Opinion: Let’s stop pussyfooting over property prices

According to a report published by Shelter this week, if the price of an oven ready chicken had risen as fast as the price of the average house since 1971, it would cost £51.18. House prices simply have to fall if we’re to find any way out of our economic mess and many of those with mortgages are going to have to take a hit. What we need to do is to ensure that the pain is borne by those who can best afford it… and who caused the problem in the first place.

We need to get over our obsession with property as wealth and prioritise the concept of “home”. The prominent inclusion of property values in economic models is falsely promoting the concept that inflated house prices are a good thing. They are not.

Our unnaturally inflated property stock encourages land-banking, floods the market with foreign money that overheats the London market but adds little to economic liquidity, reduces spending and therefore growth and drives the building industry’s attempts to circumvent the Section 106 affordable housing quotas that Don Foster has fought to protect.

We can’t keep pussyfooting around this problem. What we need is a raft of policies that combine to encourage home-building, discourage the hoarding of empty buildings and land, promote responsible renting and to see our towns not as property markets but communities. We also need to protect the many that will end up in negative equity but have not defaulted on their mortgages.

Some of these policies will seem illiberal to idealist free marketers but in concert they will change the culture of home ownership in Britain to one that actually helps the markets. This will dramatically reduce the average cost of living and increase the flow of money, boosting economic growth. It will put more people outside the housing benefit threshold, cutting costs to the taxpayer. It will free up billions of pounds currently dormant in land banks and empty buildings.

Here are a few suggestions.

The mortgage companies themselves should maintain the austere approach to home loans they reverted to in 2008. They should not try to fuel the market further by offering complex, long term products such as hereditary mortgages or shared ownership. By legislating for responsible lending (say 1980s style ceilings of three times annual income instead of 10) it will reduce the risk of defaults – good for customers, banks and taxpayers.

In return, the banks should be far more compassionate towards those in negative equity, underwriting the difference unless the customer defaults over several months.

We must also address the habit of property being used as a mainland tax haven. The foreign wealth pouring into the London property market is making the city unviable to live in. Meanwhile, UK billions buried in land and property instead of stocks and shares are hampering economic fluidity and growth.

Land tax and the mansion tax are already on the Lib Dem agenda but perhaps we should consider laws akin to Denmark’s, which restrict foreign property ownership and deter the hoarding of empty buildings and land. It might seem anathema to free market liberals but I believe we have to balance free market ideology over the needs of families and the national good.

Don Foster’s work on planning consent helps increase the affordable housing stock, as would incentives for councils to see building as positive. Leaving planning powers with them is right in principle, as Don says, but we cannot allow a culture of nimbyism to rule the day.

The tinkering around the housing crisis has to end and it is not sufficient to say we just need more houses. To fail to act decisively now is to submit the coming generation to a life where owning or even renting your own home is a mere pipedream. The knock-on economic effects of this on our productivity, prosperity and well-being do not bear thinking about.

* Neville Farmer is an Executive Member of the Parliamentary Candidates Association

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50 Comments

  • “According to a report published by Shelter this week, if the price of an oven ready chicken had risen as fast as the price of the average house since 1971, it would cost £51.18. ”

    That’s economic growth for you. Innovation has made chickens cheaper in real terms (as a proportion of peoples’ wages) because the whole supply chain requires less labour. Who benefits? Landowners mostly, who are able to charge higher rents from peoples’ increased disposable income. Now, if only somebody could think of a tax that was proportional to this rental value that captured the unearned increase in the landowners’ wealth and acted as a punishment to those who squander the productivity of their land and rewarded those that make good use of it!

    I agree with the idea of forcing banks to lend sensibly again (reducing loan income multiples) and removing the awful props to land-prices (shared ownership, etc). That’s not to say that banks can’t lend recklessly if they wanted to – just that the depositors should not be protected if they do.

    “In return, the banks should be far more compassionate towards those in negative equity, underwriting the difference unless the customer defaults over several months.”

    I don’t understand that bit. Negative equity has nothing to do with defaulting on a loan. It’s perfectly possibly for someone to pay the mortgage whilst they’re in negative equity. Negative equity is one of the risks of buying a house. Any attempt to remove that risk will result in higher house prices.

