Stable doorPosted: May 23, 2016
Originally published on Inside Edge 2, my blog for Inside Housing
Back in 2010 a Conservative housing minister mused that a period of stable house prices would be a good thing. Six years later – and in the context of the European referendum – it would apparently be a disaster.
A report today from the Treasury warns that prices could be 10%-18% lower by 2018 if we vote for Brexit next month. It’s part of a message that a leave vote would trigger what David Cameron calls a DIY recession that would cost hundreds of thousands of jobs.
I’ll leave the wider economic arguments to others (though note this would be quite a mild recession by comparison with the recent past) and concentrate here on house prices. This may seem a minor point by comparison with the more general impact on the economy but it’s interesting that this was the aspect of today’s Treasury analysis that George Osborne chose to trail last week.
The important thing to note is that the 10% and 18% are not what the Treasury says would happen to house prices compared to current levels, but compared to current forecasts.
Under its ‘shock scenario’, house prices would be 10% lower than they would otherwise have been by 2018. However, the Office for Budget Responsibility currently forecasts that prices will rise by 10% over the next two years – and 26% by 2021. The shock, in other words, would mean stable house prices.
The ‘severe shock’ scenario would leave prices 18% lower than they would otherwise have been by 2018. This would imply a fall in house prices in cash terms but that would still leave them higher than they were this time last year.
Contrast this forecast of doom with a speech given by Grant Shapps to an audience of house builders back in 2010. Here’s what the then housing minister had to say:
‘I think we need a market that’s boring. Where things are really quite predictable. Where the pressure of making what could be the single biggest financial decision of your life, is based on your needs and desires, not on whether you feel lucky.
‘Buying a home shouldn’t be like playing the lottery. Sometimes it seems like we’ve all forgotten what our housing market is actually for. To provide a home. A home where we feel safe, comfortable and happy.
‘A place that makes us feel secure. Somewhere we can bring up our family or live happily alone. I have a simple ambition. An ambition for a period of house price stability.’
This blog has not had much praise for Conservative housing ministers over the years but, as I said at the time, he was absolutely right.
It was never going to last of course. In the five-and-a-half years since Shapps gave that speech, the ONS house price index shows that the average UK price has risen by 40% from £208,000 to £292,000. And, after that brief interruption, politics has returned to its normal state in which inflation is the enemy except when it comes to house prices.
The result is that we have some of the highest house prices in the world compared to earnings and rents. The OECD says UK house prices are more than 30% over-valued, while The Economist says 40%. London house prices are the most over-valued in the world, according to UBS.
Yet far from trying to dampen things down, the government seems intent on pouring petrol on the fire. Under the guise of boosting housebuilding and helping first-time buyers, the Treasury is doing everything it can to prop up prices at unsustainable levels. What began under the coalition has only accelerated under majority Conservative rule with London Help to Buy, Help to Buy ISAs, Starter Homes and the redirection of subsidy from homes for rent to homes for sale. On the Treasury’s argument today, the result will be prices rising even further out of reach.
Compare that to the ‘disaster’ of stable or gently falling house prices portrayed by David Cameron and George Osborne on Monday.
The 37% of households who do not already own their home would find it a little bit easier to buy one. Yet the impact on the 63% of households who do own would vary: anyone intending to trade up to a more expensive home would benefit; anyone intending to stay put would see little difference; only those planning to sell up and buy somewhere cheaper would lose out. Many of those owners will also have children who would find it a little less impossible to buy.
As at the 2015 election, the obvious political calculation is that messages like this will appeal to the parts of the electorate who are most likely to vote, and that they will be unable to see beyond their wealth on paper.
Yet it’s a measure of just how much house price inflation has distorted our politics that our leaders think a period of stable house prices would be a disaster. If it wasn’t for Boris Johnson, George Galloway, Nigel Farage and Iain Duncan Smith it might almost be an argument for Brexit.