This article appears in today’s Guardian.
House prices rose by 10.5% in the 12 months to April. A typical home now costs £167,800, according to Nationwide – more than in August 2008, the month before Lehman Brothers collapsed, credit seized up and the economy fell off a cliff. It’s as if the financial crisis and the worst recession since the 1930s had never happened.
While home owners – especially those who had fallen into negative equity – will cheer the housing market’s bounce, it is high time Britons were weaned off their addiction to property speculation. It is a dangerous delusion that we can all prosper by swapping more or less the same stock of houses with each other at ever more inflated prices. Unfortunately, few politicians – with the notable exception of Vince Cable– propose to do anything about this nationwide pyramid scheme. After all, another fix of house-price inflation that got consumers spending again would appear to be a pain-free way to stimulate the recovery. In truth, though, it would be recklessly unsustainable.
Fortunately, the housing market is not yet as bubbly as the headline figures suggest. Volumes remain depressed: half as many properties are changing hands as two years ago. And while London prices are being pushed up by bulging City bonuses and foreign investors capitalising on the weak pound to snap up prime property in the capital, the rest of the country is looking less perky. Even so, it is astonishing that prices are notching up double-digit growth with the economy stagnant and houses still extremely expensive. Priced at more than five times average earnings, the typical house is more exorbitant than at the height of the 1989 property boom.
In part, this is because the supply of new houses – which is constrained by planning restrictions and the failure of successive governments to build enough social housing – has failed to keep pace with rising demand. This is notably due to more single people wanting to live alone; blaming immigration is a red herring – while house prices at their peak in 2007 were two-and-a-half times as high as in 2000, they would have been only 7% lower had net immigration to Britain been zero over that period, according to Stephen Nickell, of Oxford University, whose testimony is quoted in an infamous House of Lords select committee report that was hardly pro-immigration. Mostly, though, property prices are buoyed by financial factors: the availability of cheap credit and the willingness of prospective buyers to borrow huge sums in anticipation of future gains.
The belief that the “property ladder” is the road to riches does all manner of damage. It saps long-term growth by diverting funds – and talent – away from productive investment. Three-quarters of bank loans go to the property sector; many would-be entrepreneurs become property developers instead. It also promotes an unhealthy reliance on the financial sector and debt-fuelled consumption. And it destabilises the economy, as euphoric booms are inevitably followed by nasty busts.
Rising house prices force many families to squeeze into smaller homes, prevent many people from buying a place altogether, and inflict long commutes on people who cannot afford to live near their workplaces in city centres. They transfer wealth from poorer young people to richer older ones. And they fracture society between property haves and have-nots. The biggest beneficiaries are Britain’s big landowners – the 0.3% of the population who own 69% of the land – who get richer each year without lifting a finger. The Duke of Westminster, who inherited 300 acres of what were once fields and are now Mayfair and Belgravia – the priciest parts of central London – is laughing all the way to the bank.
What, then, should the government do? For a start, ease planning restrictions and build more social housing. That does not imply concreting over the countryside: 3 million new homes at the government’s target density would take up a mere 0.3% of the UK’s land area – even less if they were built on brownfield sites. Second, the authorities should restrict mortgage lending when the housing market is getting bubbly through targeted measures – such as requiring banks to hold more capital against property lending – that do not crimp desirable business investment.
Last but not least, the government should introduce a tax on land values. Taxing wealthy landowners’ windfall gains would help curb property speculation, fund new social housing and reduce the budget deficit. Over time, shifting the tax burden off labour and on to land would create jobs, reward hard work and promote more stable, sustainable and balanced growth. Fixing the housing market should be a priority for whichever parties form the new government.