What is the answer to Britain’s too high house prices?
Put your ear to the ground and you can hear the escalating rumble of a lobby that says it is building a lot more homes, with a substantial easing of the restrictions on building on the Green Belt and farmland.
Another eye-catching report calling for the building solution to Britain’s property affordability crisis landed this week. The National Housing Federation’s call to arms included the juicy forecast of prices soaring 42 per cent by 2020, locking out millions more first-time buyers.
Another brick in the wall: Would a new building boom really solve the problem of too high house prices – a glut of homes didn’t keep a lid on prices in Spain, Ireland or the US.
As interesting as the report was it was incomplete and thus fundamentally flawed. You cannot have this debate without mentioning the mortgage bubble that got us into this mess and the NHF chose to skip straight over that.
The decade-long boom to 2007 that sent house prices spiralling to unaffordable levels was not caused by building too few homes, but by easy credit and property inflation allowed to run unchecked.
A low level of building may have played its part, but it wasn’t the driving force.
The simple economics of almost all property booms comes down to cheap money, speculation and the illusion of wealth expensive highly-mortgaged houses offer.
Look at the US, Spain and Ireland. Just like Britain, all had house price bubbles, yet in those three countries there was a huge amount of new homes built.
Ultimately, their building booms have made a contribution to property becoming far more affordable – many of those homes now sit empty and unused and you could pick them up for a relative song – but it was property bubbles bursting and trashing their economies that drove house prices back down.
In Britain we had more leverage to save our property market and never allowed our bubble to burst properly.
There is a debate to be had about whether Britain needs to be building more homes, which we almost certainly do, but we need to do that without signing up to urban sprawl and clogging our open spaces.
We also desperately need to do something about the horrendous North South divide in our economy that drags far too many people to London and the South East.
To express such a view inevitably draws accusations of being a Nimby, yet to show a healthy distrust of the vested interests of building, banking and business who have delivered a failing property market for so long seems eminently sensible to me.
There is nothing wrong with taking responsibility for your back yard, after all, if you don’t who will?
The bubble that never burst: House prices in Britain never fell back to their long-term average relationship with wages, as record low interest rates
and heavy pressure on mortgage lenders not to repossess bolstered prices.
It feels as if we are currently sat in dangerous territory, where the muddle over why we are in this mess is being combined our desperate hunt for economic growth.
Hence the arrival of George Osborne’s plan to solve the problem of too expensive housing, which boils down to bumping up buyers’ deposits to support those very same high prices.
Highly respected City analyst Albert Edwards, of Societie Generale, was even more scathing in a research note last month.
He said: ‘I believe it truly is a moronic policy that stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business.’
In delivering that verdict, Edwards made it clear which side of the more building vs cheap credit argument he falls on.
He said: ‘Why are houses too expensive in the UK? Too much debt. So what is George Osborne’s solution for first-time buyers unable to afford housing? Why, arrange for a government-guaranteed scheme to burden our young people with even more debt!
‘Why don’t we call this policy by the name it really is, namely the indentured servitude of our young people.’
The difficult part of the Help to Buy argument is that from the side of the hopeful first-time buyers and movers taking the cash it can look a short-term no-brainer.
There’s a saying that says, ‘don’t hate the player, hate the game’ and the way Britain’s property market game is run means it’s a big risk to sit on the sidelines. You may believe interest rates are too low, but if you are a homeowner it would be foolish not to take advantage of them to cut your mortgage payments.
Likewise, it’s hardly surprising there has been a steady supply of people willing to take some interest-free government money to get out of their rented home or climb up another rung of the property ladder, when the alternative is to stay put, save hard and hope property prices fall and wages rise.
And all that means of course, that there is one thing Help to Buy has undoubtedly been a winner for - housebuilders’ share prices. On that leaderboard Barratt Developments is up 155 per cent over the past year.
To put that in context, a first-time buyer who had stuck their 5 per cent deposit on that would now sit within touching distance of a 15 per cent one.
A bonus for builders: Help to Buy has delivered a shot in the arm to the new build homes market and sent housebuilders’ shares soaring.
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