Flat house prices offer real gains
Sunday 06 August 1995
Amid all this, there has naturally been a lot of discussion about the economic consequences of depressed housing market; for example the effects of low housing turnover on consumer demand, or negative equity on labour mobility. Thus the housing situation has been discussed in terms of applying first aid to what is seen as an abnormal phenomenon. What could or should be done about the problems that falling house prices create?
There has been much less discussion on the basis that flat or falling prices are the new norm. If you start from there, a whole set of different questions spring out. For example, what are the economic consequences of what is by historical standards very affordable housing? If our economic performance has been adversely affected by swings in the housing cycle what will be the effects of eliminating this? If housing is seen as much as a cost as an investment, where else will savings go?
Some facts to help establish what the new norm might be. As the left- hand graph shows, the trend of real house prices has been slowly upwards since the Second World War: houses have been getting less affordable in relation to other goods for the last 50 years. But there have, during this time been three periods where real prices have fallen: in the 1950s, in the middle 1970s and in the last seven years. Nominal prices were flat for a long period in the 1950s and have been flat or falling slightly since 1988. During the 1970s, thanks to very high inflation, nominal prices continued to rise, but the obvious period to look at is the 1950s, in that overall inflation was similar to today - 1-3 per cent.
The second graph shows prices in relation to people's income, an index of affordability. The obvious message here is that the early 1970s and late 1980s were aberrations, and that prices are now back to a more normal relationship. That does not mean that the present level is "right", for it could fall further. But it does show that the levels of the early 1970s and late 1980s were wrong.
That is all rather comforting, for you can find periods in the past that look similar to conditions today. There is one note of caution that the third graph should sound, for there is something different: the rise in home ownership seems to have stopped.
For most of the post-war period (the graph only goes back to 1965, but the same process was at work in the 1950s) the proportion of owner-occupied homes in the housing stock rose by between 0.5 and 1 per cent a year. That is as near a straight line relationship as you ever get. But now it has been checked at just under 68 per cent. Of course, it was always going to have to stop at some stage, for the proportion of owner-occupiers cannot mathematically go above 100 per cent. And it could creep up again, maybe into the low 70s, like the US. But you can be pretty certain that, even if owner-occupation resumes its climb, it will only inch upwards in the future. There will always be some people who do not wish to own homes, or who cannot afford to do so.
If this is right, we face a period of considerable stability in home ownership. People will move house of course, trading up or down as their needs change, and moving from one region to another in response to changes in job and family circumstances. We will go on building new homes, for the population will continue to grow until about 2027, when the population is projected to rise 62.3 million from the current 58.2 million. But the great turmoil of the British housing market of the last 150 years - the Victorian building boom, the 1930s growth in owner-occupation, the building of the council-housing tower blocks in the 1950s and 1960s, and the trends noted above - is over.
If housing turmoil becomes a thing of the past, so will the distortions it has brought. Critics of British housing policy will single out any number of flaws, but as far as its effect on the rest of the economy is concerned there are two main groups of criticisms. The first is that too much resource (and from the individual's point of view too much saving) has gone into housing; the second is that fluctuations in house prices have distorted the pattern of growth and made economic management more difficult.
Some aspects of the first criticism may not wash, for example the point that we have invested in homes at the expense of industry. Few Europeans or North Americans would envy the Japanese with their shining (but underused) factories and tiny homes. Indeed, the main criticism of British housing is surely less that we have put too much into it, and more that the quality of what we have built is too low.
From the point of view of the saver, though, there must be some truth in the fact that British home-owners have too high a proportion of their assets in property, which is inflexible. From a prudential point of view, they would be better building up savings in the form of financial assets rather than putting all their eggs in one basket, their homes. It would natural now to expect a rise in other forms of saving: that the normal pattern for the next generation of home owners will be to have a mix of financial and other assets. People will still want to own their main home, but they will be less anxious to move frequently and more eager to build up their stock of Peps, pension fund entitlements and so on. The result may well be that more resources become available to commerce and industry, for demand for these financial assets will surely generate its own supply.
More important in economic terms, perhaps, will be the ending of housing and the way we finance home ownership as a source of instability. Booms in housing create booms in consumer durables, partly because as people move into new homes they tend to buy new kit, and partly because they take out part of the equity. Our housing finance market is a further source of instability, with movements in short-term interest rates having a dis- proportionate impact on demand.
Both these economic changes will be beneficial, but we are not just economic animals; we are also social ones. So expect social as well as economic changes. Rid us of the obsessive need to jump onto the housing market for fear of being left behind and we may be more content to rent. If the appropriate legal and tax changes are made a mid-market rental sector could reawaken. The harsh frontier between owner-occupiers and council tenants would be softened if there were an active private rental sector.
So the ultimate pay-off from a stable housing market may be a less divided, as well as a more efficient, society.
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