all the indications of being willing to take on the big issues. Credit where it’s due.
Mr Shapps is also a brave man, precisely because this is such a major issue. Apart from stock market and exchange rate movements, which other market is regularly and routinely reported in the mainstream media as an indicator of the health of the economy? From an economic point of view constantly rising prices are typically seen as problematic – indicating that the market is suffering from adjustment problems. Yet, in the UK we have come to see rising house prices as almost uniquely tied to economic success. And the right to benefit from unearned capital gains has become engrained in the British psyche.
House price growth led to previous governments considering how the state might withdraw from provision on the understanding that households would have the wherewithall to provide for themselves through their accummulated wealth – so-called asset-based welfare. Recent house price declines have already placed a question mark next to this approach. House price growth has effected a major redistribution of wealth from the young to the old. It has reinforced social division: those young people whose parents have accummulated assets have been able to draw on those assets to facilitate further purchases, thus potentially perpetuating differentials in wealth holdings across generations.
An attempt to tackle engrained attitudes to owner-occupation is long overdue. Many housing analysts have been advocating such a move for at least two and half decades. Recommendations to deal with the problem in a more fundamental way have been declined by successive governments.
But it is going to tread heavily on many toes. Mr Shapps, if he is committed to tackling this issue, should be encouraged to stick to his purpose in the face of the inevitable squeals of outrage from various quarters, including some that no doubt represent traditional sources of Conservative support. Let us not forget that it was the Conservative governments of the 1980s and 1990s that gave the push towards a home ownership society great impetus through policies such as the Right to Buy. Contemporary commentators spoke of Britain having a ‘tenure policy’ rather than a ‘housing policy’ so great was the focus on promoting home ownership.
The squeals of outrage will, however, be the pains of transition. The British population needs to go cold turkey on its addiction to house price growth. In the medium term, social welfare will be enhanced if it does. The message should not be that we do not want households to invest and accummulate, but that it is not sensible to see housing as the main vehicle for doing so.
But today’s statements leave big questions unanswered. The biggest question of all is what, precisely, will – and can – the government do to deliver on this reorientation of policy? The statements offer very little on this point. Of course, it is here that things become more challenging. At one level, it may be a challenge to convince others that radical action is even necessary when prices are continuing to fall, and some are concerned that the market may collapse in 2011. Isn’t this evidence that the market is correcting itself? My view is that while that may be the case it does nothing to remove the potential of another run up in house prices when the economic context improves. In fact, such a run up is inevitable unless there is some form of structural change in the housing market.
The routes forward for action that are typically identified include:
- Attempting to reorientate the British population so it adopts a more continental European attitude to housing, which means normalising renting as a viable mainstream tenure for the long term as well as the short term. Lord Oakeshott is cited in today’s Observer as saying, in effect, this is the route that should be pursued. It implies an increase in the supply of rented housing – probably both private and social – and a diversification of the profile of the sectors, which, for example, tends not to cater well for families.
- Debate in the early 2000s was focused more on how to expand housing supply in order to stabilise prices. A number of econometric estimates were produced that suggested that the rate of new build housing supply, in the south of England particularly, would need to expand considerably to counteract house price inflation. This is an approach that does not address the cultural issues that underpin the problem. It is also an approach that may be in conflict with the proposals for the planning system contained in the Localism bill. These are likely to see a reduction in new supply.
- A further possibility is to tighten up the regulation of the mortgage market. It is generally felt that while mortgage market deregulation has not caused booms in house prices it has allowed price bubbles to inflate further and faster than would otherwise be possible. For example, lending criteria tend to operate cyclically. They loosen in a boom (as mortgages of many multiples of income start to be offered) and tighten dramatically in a bust (as banks claim to have ‘learnt their lesson’ – only to unlearn it when house prices start moving again).
- Other ways of seeking to defuse a run up in house prices typically involve the application of taxes. This could include differential tax treatment to try to encourage households to invest money in classes of assets other than property. It could take the form of transaction taxes (eg stamp duty or capital gains tax), taxes on wealth holdings (eg a Mansion Tax) or something more radical like a land value tax.
None of these would, I am guessing, appeal greatly to a Conservative Housing Minister. And there are probably innovative solutions out there that should be seriously considered. It will be interesting to see what Mr Shapps has up his sleeve. Let’s hope that, once we find out more, three cheers will be fully justified.