Home ownership has now become “unaffordable” to people on middle incomes, Vince Cable admitted, as he warned that the bubble developing in the housing market could be more serious than during the last property crash.
Amid growing tension between the Conservatives and Liberal Democrats over rising house prices, the Business Secretary told The Independent: “The fundamental problem is a chronic imbalance between supply and demand. A recovering mortgage market is just fuelling demand again.”
Mr Cable warned: “A family on average income is nowhere near able to afford a house at the average price. Property has become much more unaffordable for people on middle incomes.”
The Lib Dem minister said that, in the mid-1990s, the average house price was three times average earnings. Today, at roughly the same stage of the economic cycle, the ratio is about 5.5. It rose to more than six before the crash of 2007.
The Lib Dem minister hit back at comments by Kris Hopkins, the Conservative Housing Minister, who told the BBC’s Newsnight programme that rising house prices are a good thing.
Mr Cable said: “I do not agree with Kris Hopkins that rising house prices are a good thing. If you are an owner-occupier who has paid off your mortgage, it is an increase in your paper or real wealth. But if you are a young family trying to get into the housing market and it is unaffordable, it is an extremely bad thing".
Although Tory ministers will be infuriated by Mr Cable’s comments, his warning will be taken seriously. As the Lib Dems’ economic spokesman during the previous Labour Government, Mr Cable was dubbed “the sage of the credit crunch” after warning that the housing market would collapse, calling for the nationalisation of Northern Rock and predicting the banking crisis.
The Business Secretary believes the country now faces a different – and possibly even worse – housing market crisis. Last time, the problem was mortgage lenders being over-exposed. This time, he said, the “real issue” is the need for more housebuilding.
Mr Cable added: “We have taken some very good measures in government like allowing those areas with severe need for additional housing to increase borrowing against their assets to build new houses. We’ve made financial help available to small businesses in the building trade to increase competition and introduced one for one replacement of council housing every time one is sold. The number of council houses actually fell under Labour. But more needs to be done. We must build many more houses - that and only that is the solution to our housing problem.”
His comments will be seen as a move by the Lib Dems to champion voters in their 30s who are struggling to get on to the housing ladder. Last month’s Budget, which included sweeping reforms on pensions and savings, was seen as a pitch by the Conservatives to the over 50s.
Mr Cable was alarmed by this week’s survey by Nationwide Building Society, which found that the “house price gap” between London and the rest of the country is at its widest since records began in the 1970s. Prices in London have risen by 18 per cent to an average of £362,699 in the past year. The average in the rest of the UK is £178,124, an increase of 9.2 per cent over the same period.
Some Lib Dems are worried that the Government’s Help to Buy scheme, which guarantees 95 per cent mortgages, may be contributing to a housing bubble by encouraging people to buy rather than miss out on rising property values. They hope the Bank of England, which is monitoring the programme, may call for it to be limited to regions outside London and the South East and for the £600,000 property price limit to be halved.
George Osborne admitted the Government needed to be “vigilant” about house prices but rejected criticism that Help to Buy had acted as "fuel" for a surging market. The Chancellor told the Treasury Select Committee: “I think we have to keep a close eye. Clearly house prices have started to rise. But that is why we have created the [Bank’s] Financial Policy Committee.”
Treasury figures show that, a year after its launch, Help to Buy has enabled 17,395 home sales to go ahead. The average value of the property sold is £194,992, with 88 per cent going to first-time buyers and 77 per cent outside London and the South East.
Mr Hopkins insisted that Help to Buy accounted for only 0.5 per cent of transactions in the last quarter of last year. "We are nowhere near the peak at this moment in time," he said. “I don't agree that we are stoking demand, I certainly agree that we need more housing.” He admitted the country was "woefully short" of housing supply.