We are Addicted to Rising House Prices
Guest Contributor Simon Beard on having too much of a good thing
Studying economics prior to the recent recession, it became all too apparent how vulnerable our economy was to a slump in house prices. From the willingness of consumers to get out and buy things to the ability of our banks to make a profit on their investments, a great deal of the drivers of our economic prosperity appeared to be premised on a neverending rise in house prices. Whilst many have subsequently claimed to have predicted the dire consequences of this irresponsible behaviour the truth is that nobody was seriously willing to get real and admit that our economic model was fundamentally unsustainable.
Such blindness in economics is perfectly forgivable, unfortunately the truth is that it happens all the time, and to the best of people. What is not forgivable is our failure to learn the lessons of the global recession. Whilst an almost total collapse in the property market did produce short-term falls in house prices this did not in fact make the majority of housing affordable for the majority of people. Since then a stark decline in the rate of house building, a chronic shortage of social and affordable housing and a simple desire for things to get back to how they were before have seen house prices bounce, and in many areas start to exceed their pre-recession levels.
So what is the problem?
Over-inflated house prices hurt our economy in many, many ways. Here are five of the most important.
Firstly, they undermine the possibility of an ownership society. People who cannot afford to own their own homes are far less likely to take a stake in their local communities. They have less of an incentive to invest their social capital in improving their neighbourhoods, or their financial capital in improving their homes. Areas of low owner occupancy have more crime and often rely far more on external organisations to support them. In short they are unlikely to be the corner stones of a big society.
Secondly, they suck money away from investment. Whereas once young people were able to put money aside for their futures, they are now forced to borrow heavily against them. What this means is that there is less of our money that banks can invest in economic growth and a far greater need for investment to be diverted into paying for mortgages. In turn, this leads banks and building societies to rely less upon their customers and more upon high-risk investments in the global financial markets to secure their returns. Good for bonuses in the City of London, but very, very bad for ordinary people looking to set up new businesses or social enterprise.
Thirdly, they make our economy less productive. As economists have been arguing since the time of Adam Smith, there is a fundamental difference between a rise in the price of any good and a rise in the price of land, which is fundamentally what is driving our present rising house prices. In short whatever we spend on things that are produced will, in the end, be re-invested into the economy, either through wages or profit on capital investment, both of which feed economic growth and encourage productivity. However because the owners of land do nothing to produce the value of that land then money we spend on it encourages only idleness and complacency. Most people only ever use the value of their houses as a means of buying another, usually more expensive, house without any economic productivity whatsoever. As with money paid in taxes, money spent on land is effectively a dead weight on the economy, but unlike taxes it carries no corresponding social benefits to compensate us for this loss.
Fourthly, it harms our young people. One of the clearest effects of rising house prices has been the dramatic rise in the age at which people can buy their first house. Whilst many baby boomers where able to set up a home in their early twenties, most young people today simply cannot afford to do so until their thirties or even later. This, along with the rising cost of education and a decline in personal financial security, is fuelling the crisis of today's "iPod" generation (Insecure, Poor, Over-dependent and heavily in Debt). Ironically, young people themselves are not dissatisfied with the situation, the high standard of living and willingness of their parents to contribute to their future mean that many are left comfortably well off. However the situation does heavily disincentivise risk taking, and encourage them to take whatever stable employment they can find, or to survive on benefits. This is exactly what our economy does not need, since we are now in direct competition with countries with a far greater willingness to take risks and innovate, and we will all be the losers if our young people lead us into economic stagnation.
Finally, it is one of the greatest blocks to greater social mobility. It helps the haves at the price of hindering the have-nots. It forces some to use up to half their income paying off debt whilst allowing others to live off the benefits of inherited wealth. This is not to demonise the wealthy, but simply to point out that high house prices are helping to build up high impregnable financial walls around them, and to force the poor, quite literally, into burying their talents in the ground and being ‘cast into outer darkness; where shall be weeping and gnashing of teeth.'
What is to be done?
One thing appears clear, if we do nothing house prices will continue to rise, probably until the bubble bursts once again with who knows what results for our already fragile economy. At present the only policy being used to deal with the situation is housing benefits for the very poorest. However, these are actually proving part of the problem by supporting astronomical rents in many parts of our country and making it almost impossible for those on them to move to economic independence, due to the impossibly high cost of surviving without government support.
Whilst many may rightfully worry about the possibility of government getting more involved in our system of land ownership, the truth is that the most dramatic phase of land reform in England in the past century was undertaken by Margaret Thatcher, who realised the need to help people move from government dependence to housing ownership. The flaw in her policy was to use the revenues raised from selling off council housing to fund other services, rather than to build more social housing and allow the state to partner more people into buying their own homes. The results of this one-sided policy was typical of the short termism of the 1980s. Whilst some clearly benefited, a great many others lost out, and we have been left with a legacy of long waiting lists for council housing, local councils without the resources to meet this need and rising inter community tension as individual groups feel they are being disadvantaged.
So the first step should be a return both to the politics of the 1960s, where governments sought to outdo one another in building new houses, and the 1980s, where they dared to allow tenants to buy their own homes. In short, the government needs to see itself as a social investor in housing and a partner for all those who wish to responsibly move towards owning their own homes.
Another policy worth serious consideration is to copy our former colony of Hong Kong and introduce some version of land value taxation. This has been proposed for many years as a way of reducing the dead wait incurred through rising land prices and bringing more of it back into society. Whilst the UK already has something very similar to this in our method of raising council tax, the system is chronically unresponsive to changes in house prices and utterly arcane in its system of calculating rateable values. Furthermore, it taxes productive home improvements and unproductive rises in land value alike and does not tax any of the benefit land owners receive through gaining planning permission to build prior to the completion of their house. On the other hand Vince Cable's proposed ‘mansion tax', which may or may not see the light of day in a Conservative / Lib Dem coalition, would not tackle the problem, since it is house price inflation for the poorest that is the most damaging to our economy, not the richest. As Philippe Legrain powerfully argued in a recent edition of Prospect magazine only a tax on the unimproved value of land represents fairness, as well as being the only efficient way of using our tax system to solve the house price problem, and not just as a means of levying another stealth tax on the wealthy.
A final policy proposal, and in many ways the most necessary, is a radical overhaul of our planning system. At present conflict appears to be built into the planning system. From the very earliest stages of a planning application residents are likely to object and developers to ignore them. This in turn means that in order to make new developments financially viable developers need to increase their profits in order to pay off their lawyers and public affairs executives. To achieve this they must raise the price of their new build homes, and so give the buyers of those homes extra incentives to challenge further developments, lest they undermine the high prices they themselves paid and lead them into negative equity. Part of the solution to this problem must be allowing local communities to profit more from new residents, by increasing their ability to raise income locally and reducing their reliance on central government, another is to give them more control over their own planning and house building. However, fundamentally what is needed is to involve local people more in solving the very difficult decisions about where to place new, and to trust that they will respond to the pressing demand, for the sake of their local services, their young people and their economic future.
It is difficult to overestimate the challenges inherent in bringing down house prices, but a necessary first step must be realising that they are too high, and that the effect of this on our economy is unsustainable. We need a programme to wean us off our addiction to rising house prices or we will surely find ourselves in crises again and again. Only this way can we take responsibility for the economic future of our country, and build one nation of ownership, investment, productivity, prosperity and fairness.