  • Richard Harris 14th Feb '13 - 1:07pm

    “many of those with mortgages are going to have to take a hit.” How exactly is this “hit” going to be shared out fairly? Are we going to hit the first time buyers that had no choice but to borrow what they did to get a house, or perhaps the person about to retire and use their equity to pay for their pension? In both cases the “hit” would be life changing. Whilst all your suggestions make sense, they would only have worked before the property bubble took off. Now we are here, I don’t think the answer is to recommend large scale debt poverty as a solution. Unless, of course you are prepared to actually write off the inevitable debt nation wide house price correction would cause.

  • @Richard Harris

    The pensioner you speak of has received a huge windfall benefit as a result of the above inflation rise in property prices. If that above inflation rise is slightly less as a result of lower house prices then so what? There is no inevitable debt to write off. As for the first time-buyers that bought at the peak of the market: – they were not forced to buy as they had the option of renting instead whilst waiting for prices to correct downwards. I know plenty of people in this position – they chose not to buy at the inflated price, yet they have been punished by policies that have kept house price inflated at close to the peak of the bubble.

    Note please that there is a difference between house price rises that result from economic growth and those that resulted from reckless lending and the exuberance of those buying during the bubble. House prices rose by 175% in my street between 2000 and 2004 whilst rents remained flat. The vast majority of that increase had nothing to do with economic growth or a shortage of new houses.

  • Keith Browning 14th Feb '13 - 1:29pm

    Food prior to the Great War (1914) was about ten times more expensive than today and made up a substantial part of everyone’s income. Property and land was relatively cheap. This can be traced back several centuries and explains why food riots were a regular part of the British way of life.

    The second half of the 20th century produced a harvest of cheap food, where we are now reaching pay-back time. Your £50 chicken looks about right using the economic balance of 100 years ago.

    The population explosion has moved the balance of needs to housing and the only cure seems to be to produce more supply than demand – basic economics of the market place. Tinkering around the edges will probably cause more problems – unintended consequences.

    I suspect the current food crisis will cause a re-think in the way we purchase and consume food, which will inevitably raise the cost of the things we eat – the unintended consequence might be that we generally eat less and therefore become less obese and healthier. People will also have less money in their pockets to spend on houses, which will keep the prices from rising.

    Joined up thinking is required – not trying a quick fix to placate a vested interest – be it at the producer or consumer end.

  • Well said. I used to work for a biggish private landlord/property firm and even back then house prices were rising at a ridiculous rate. They are simply not worth the money people are paying for them and are also driving up the benefits bill to unsustainable levels. Over pricing is a bigger factor in the stagnating market than shortage in the housing stock.
    You could see what was happening before the bubble burst in 2008. People were being encouraged to apply a lick of fresh pain to the skirting-board or put a new carpet in and hey presto their homes were suddenly jumping in value by thousands of pounds. Utter madness as the structures remained exactly the same and homes have simpky became increasingly unaffordable.

  • Charles Beaumont 14th Feb '13 - 2:07pm

    Neville – I strongly agree with your description of the problem and strongly disagree with the proposed cure. Making it harder for people to buy houses impacts the poorest first. What we need is two things: one is to make it easier for people to build houses (and not through a simplistic delisting of the green belt, but by reudcing the complexity of local plannign laws); the second is an improved private rental market. Owning a home is currently a great investment, which is why everyone wants to do it. If it were not and if long-term, high quality rental options were available, this would all change.

  • Mark Smulian 14th Feb '13 - 2:40pm

    I agree with Neville about tax on the foreign money pouring into the top end of the London property market.
    However, he says planning powers should be “left with” local authorities, but that “we cannot allow a culture of Nimbyism to rule”.
    These statements are contradictory. If planning powers are exercised locally, how can a ‘culture of Nimbyism’ be prevented in at least some places if that is the wish of local voters?
    There would be no point in councils having planning powers at all if they were not allowed to use them to block development they believe to be locally unacceptable.
    Plenty of voters are capable of simultaneously worrying about where local young people can afford to live while also opposing housebuilding, or even the subdivision of houses into flats. One of the reasons we have local politics is to balance these competing priorities as best it can.

  • Dominic Curran 14th Feb '13 - 3:08pm

    Neville, like Charles I agree with your description of the problem but am alarmed at your proposed solution, one which echoes a suggestion by the ippr last year.

