The European Commission is right to criticise housing policy in the UK. We can only hope that a future government sees the need to bring a degree of stability, affordability and sanity to the housing market
I don’t normally find myself agreeing with the European Commission, but its recent intervention concerning the UK housing market seems to me to be both timely and relevant given the frightening level of house price inflation in the UK and particularly in London. Amazingly, the response to its sensible suggestions have resulted in a furore of criticism from many quarters including Tory MPs, Vince Cable and quite amazingly that Europhile-in-chief, Nick Clegg. What is going on?
Housing has always seemed to me to be the UK disease. Why is it that housing is the only purchase item where, if the price goes down, people say ‘oh dear’ or ‘how terrible’, whereas if the price of food, energy, transport, wine, foreign holidays or consumer goods goes down people usually say ‘great’? Doesn’t anybody ever learn the lessons of economic history – asset prices can’t continue to increase indefinitely and will go down as well as up?
Unfortunately, governments tacitly reinforce this view. After a period of economic bad news (and we have had much of this in recent years) they like to trumpet rising house prices as a sign that things are getting better and good times will be back soon. Unfortunately, it is actually a sign that a new housing bubble is being created that will in due course bring the economy, once again, crashing down on all our heads.
In the UK we have had many property booms and busts, most recently in the early 1990s and the later part of the 2000s just prior to the great recession and the huge collapse in property prices. After a frenzy of buying and escalating house prices, a property market collapse usually ensues.
Over the previous years of the cycle some people will have made large financial gains from buying and selling houses but many who bought at the peak of the market suffered major financial losses and end up in negative equity and possibly bankruptcy, homelessness or both. Economic history shows us endless examples – the South Sea Bubble, the 1929 crash – of people believing that asset prices could only go up and not come down.
For the past 20 years or so I have argued strongly against treating housing as an investment asset instead of being a purchase item essential for civilised life. However, in the UK, in choosing a house, many people still look at the financial gain they are likely to make if they sell the house in a few years, and not its suitability as a place to live and raise a family.
If financial losses on housing were just an individual matter then we might not need to give it too much attention since it is up to people how they invest their money and what risks they wish to take. However, these booms and busts in housing have a number of major economic and social consequences some of which include:
- Many people and families have their properties repossessed and are made homeless
- In some parts of the country (eg London) even though there can be a shortage of appropriate housing some property stock is kept vacant since landlords are happy making capital gains without the bother of having tenants
- The rapid escalation in house prices in an area makes housing unaffordable to many people especially first-time buyers.
- Borrowers, encouraged by irresponsible financial institutions, take on completely unaffordable mortgages in order to get on the housing ladder, and end up in calamitous financial situations
- Investment funds applied to property purchases are diverted away from more productive forms of investment
- Most importantly, the financial crises that have occurred in many countries have led directly to collapsing economies, unemployment and major reductions in public services and infrastructure
It has been said that the seeds of the next financial crisis are already being sown in the backrooms of banks and other financial institutions by people thinking up the next dodgy product range that can be sold to naïve people at a profit. This may or may not be the case, but the question is whether now is the time to think about how we might avoid yet another housing market boom and bust with its dreadful consequences.
In its recent report, the measures suggested by the European Commission involved:
- Increasing the rate of building of new houses – increasing supply should keep down hose price inflation provided the hoses are built in the right places. Either houses are built in areas where jobs are available such as the South East or the government must find a way to increase job creation in other parts of the UK and increase house building accordingly
- Curtail Help to Buy – this policy was always seen as politically shrewd but economic madness if the supply of housing could not be increased to deal with the increased demand the policy would create. The surge in house prices is now a case of chickens coming home to roost
- Council tax – raising the rate of tax on higher-value properties, which would raise revenue that could be ploughed back into house building
The above measures are sensible but I would go further and advocate that the government considers applying capital gains tax to all domestic property transactions including first properties. This would give a signal that housing should not be seen as an investment asset but a human right. It would also reduce the attraction of housing as an investment by reducing the possible gains and, of course, raise additional funds for the Treasury.
Obviously the present government, which has to face an election next year, is never going to introduce such a radical tax policy. Ministers want to convince us that the UK economy is on a path of long-term sustainability (which it isn’t) and that rising house prices means the good times are back (which they are not for the majority of people). They will not do anything that will destroy that illusion so close to an election.
All we can hope is that some future government, with a five-year term in front of it, might see the need to bring a degree of stability, affordability and sanity to the UK housing market both in the South East and the rest of the country. Clearly the details would have to be worked out in terms of rates of tax and exemption limits, and the policy would need to be harmonised with other policies such as accelerating the house building programme.
But what would people do with their spare funds if they couldn’t speculate on the housing market? They could invest in the equity markets but, perhaps, the government might also think of establishing some form of national competition involving much larger sums than the National Lottery so that people could speculate without damaging the real economy. (I jest of course).
