Hamish McRae: A price boom redistributes wealth destructively
Sunday 13 April 2008
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.
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