    If you want to restrict mortgage lending to 3 times income, you are bascially legisating for virtually no one in London to be able to buy their own home for a generation, unless they can stump up deposits of several hundred thousand pounds.

    I suspect that you own your own home – if so, this stinks of pulling up the ladder behind you.

  • @Dominic Curran
    “If you want to restrict mortgage lending to 3 times income, you are bascially legisating for virtually no one in London to be able to buy their own home for a generation, unless they can stump up deposits of several hundred thousand pounds.”

    Not in the slightest. House prices are set on the demand-side. The reason they went up so much is because the banks kept lending larger income multiples. If they are forced to only lend only 3x salary then prices will inevitably fall. Nobody will be forced out of ownership

  • Neville, you describe the problems accurately.
    Landbanking is caused by the planning system. If it was possible to buy land to build on easily there would be no need for it. Landbanking is the logical result of the system and to end it the system must be changed. Developers will not release land at a loss they make as much profit, if not more, from selling their planning permissions as actually building.
    The cost of the land represents around one third the cost of a new house – a rule of thumb which has applied for decades. If the price of building sites can be reduced by increasing the supply then house prices can be stabilised, or reduced.
    A worrying thing over the last few months is the regular comment in the national press that houses prices in London are increasing again. This is a bad thing not a good thing. If we want a UK recovery action should be taken to stop funds flowing into house price inflation again. Stopping increases in houses prices may be “politically acceptable” while bringing them down to where they should be is not. A declared national policy of working towards stable house prices would stop speculation.
    Dominic. We cannot base national policy on the hope that interest rates will remain low for even. To allow multiples for mortgages over 3 times income is irresponsible and only viable for banks if house prices are increasing so that defaults can be recovered from inflationary increases. The need for excessively high mortgage multiples suggests a shortage of supply. Why should the public North of Watford support speculation by members of the public in the South East ? We need to solve the problem not treat the symptoms.

  • Old Codger Chris 14th Feb '13 - 4:59pm

    Excellent piece. Housing is the biggest scandal in domestic politics. The nation’s mindset needs to change – not easily accomplished I know.

    Can we please research a Land Value Tax? It was once Liberal policy. And it was once Winston Churchill’s policy. It would also help reduce other taxes.

  • >We need to solve the problem not treat the symptoms.
    A major cause of the problem is population and one that has (largely due to immigration) been growing significantly since the mid 90’s without politicians paying any attention to the impact this would have on the country.

    The real question is whether a population projection of 70 plus million by 2030 fuelled largely by immigration is really sustainable; given what we know is coming down the road in the next few decades and the state of the UK economy. I note that todate the coalition (like previous administrations) has refused to draw up a population policy, which is really a necessary precursor to sensible housing and infrastructure policies…

    Once we get a population policy sorted we will have effectively capped demand for housing and hence automatically put a brake on the property market, since supply and demand will be broadly in balance.

  • Matthew Huntbach 14th Feb '13 - 5:21pm

    Dominic Curran

    If you want to restrict mortgage lending to 3 times income, you are bascially legisating for virtually no one in London to be able to buy their own home for a generation, unless they can stump up deposits of several hundred thousand pounds.

    Don’t you people who write this stuff understand how free markets work? You seem to be writing as if there is some committee which sits down and sets house prices. It does not work like that.

    A house sells at whatever someone is willing and able to pay for it. So if mortgages are harder to obtain, people will not be able to offer so much to pay for whatever houses come onto the market, therefore prices will fall. You can’t make it easier for people to buy houses by giving everyone more money to do it, that just causes house prices to rise, you can’t make it harder for people to buy houses by giving everyone less money to do it, that just causes house prices to fall.

    You can make it easier for some and harder for others, however, by differential subsidies and penalties.

    What is happening on the housing market now is that people who are buying are often doing so with large subsidies that come from inheritance itself derived from sale of housing. Therefore, there is a vicious circle, house prices are pushing house prices up, and those who have been foolish enough not to choose the right sort of parents are getting shut out of the possibility of home ownership. Until we end our sentimental attitudes to inheritance this will just make things worse and worse.

  • David Allen 14th Feb '13 - 6:02pm

    Richard Harris said: “Whilst all your suggestions make sense, they would only have worked before the property bubble took off. Now we are here, I don’t think the answer is to recommend large scale debt poverty as a solution.”

