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Saturday, 20 May 2017

FALLING HOUSE PRICES Nightmare on Downing Street

‘Affordable housing’ ‘Help-to-Buy’ — these are just some of the ways politicians pretend to tackle the housing crisis. They know that there is a crisis — too few homes available to buy, and the price of houses spiralling beyond the reach of many hard-working, just-about-managing families.

The one obvious political solution to the crisis would be to engineer a crash in the housing market. What happened in 1988-97 would do nicely! Instead of the average house costing FIVE times average earnings (1990) it dropped to a much more ‘affordable’ THREE times earnings.
Of course the 1990s were a time of woe for home-owners. Repossessions soared. No politician wants to held to blame like the hapless John Major, especially after the debacle of ‘Black Wednesday’ in 1992 (when the UK was ejected from the European Exchange Rate Mechanism).

All through this time the price of houses fell. From a peak of £140,000 in 1988 it dropped to about £90,000 by 1996, a 40% drop. (At lot of this drop in real prices was masked by steep rates of inflation.)

So did this put people off buying houses? Was this the end of the dream for the ‘Great Home-Owning Democracy’? Not really, if you look at the picture:

There was a slight dip in the percentage of owner-occupiers, with and without a mortgage. A mini-peak of 68½ % was reached in 1994 and flat-lined for about three years.

After 1997 ‘things could only get better’ under Prime Minister Blair, and ownership advanced again. The Great Home-owning Democracy topped out at 71% in 2003. 

 Since then, despite the efforts of the politicians (or because of them?) things have got a lot worse. House prices are now more than double what they were in 1997. They have doubled in terms of earnings too.

Ownership is becoming less possible especially for the younger, first time buyers. Now it’s not 71% that are owners, currently less than 64% own the home they live in. Or back to 1986 as the dotted line on the chart shows.

This is a cluster of policy failures which surely means that any politician wanting to be re-elected would need to fix it. The solution seems so obvious — we need a period of falling house prices.

Great hopes and expectations were raised after the Great Financial Crash in 2008. Now at last we would see HPC — the housing price crash. The website attracted huge attention. And yes, for a while the market stuttered.

But then Gordon Brown “saved the world” (he meant to say ‘the banks’). Chancellor Darling introduced Quantitative Easing, which stuffed the banks with lots of money to lend. The result? House prices started rising again. Ownership rates carried on declining.

They knew that this was exactly what would happen, and yet the politicians, Brown, and Cameron after him, allowed it to happen! Where was the statesmanship from the leaders who would Do The Right Thing and let house prices crash?

According to Keohane & Broughton [1] in The politics of Housing
            “The problem is the extent of the asset bubble that’s been created around land in the UK and particularly in the South of England is such that it cannot easily or quickly be unwound – so much of it is linked to the health of our banks, and to individual's long term financial security. There is no way of addressing this problem in the short run – housing officials and ministers are operating within almost impossible constraints, which pushes them into short termism. It’s easier to announce another package of 'help for hard pressed homebuyers' than to seriously address chronic issues of undersupply and affordability. They can’t deal with the long term strategic stuff”. 

K&B tell us that there are 3 factors to bear in mind
1.     Is housing a pressing problem? Do we really want to fix it?
2.     What are the voters’ aspirations and financial interests?
3.     Ideology of the Parties? All capitalists now.

Judging by the half-baked ideas coming out about the ‘need to build more house’ and such gimmicks as ‘help to buy’, the politicians clearly don’t want to fix it. But won’t the voters punish these reckless politicians for their fecklessness?

Not the existing home-owners. They are still a comfortable two-thirds majority of the people, and these are people that vote, mostly for the Tories. They value their ‘hard-earned’ build-up of equity in the value of their house. (In truth it is unearned capital gain!) But woe betide any Chancellor who would deprive the owners of their anticipated pension fund.

But the non-owners join in this self-enriching dream. Even though the prospect of becoming a home-owner is receding for many, they still rather like the ‘free lunch’ of rising prices. Again one effect of QE is to keep interest rates at rock bottom. This appears to make the cost of buying a lot more affordable.

In ideological terms there is little that sets the parties apart. All, even Corbynistas, pay lip-service to the home-owning democracy. It has been a wonderful ride. Property owning has expanded from being the privilege of the very few — about 10% were home- or property-owners in 1910. To get this up to 70% is a real and I think highly desirable policy goal.

At some point the balance will tip, and falling house prices will become the only solution. But for now the owners think that ever-rising house prices will go on for ever, and no politician could get elected disabusing them of their money-for-nothing fantasy.
Useful links

[1] Keohane, Nigel and Nida Broughton (2013) The politics of Housing Social Market Foundation

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