Inflating another Bubble?

[source: wikimedia][source: wikimedia]

Since the 2008 recession, journalists and politicians have spilt much ink arguing over the nature and sustainability of the economic recovery in the UK. Pessimists first lamented a prolonged period of GDP flat-lining as the economy tinkered on the edge of a double-dip recession. Now that the UK is poised to be the fastest growing economy in the developed world, the debate has shifted in emphasis, focusing on the slow growth in household incomes, a “cost of living crisis” and, more recently, alarm bells have sounded over the inflation of another housing bubble.

Are attempts to highlight these issues merely examples of crude political expediency, designed to destabilise the Coalition Government? Do recent trends in house prices indicate that the UK has returned to a cycle of “boom and bust”?

Double-digit increases in property prices have caught headlines in recent months, and the figures are impressive: in the last year alone house prices rose on average 6.7% in England and Wales. In London, the cause for alarm is even greater, as the average soared by 17.6%. A rapid acceleration in the value of real estate, and to such a great extent, is reminiscent of the upward spiral in prices which preceded the 2008 crash. Property inflation of this kind also lends credence to the argument that the economy is currently overheating.

No other country, except perhaps Australia, has witnessed the sort of explosion in house prices experienced in the UK. In nominal terms, the value of properties has increased by a factor of forty since 1971. Meanwhile, average incomes have crept upward sluggishly over the same period, and in the six years following 2008 they have contracted in real terms.

As a result of soaring house prices, first time buyers are increasingly being “priced out” of the housing market altogether. Years of slow real wage growth, coupled with the tight-fistedness of banks and Building Societies to lend, have made obtaining the cash needed for a deposit and a mortgage nothing more than a distant aspiration for many ordinary people. Some estimates suggest that at no other time in the UK’s recent past has it been more difficult for young people to get a foot-hold on the property ladder than it is today.

But what are the solutions to such intractable problems, and how can we go about addressing the UK’s dysfunctional housing market?

Significant confusion clouds the housing debate. Apart from being a heavily politicised discussion, issues have been complicated by straw man arguments, red herrings and vested interests. Much of the rhetoric has distracted from the main point: that the forces determining long run house prices are supply and demand.

Conducting the debate merely on the basis of the most recent spike in house prices implies that the current situation is somehow exceptional or unusual. But in fact there is nothing more predictable in the UK housing market than rising prices. Ed Miliband’s proposals for rent controls, forced occupancy and increased housing benefits reflect a tendency to see issues from a narrowly short term perspective, and as only concerning the demand-side.  At best, these policies address only the symptoms of a poorly functioning market for housing, and are peripheral in relation to the broad, structural factors which determine the affordability of housing in Britain.

The government should not be distracted from the reality that it will be an expansion of private and public sector housing development which will sustainably drive down prices in the future.

But of course this is easier said than done.

Housing developments are often highly controversial, arousing opposition and recrimination from local communities and campaigners. We can all agree that more houses need to be built, but where they are built and in what form they come are not issues so easily resolved. As is so often the case, the interests of local communities conflict with those of the Central Government. Greenpeace, the Campaign for Rural England and the National Trust have taken a staunchly anti-development stance and are often able to mobilise considerable local support. These organisations tend to present Britain as some kind of industrial wasteland, sprawling with conspicuous developments which plight areas of natural beauty. There is a common perception that the UK is a “crowded island.”

But the reality is quite different. For instance, the Land Use registry estimates that only around one-tenth of land in England is actually developed on. The myth that there is a shortage of land available in the UK stands up to little scrutiny.

For a local community, new developments entail a loss of green field sites, possibly more congestion and crowding, and for homeowners it is likely to entail a decline in the value of their house. Development also entails benefits, of course, but these do not accrue to the same people who bear the disadvantages. Therefore, crucial to overcoming resistance at a local level will be to ensure that the balance of opportunities and risks are shared fairly by communities. The coalition’s localism agenda has taken steps to this end. If local authorities had to cover the majority expenditure through local taxes, then they would have a vested interest to enlarge their tax base, and granting planning permission would be one way of doing so. By blocking developments, Councils would be either foregoing the opportunity for tax cuts or improving local public services.

In London, the housing crisis has had a completely different flavour. Here, double digit price rises are being fuelled by a combination of severe supply constraints and seemingly limitless demand, especially from foreign buyers.

One way to address the intense upward pressure on prices in the Capital would be to review regulations and height limits which prevent high rise apartments from being developed across London. Although the City’s sky line is enhanced by high visibility, there is a case to be had for allowing greater leniency for developments which are unobtrusive and remain in-keeping with the local environment.

Another way would be to look again at the decades old legislation protecting the Green Belt. The Adam Smith Institute has published extensive research to suggest that as many as 800,000 new homes could be built around the capital by shaving just half a mile off each boundary. Proponents of this strategy claim that tight regulations on housing developments in the Home Counties and surrounding countryside are a major barrier to easing the upward pressure on prices.

Protecting green space and areas of natural beauty is important. But the pendulum has swung too far in favour of red tape, consultations and bureaucracy. As a result, the supply of housing in the UK has become almost completely unresponsive to changes in the level of demand.

The key, therefore, is to achieve some kind of workable balance. Developers must not be allowed to build remorselessly and without regard for the interests of local communities – they enter a social contract with all those who are implicated by their plans. Also, if properties are unaffordable for the local population, and if the market becomes saturated by buy-to-lets, investment buyers and foreigners, then property inflation will worsen, not ease.

Equally though, house builders must retain a degree of autonomy in pursuing profitable ventures when they arise. The “Green Blob” activists as they have become known, who dismiss wholesale the arguments for building more housing, often pursue self-serving vested interests and in turn place under threat the national interest.

Backbenchers from the Labour party have also waded in and argued the need for greater social housing. This is not all that surprising given that the ONS last year estimated that as many as 1.85 million households are currently on waiting lists. But social housing is simply not an adequate substitute for a well-functioning housing market. Advocates themselves often acknowledge the negative outcomes of expanding social housing, in particular entrenching poverty and separating residents from mainstream society.

The need for greater social housing is also weakened by the fact that, as a proportion of the total, social housing is relatively high in the UK – currently around one-fifth. By European standards, this is high indeed. If the intense strain on low-cost housing in the private sector were addressed, so too the conditions in the social housing sector would improve.

It is imperative that these political issues do not distract from the dire need to increase the number, and/or scale, of housing developments in the UK.

If the agendas of politicians and leaders of the so-called “Green Blob” continue on their self-serving path then the price pressures in the housing market will continue unabated.