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Zero house price inflation is to be welcomed not feared Zero house price inflation is to be welcomed not feared
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Ready to go house hunting? Tradition has it that no sooner have the hot-cross buns been buttered on Good Friday than potential buyers start the search for a new home. Estate agents look forward to Easter the way retailers relish Christmas, but perhaps with less exuberance this year than is customary. Ready to go house hunting? Tradition has it that no sooner have the hot cross buns been buttered on Good Friday than potential buyers start the search for a new home. Estate agents look forward to Easter the way retailers relish Christmas, but perhaps with less exuberance this year than is customary.
As things stand, 2017 looks like being the weakest year for housing transactions since 2013. The latest surveys from the Nationwide and the Halifax show that house prices are no longer rising. As things stand, 2017 looks set to be the weakest year for housing transactions since 2013. The latest surveys from Nationwide and Halifax show house prices are no longer rising.
In a sense, the lack of oomph in the property market is curious. Home ownership is still much sought after in Britain, where there is a strong feeling that bricks and mortar are a more reliable long-term investment than any other asset. What’s more, it has never been cheaper to borrow.In a sense, the lack of oomph in the property market is curious. Home ownership is still much sought after in Britain, where there is a strong feeling that bricks and mortar are a more reliable long-term investment than any other asset. What’s more, it has never been cheaper to borrow.
Even before the Bank of England cut official interest rates to a record low of 0.25%, lenders were vying with each other to offer the most attractive home loan packages. Competition has driven down mortgage rates to ultra low levels. Home ownership has fallen sharply since peaking in the early 2000s and is now at its lowest level in 30 years, yet there is no surge of prospective buyers seeking to take advantage of attractive deals. Even before the Bank of England cut interest rates to a record low of 0.25%, lenders were vying with each other to offer the most attractive home loan packages. Competition has driven down mortgage rates to ultra-low levels. Home ownership has fallen sharply, since peaking in the early 2000s, and is now at its lowest level in 30 years, yet there is no surge of prospective buyers seeking to take advantage of attractive deals.
One explanation is that Brexit has made people wary about taking on financial commitments. Another is that rising inflation has made individuals feel worse off and is having a dampening effect on the housing market.One explanation is that Brexit has made people wary about taking on financial commitments. Another is that rising inflation has made individuals feel worse off and is having a dampening effect on the housing market.
Neither argument looks entirely convincing. Robust car sales suggest that consumers are happy to buy big-ticket items, while the recent increase in the cost of living has been modest by historic standards. Inflation currently stands at just over 2%; within the past half-decade it has been above 5%. Neither argument looks entirely convincing. Robust car sales suggest consumers are happy to buy big-ticket items, while the recent rise in the cost of living has been modest by historic standards. Inflation stands at just over 2%; within the past half decade, it has been above 5%.
The likeliest explanation for the current muted state of the property market is that houses are simply too expensive for first-time buyers, even with mortgage rates as low as they are. According to the Office for National Statistics, the average house price is 7.6 times the average annual salary, more than double the figure two decades ago. The Bank of England wants to prevent the sort of excessive lending that took place before the financial crisis of a decade ago and has told lenders not to offer loans that are more than 4.5 times a borrower’s income. The likeliest explanation for the muted state of the property market is that houses are simply too expensive for first-time buyers, even with mortgage rates as low as they are. According to the Office for National Statistics, the average house price is 7.6 times the average annual salary, more than double the figure two decades ago. The Bank wants to prevent the sort of excessive lending that took place before the financial crisis of a decade ago and has told lenders not to offer loans that are more than 4.5 times a borrower’s income.
In those circumstances, only one of three things can happen. Earnings growth can pick up while house prices remain steady. Earnings growth can remain modest while house prices fall. Or prices remain high and income growth remains low, in which case stasis ensues.In those circumstances, only one of three things can happen. Earnings growth can pick up while house prices remain steady. Earnings growth can remain modest while house prices fall. Or prices remain high and income growth remains low, in which case stasis ensues.
There seems little prospect of an acceleration in wage growth, currently running at little more than 2%. Equally, the conditions that would normally prompt a sharp fall in house prices – high and rising interest rates and lengthening dole queues – are not present. The market will go sideways unless such time as demand drops, the supply of homes increases, or the Bank relaxes its lending conditions. There seems little prospect of an acceleration in wage growth, currently running at little more than 2%. Equally, the conditions that would normally prompt a sharp fall in house prices – high and rising interest rates and increasing unemployment – are not present. The market will go sideways until such time as demand drops, the supply of homes increases or the Bank relaxes its lending conditions.
While the economy has certainly slowed since the turn of the year, it is not about to plummet into recession. Sharply higher interest rates from the Bank of England would certainly kill off demand for property, but that doesn’t look likely either. Meanwhile, a good chunk of the homes that are being built appear to be going to overseas buyers who have found that their money goes further as a result of the depreciation in sterling. While the economy has certainly slowed since the turn of the year, it is not about to plummet into recession. Sharply higher interest rates from the Bank would certainly kill off demand for property, but that doesn’t look likely either. Meanwhile, a good chunk of the homes that are being built appear to be going to overseas buyers who have found their money goes further as a result of the depreciation in sterling.