    It is a pity the bubble happened. But it happened. Now – unless we want to create another bubble – prices must fall. They can fall fast, if Neville gets his way, or they can drift down slowly, as is happening now. A fast fall would of course create a lot of pain quickly, and there would be no easy way to avoid it that I can see. But a slow fall will only prolong the pain, kill the market, and promote long term renting over buying. I don’t see an easy answer, except – don’t allow bubbles in the first place.

    Some say that we have a desperate shortage of new housing, so we should build like crazy to satisfy pent-up demand. Others say that we should build in order to create the huge overhang of unsold properties that would be necessary to force down prices. These wise pundits, with their diametrically opposing views of the state of the market, cannot both be right. They could, however, both be wrong!

    The reason so many builders will not build on their land banks is, because they do not believe they could sell what they had built. Forcing planners to allocate more land, or (somehow) forcing builders to build on it, is not going to alter that.

    What we have, I believe, is massive demand for better housing from those who are too poor to be able to do anything about it, and whose “demand” therefore does not affect markets. Building new houses will do nothing for that demand unless it gets the poor into those houses. If we don’t like the idea of new council housing estates, we had better find something else which is equally suited to clearing people quickly out of overcrowded slum conditions and into something reasonably habitable.

  • John Richardson 14th Feb '13 - 6:58pm

    A house sells at whatever someone is willing and able to pay for it.

    AND crucially whatever the owner is willing and able to sell it for. Sellers are not exactly queuing up to realise big losses and many will be prevented from doing so by negative equity. I think what happens when you restrict the mortgage supply is exactly what is happening now. The market comes to a crawl and prices stagnate in cash terms. There will be no big fall no matter what policies you have unless they also cause mass unemployment and large scale repossessions.

    Build more homes for rent (council/private whatever…) and have other policies that counter pressure for prices to increase. Eventually earnings will catch-up. But radical action to force immediate reduction in house prices will be an social and economic disaster, IMO.

  • Richard Dean 14th Feb '13 - 6:58pm

    The purchase price of a house is basically the price of labour plus a markup, isn’t it? The labour costs are the labour costs of making things, like converting clay and sand and cement into brick, plus the costs of assembling things, such as assembling bricks to make a wall. So reducing the price of a house probably means one of four things:

    > reducing wages
    > increasing efficiency, and so employing fewer people
    > reducing markups
    > subsidizing, ie getting someone else to pay

    Bubbles are games of markups aren’t they? But markups are problematic because they need to increase the longer a house is unsold – to cover the developer’s loan coast – and anyway markups are now relatively low – much of the previous housing bubble seems to have burst, but a new one might be starting.

    http://www.thisismoney.co.uk/money/mortgageshome/article-1671748/House-prices-What-expect–news-predictions.html
    http://www.independent.co.uk/property/house-and-home/property/are-we-heading-for-a-new-housing-bubble-8461000.html

    These factors and these news reports seem to suggest that controlling markups probably means keeping prices where they are now, not reducing prices below what they are now. So, which method of reducing costs do LibDem economists recommend?

  • Helen Dudden 14th Feb '13 - 7:02pm

    If the comments that are written in the Chronicle in Bath are correct, there are 4, 600 properties that could be built. these are on brown field sites, not effecting any green field site at all.

    These are the article states either, builders have run out of funds or just left outstanding with planning. I think this is an awful situation and I have been writing today on the need to rethink this type of behavior.

    Undeveloped property should be treated in the same way, use it, or lose it? Is this the answer? I feel property should be developed, not simply left for years doing nothing.

  • I don’t thunk people with mortgages should take a hit (and I am not one!) … the fairest ways to sort this out is(i) to tax highly people who inherit properties with values over the national average for their type, and (ii) control the buy to let mania. A good start will be made on the latter with the housing benefit cap, which yes may lose some tenants some properties but will also stemthe obscene subsidy for BTL landlords HB represents.

    Now, for the first scenario -windfalltax on property in London and the south-east anyone?

  • “The purchase price of a house is basically the price of labour plus a markup, isn’t it?”

    Entirely incorrect. The purchase price of a house is what you’ve listed + LAND. Labour and construction costs have been fairly stable over the years, instead, it is the land values and costs that rocketed and ensured house prices reached their lofty heights.

