If the BBC leaders’ debate tonight devotes more time to bigotgate than to housing, I am going to dedicate the rest of my days to working for the Corporation’s demise.
Britain’s unsustainable housing market is at the root of many of the country’s problems and could wreak appalling damage on voters during the next parliament. It must feature in the debate.
Someone should start by reminding Gordon Brown of a promise he made in his first budget speech in 1997:
Stability will be central to our policy to help homeowners. And we must be prepared to take the action necessary to secure it. I will not allow house prices to get out of control and put at risk the sustainability of the recovery.
As I argued recently:
When Brown spoke, the average house cost £75k – about £10k above the early 1990s nadir. A long long boom was just beginning. Prices would peak in February 2008 at an average of… £232k!!!
In other words, Brown promised not to let house prices spiral out of control and then allowed them to treble, during a period when household disposable income increased by only 30% or so.
2007 saw what is often called a housing price crash, but as this graph shows, it was really only a blip.
As the government pumped money into the economy and pushed interest rates to unprecedented low levels, the bubble started to inflate again. House prices are now back to the levels of June 2007.
Second guessing the housing market is a mug’s game, surely this is unsustainable. British houses are overvalued by nearly a third, according to one measure. Worse is the amount of mortgage debt outstanding – $1.238 trillion. By comparison, government debt is ‘only’ £950 billion.
Low interest rates and buoyant employment (relative to the economy’s woeful performance) have kept householder’s head above water – but the highly-indebted remain highly vulnerable to any increase in interest rates or to further job losses.
My best case for the housing market is a long period of stagnation (we desperately need lower prices). Worst case would be a sudden, vicious and self-fulfilling collapse. I believe this is currently the most serious economic risk facing the British people (one which is, of course, interrelated to Europe’s sovereign debt problems).
So what do the major parties have to say about this in their manifestos?
- Labour wants to expand home ownership and exempt all houses under £250k from stamp duty (likely to push house prices up). It says it will build 110k houses over two years (likely to push prices down).
- The Conservatives promise to exempt first time buyers from stamp duty if their house costs less than £250k. It wants to put communities in charge of planning, which is highly likely to reduce the number of houses built.
- The Lib Dems plan to use loans and grants to bring 250k empty houses back into use.
Pretty weak beer, all told. No party questions the shibboleth that Britain needs more homeowners. None is prepared to explain how they will manage risks that have been increased by the response to the financial crisis.
Far less do they have policies to fulfil Brown’s promise from 1997 – to end boom and bust in the housing market radical proposals (see my Long Finance paper) to prevent the mortgage market from screwing borrowers every twenty years or so.
So here’s my question for tonight’s debate:
In 1997, Gordon Brown promised he’d never let house prices get out of control again, but then presided over a housing bubble that has left British householders owing £1.2 trillion on their mortgages. In government, what will you do to stop the housing dream from becoming a housing nightmare?