One and a half cheers (at least) for Mr Shapps

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.

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6 replies »

  1. Land Value Tax radical? It would merely be a return to the system which financed Britain during the 18th century and early 19th century. That sounds quite Conservative to me.

  2. Absolutely agree that the idea is a venerable one.

    I was thinking more in terms of the politics and logistics of it in the current UK context. The idea of (re)introducing such a tax would be radical in relation to the current state of political opinion (and politicians’ understanding of public opinion) and at a practical level it would be challenging when there is no useable database upon which to base the tax. There is national political interest in the idea (eg from the Liberal Democrats) but I don’t see that making a lot of headway. None of that means that it would be impossible or undesirable to go down that route – just that I think it is unlikely.

  3. Yes, one occasionally sees Tories who become dimly aware of the huge mess this country is in, and just how hard life is for those who aren’t the sort of millionaires that fund the Tory Party and that dominate its upper levels.

    However, in the end these people are Tories. They aren’t going to stop being Tories. And the one prime thing that a Tory stands for, it is at the heart and core of his or her being, is defence of money made by being rich rather than by working. Forget all the guff they sometimes issue which suggests otherwise. Go back to Margaret Thatcher – she was very good at making people THINK she stood for honest reward for honest labour. She did not – she was a Tory and her prime aim was the Tory aim – making money by sitting on your arse and owning things is to be defended above all else. That’s what the two things she is most remembered for were about – “right to buy” and “Tell Sid” privatisation – they were about pulling enough ordinary people into making a little money the Tory way, that it would become politically impossible to attack it.

  4. For housing bubbles in various countries see ..A real estate bubble or property bubble or housing bubble for residential markets is a type of that occurs periodically in local or global markets. .Some argue that a such as the allows the identification of real estate bubbles….As with all types of whether real estate bubbles can be identified or prevented is contentious. Bubbles are generally not contentious in after a peak and crash..Within some argue that real estate bubbles cannot be identified as they occur and cannot or should not be prevented with government and central bank policy rather cleaning up after the bubble bursts..Others within mainstream economics and in such as American economist and British magazine argue that can be used to identify real estate bubbles.