In short, the economy has reverted to the state it was in before George Osborne gave the housing market a boost half way through the last parliament. Two policies – Funding for Lending and Help to Buy – got mortgage lending going again and led to stronger growth. In short, the economy has reverted to the state it was in before George Osborne gave the housing market a boost halfway through the last parliament. Two policies, Funding for Lending and help to buy, got mortgage lending going again and led to stronger growth.
But this was a sugar rush. There was a limit to how far house prices can rise and that limit has been reached. Many of those who are ostensibly gaining from rising house prices are now opening branches of the bank of mum and dad so that their offspring can buy their first home. But this was a sugar rush. There was a limit to how far house prices could rise and that limit has been reached. Many of those who are ostensibly gaining from rising house prices are opening branches of the bank of mum and dad so their offspring can buy their first home.
The prospect now is for a period when house price inflation hovers around zero, but this is to be welcomed rather than feared. All the major recessions in the economy over the past four decades have come after unsustainable housing booms; the periods when the economy has rebalanced towards manufacturing and investment – such as the mid-1990s – have been when house price inflation has been weak. Growth in 2017 will rely less on the strength of the housing market and more on the ability of UK exporters to take advantage of a more competitive currency and a pickup in global demand. The prospect now is a period in which house price inflation hovers around zero, but this is to be welcomed rather than feared. All the major recessions in the economy over the past four decades have come after unsustainable housing booms; the periods when the economy has rebalanced towards manufacturing and investment, such as the mid 1990s, have been when house price inflation has been weak. Growth in 2017 will rely less on the strength of the housing market and more on the ability of UK exporters to take advantage of a more competitive currency and pickup in global demand.
Britain could learn something from other countries, namely that you don’t need rising house prices or even high levels of owner-occupation to be rich and successful. Germany has done just fine, even though it has a far bigger rented sector than Britain and has had much lower levels of house-price inflation. Britain could learn something from other countries, namely that you don’t need rising house prices or even high levels of owner occupation to be rich and successful. Germany has done just fine, even though it has a far bigger rented sector than Britain and has had much lower levels of house price inflation.
Research by Andrew Oswald and Danny Blanchflower shows that rising home ownership leads to a subsequent increase in unemployment, because owner occupation affects labour mobility, increases congestion costs and encourages Nimby-style behaviour that means fewer new businesses. The correlation holds true across the developed countries of the Organisation for Economic Cooperation and Development and in individual states of the US. Research by Andrew Oswald and Danny Blanchflower shows rising home ownership leads to a subsequent increase in unemployment, because owner occupation affects labour mobility, increases congestion costs and encourages Nimby-style behaviour that means fewer new businesses. The correlation holds true across the developed countries of the Organisation for Economic Co-operation and Development and in individual US states.
There is no evidence that buying a house means you personallly lose your job a couple of years down the line, which suggests Britons will not easily be turned on by the idea of becoming a nation of renters. But the idea that high levels of renting can be associated with a dynamic local economy is supported by the evidence of London, which is thriving even though buying a home is a distant dream for most young people. It might also explain why unemployment was so low in the 1950s and 1960s, when councils were building homes to rent. There is no evidence that buying a house means you personallly lose your job a couple of years down the line, which suggests Britons will not easily be turned on by the idea of becoming a nation of renters. But the idea that high levels of renting can be associated with a dynamic local economy is supported by the evidence of London, which is thriving even though buying a home is a distant dream for most young people. It may also explain why unemployment was so low in the 1950s and 60s, when councils were building homes to rent.
Sooner or later a politician is going to brave enough to say that Britain has got housing policy completely wrong. They will say, quite correctly, that there is no future in an economy that relies so heavily on a housing market that lurches from boom to bust. They will demand that the shackles be taken off local authorities so that they can tackle a homelessness crisis. They will accept that Britain’s taxation system encourages demand for housing while the planning system discourages supply, and act accordingly. Sooner or later, a politician is going to be brave enough to say Britain has got housing policy completely wrong. They will say, quite correctly, that there is no future in an economy so heavily reliant on a housing market that lurches from boom to bust. They will demand that the shackles be taken off local authorities so they can tackle a homelessness crisis. They will accept that Britain’s taxation system encourages demand for housing, while the planning system discourages supply, and act accordingly.
That would mean reform of a property tax system that manages to stimulate demand, encourage land hoarding and be regressive all at the same time. It would also mean taking on the biggest vested interest in Britain: owner-occupiers who, through luck rather than skill, have amassed considerable wealth as a result of soaring housing prices. Which is why it is not going to happen any time yet. That would mean reform of a property tax system that manages to stimulate demand, encourage land hoarding and be regressive all at the same time. It would also mean taking on the biggest vested interest in Britain: owner occupiers who, through luck rather than skill, have amassed considerable wealth as a result of soaring housing prices. Which is why it is not going to happen any time soon.