Gold News

Stupid Housing Solutions

...for the UK's stupid housing crisis...

I AM reasonably convinced that the housing market lies at the heart of the vast majority of Britain's current political woes, writes John Stepek, editor of MoneyWeek magazine.

We hear a lot about income inequality – but that's nonsense. Income inequality has fallen in this country.

Property prices are a different kettle of fish. They're the most visible indicator of economic inequality and tension in our country.

You either own it, or you don't. You either benefited from the great property accumulator bet, or you didn't. And most of that depends on a series of arbitrary events, such as where and when you were born.

Think either of our main political parties is going to make this better?

Not a chance.

Property disparity is the only part of the economy that can make a large chunk of the middle class feel like "have-nots". They're the ones who swing elections.

It's the reason that you have high-earning, white-collar professionals who want to remain in the EU, willing to vote for an ardent Brexiteer in whose socialist paradise most of them would be the first up against the wall.

So it's little wonder that both parties want to be seen to be addressing the property problem. Trouble is, we're well beyond the time for short-term fixes. And short-term fixes are all that politicians are capable of.

Here's the basic problem: house prices are too high; renters can't afford to buy; current owners can't afford to upgrade because the cost per extra square foot is so high. The ability to buy is dictated far more by how much property you already own, or have owned, or that your parents own, than your income.

Our current situation is the inevitable result of encouraging people to take a series of rolling leveraged bets on the price of an income-producing asset over a period during which interest rates have been in secular decline.

Put more simply, as interest rates have fallen, the amount of money you can borrow to buy a house has soared. Now £500 a month will pay the interest on a lot more debt today than it did 20 years ago.

That's the fundamental reason house prices have gone up so sharply. And this is consistent across the globe. So everyone who imagines that high house prices are purely because "we're a tiny island, stuffed full of people" really is missing the big picture.

Don't get me wrong. I believe that there are features of the UK's property market that make it unusually prone to bubbles and I'd like to unpack them another day when I have a spare six months to do the research.

But overall, if you really wanted to bring house prices down, the quickest way to do it is not to double the rate of house buying – it's to push interest rates up to 7%.

Of course, you can't do that. Banks love lending against property, because it's a secured debt. If you don't pay, they get your house. If you create a house price crash, bank balance sheets go bad, and you end up back where you were just after the 2008 crisis.

And that's before you start counting the human cost in repossessions and job losses (because crashing prices and rising interest rates spell recession). However much we might want lower prices, we don't want that.

It's a complicated issue. It's a right pickle. And it's hugely damaging to our economy. Everyone becomes an interest-rate speculator. People delay starting families (mad as it seems). Labour mobility dries up. Every ounce of productive capital is diverted to an unproductive asset.

So what answers are our politicians coming up with?

The Tories have a great idea. First-time buyers can't afford to buy houses because there's too much money chasing houses. So why not give the first-time buyers more money to buy houses?

It really is that stupid. They're blowing another £10bn on extending the help-to-buy scheme, which enables homebuyers to purchase a new-build property with a 5% deposit.

It's as if they can't grasp that if you add another £10bn-worth of property vouchers to the housing market, then all that will happen is that house prices will go up further.

They do have to be new-build houses, of course. But recent actions from house-builders suggest that they've used the scheme as a licence to take the proverbial out of desperate buyers and, of course, taxpayers.

In August, research from Alastair Stewart, a Stockdale Securities analyst and columnist for Property Week, revealed that help-to-buy properties had risen in price more rapidly than other properties. "Help-to-buy prices have delivered 10.6% CAGR since launch versus 7.0% for Land Registry average prices."

Builders are increasingly dependent on the scheme. At many house-builders, help-to-buy properties account for between two-fifths and half of all sales. Overall, says Stewart, the scheme has "disproportionately inflated prices and delivered homes where they were less in demand".

Worse still is the fact that builders have been selling many of these homes as leasehold properties. It might look to a cynical person as though house builders see help-to-buy buyers as naive, desperate profit centres to be exploited badly for as long as they can get away with it.

Jeremy Corbyn's got a great idea too: rent controls. These have been tried around the world in various guises. They don't work. No one who has even an iota of respect for evidence – regardless of whether they are to the left or right politically – disagrees with that.

I'm not even going to try to present the evidence here because a simple Google search will give you all that you need. In short, rent controls don't help poor people – they help people who manage to secure a rent-controlled property. And they discourage investment in new property.

Such is the scale of evidence against this idea, that I have to assume that in proposing it, Corbyn is either ignorant (which I don't believe) or deeply cynical (which I do believe, because for a man like him, the ends will always justify the means). He knows that words like "control" appeal to his base.

So what happens in the end here? The least-worst outcome is that inflation takes off and house prices stagnate for a very long period of time. That way, prices gradually become more affordable in "real" terms without swathes of people losing their homes or the banking system going bust because of a huge drop in "nominal" values.

Indeed, that seems to be what the Bank of England would like to aim for, given its various attempts to restrict mortgage lending while keeping the rest of monetary policy relatively loose.

But regardless of who's in government, they're going to be a hindrance rather than a help. It's the sort of thing that might even make you feel sorry for Mark Carney.

In short, hope for the best (inflation, but not too much of it) and prepare for the worst (an awful lot of inflation and a government that thinks it can control prices). And in the meantime, chances are that the situation will get worse before it gets better.

Launched alongside the UK's highly popular The Week digest of global and national news in 2001, MoneyWeek magazine mixes a concise reading of the latest financial events with expert comment and investment ideas.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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