One of the central conclusions drawn from the Global Financial Crisis was that the UK economy was too dependent on financial services and unproductive investment in the property market rather than the real economy. So the economy needs rebalancing.

One of the main issues facing the housing market is that households overwhelmingly aspire to owner occupation, even as the chances of accessing the tenure become increasingly limited. House prices that seem to defy gravity, stagnating incomes, and difficulties in meeting deposit requirements mean that thousands of households have to reconcile themselves to renting privately for the long term. That the whole system is a mess hardly needs saying.

Is addressing the broader economic rebalancing agenda compatible with addressing the dysfunctional housing market? Is it possible to rebalance the economy without persuading households to spend less on housing and invest elsewhere instead? Even framing the question like this implies that households have a choice over incurring large housing costs, which of course is not the case for many people.

Unravelling the dependence of the UK economy on financial services and property investment is no easy matter. It took many years to back ourselves quite so tightly into this corner. How is policy handling the complexities of the agenda?

On the housing side we could argue that things are not going hugely well. Efforts to increase housing supply directly are modest, while efforts to increase supply indirectly by assisting with housing costs – notably the Help to Buy scheme – have been widely condemned as wrong-headed. On the economic side, the government has clearly made some efforts in the direction of rebalancing both sectorally and regionally, but these are initiatives that are going to take years to have serious impacts on the productive capacity of the economy. Whether the government is pursuing the rebalancing agenda with sufficient vigour is debatable.

That brings me to a curiosity. Continue Reading →