Hamish McRae: A price boom redistributes wealth destructively

On Friday Alistair Darling told reporters in Washington that there would not be a house price crash in Britain. Aargh!

I was reasonably confident until then that Britain would not experience the scale of disaster that has encompassed America, for the slump in house prices there has probably pushed the country into recession. Sure, the inflated values of the past year would be trimmed and so there would be some decline for a couple of years, but not a real crash with all its disruption and misery.

We had a taste of that in the early 1990s, as Kenneth Clarke acknowledges here. Negative equity is not a great outcome for borrowers and lenders alike, nor indeed for the economy as a whole. So let's hope that Mr Darling's comment doesn't prove a hostage to fortune and on this at least he proves right.

And yet surely affordable housing is a good thing – the idea that houses should be cheap enough for all, not just a special group that qualify for a government scheme. That would mean lower house prices relative to incomes, a smaller debt burden on buyers, less of a gap in wealth between people who had bought their homes many years ago and those now struggling to buy their first place.

But houses are not just places to live. They are also a store of wealth, the largest asset of most people alongside their pension rights. So there is an inevitable complicity between home-owners and everyone with an interest in housing: estate agents, mortgage lenders, politicians and so on. The very language we use – getting on to the housing ladder, how much money we have "made" on our home – implies that there will be steady growth in house prices. This is understandable, for the entire developed world has had 60 years of inflation, very rapid at times.

So while there have been blips, in the middle 1970s and early 1990s, when prices did fall, in the end an investment in a home has almost always proved a good one. Inflation in the economy as a whole saved even imprudent borrowers, provided they could hang on through the dips.

Maybe inflation will save home-owners again. In five, 10 or however many years' time there will be another boom and people will crow about how they bought in the 2008/09 downturn and the profit they made since then. But we should not forget that a house price boom redistributes wealth in a random and socially destructive way.

Look who benefits: the old, the well paid, people with family money, people who buy bigger houses than they need, people who live in areas of strong job growth. And who loses? The young, the moderately paid, people who have to make their own way in the world, people who are modest in their housing needs, people who live in struggling regions.

So what is to be done? Present government efforts to try to buffer people from the effects of a price boom are really just patches. Some, by directing homes to particular types of worker, and therefore restricting the supply of new homes coming on to the market, may make the long-term problem worse. Housing is a familiar victim of the law of unintended consequences: look at how rent controls dried up the supply of private rented accommodation, ultimately increasing rents.

What we need is reasonable stability in house prices. That means a period of flat, or at least flattish, prices to allow incomes to catch up. Much better a plateau than a crash. It would make for a much calmer housing market were mortgages to continue to be restricted, so that people were not encouraged to borrow beyond sensible limits.

We need to think about the supply of homes and that means looking at the way planning laws in practice have restricted the building programme.

Britain is not alone in having had a housing boom that has now come to an end. Many other countries, quite aside from the US, now look pretty exposed too. Whether Mr Darling is right or not, these are going to be tougher times. Surely we can use this period to learn from what we have got wrong and try to see that next time we do better.

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
Arts and Entertainment
Friends is celebrating its 20th anniversary this year
tvSeries celebrates 20th anniversary
Sport
Twelve of the winning bidders will each host three group matches
football
Life and Style
Jack Cooksey goes for the grand unveiling - moments before dropping his new iPhone 6 on the floor
iphone launch
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Sport
A 'Sir Alex Feguson' tattoo
football

Arts and Entertainment
Ben Whishaw is replacing Colin Firth as the voice of Paddington Bear
tv

Thriller is set in the secret world of British espionage

Life and Style
life

News
ScienceGallery: Otherwise known as 'the best damn photos of space you'll see till 2015'
Life and Style
fashion

Bomber jacket worn by Mary Berry sells out within an hour

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Audit Manager Central Functions

To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...

Credit Risk Audit Manager

Up to £90,000 + benefits: Saxton Leigh: Credit Risk Audit Manager required to ...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week