    The only sustainable means of lowering house prices is to ease planning restrictions and eradicate the scarcity value that the state currently promotes.

  • Neville Farmer 14th Feb '13 - 9:05pm

    No Dominic, I rent my flat and had to move out of London to afford to do so. There are some great comments above and some I think are misguided.
    1. When food took up a larger percentage of income than housing we had rickets and the poor lived many years less than the rich.
    2. Yes, build more council houses or whatever you want to call them, but this is not enough on its own.
    3. The repossession and negative equity comments are partly covered in my article. This will not be easy but house values have to come down dramatically. To wait for wages to reach an appropriate level is inflationary nonsense.
    4. It is the combination of all these policies that will make this work – restricting foreign investment, freeing up land through taxation, profligate lenders underwriting those in negative equity, a better managed private rented sector, more practical planning laws, responsible lending, increased social home building etc etc, anything less is tinkering and unsustainable.

  • Keith Browning 14th Feb '13 - 9:11pm

    It seems to me that builders/developers/financiers are sitting on land and planning permissions, waiting for things to return to ‘normal’ – which they probably think is the 1995-2005 period of ‘normality’.

    Well they aren’t, because NOW is as normal as its going to get for the forseeable future.

    The bubble has burst and the quicker politicians realise that and plan for a ‘Japan like’ economy the sooner things will start to improve, just a little, as the population becomes use to a different set of expectations.

  • John Richardson 14th Feb '13 - 9:37pm

    Neville, I think you need to expand significantly on your ideas for dealing with negative equity. Saying the banks should pay is a bit hand-wavy. Convince me that banks could even afford to swallow such enormous losses without bankrupting their parent governments.

  • >but house values have to come down dramatically.

    So lets follow this one through to it’s logical conclusion – let’s use London for example as there is general agreement that London property prices are excessively high and unaffordable, plus there is a general shortage of accommodation or high demand – depending upon how you look at it. The only two ways for London property prices to fall dramatically are: one the bottom falls out of London ie. it is no longer a key financial and business centre (in which case the entire country has massive economic problems) and two politicians artificially limit property prices so that houses become ‘affordable’ – whatever that means. Lets assume the second, with all things being equal, those who already own houses in London will either be caught with negative equity or a paper loss of unrealised capital in either case what is the incentive to sell? I suggest there is none, in fact I suggest the incentive is to rent rather than sell – something we saw after the 1988 property crash.

    Additionally, because London property prices no longer bear any real relationship with demand and are more affordable, we can expect more people to want to live in London rather than move out – which will help keep rents high (basic supply and demand) and create a sellers market where “yes that is the government set price for the property but if you really want it you will have to pay a premium as I retain ownership of the ransom strip”.

    If an opportunity arises to build new houses in London, I suggest that unless it is of the ‘right’ configuration there will be no interest from the private construction sector unless someone else is going to be paying market rates for their services and we know that the taxpayer/government isn’t in a position to do this until sometime after 2030. As to accommodation of the ‘right’ configuration, I suggest this is likely to be high density high rise where once you get beyond a certain number of floors economies of scale kick in – assuming even then the builders can achieve a reasonable level of profit.

    Similarly just limiting London property prices won’t stop investors (local or foreign), if they can afford one house at today’s prices then with ‘affordable’ prices they might be able to buy 10 houses.

    So the only real way for house prices to come down dramatically is for the UK to default on its debit repayments etc. etc. which may happen anyway (see http://info.moneyweek.com/urgent-bulletins/the-end-of-britain if you want to scare yourself!)

  • >It seems to me that builders/developers/financiers are sitting on land and planning permissions,
    From previous discussions on LDV no evidence has been produced to substantiate this often repeated myth.

    Whilst various figures have been banded about concerning the land banks of the various house builders, once these are put into the context of the number of actual houses these holdings represent and hence the number of years of construction, we find that the land holdings are actually very small ie. they would be exhausted within two years at current levels of construction.

  • “let’s use London for example”

    No dice. London is totally different from the rest of the UK. London’s problem is a brand new bubble created by super-rich foreign investors, and so its prices will rise. Everywhere else, where thankfully there is no longer a bubble, prices must fall.

  • Richard Dean 15th Feb '13 - 2:51am

    @Simon Shaw. So your preferred strategy is simply to reduce the value of land? I wonder if you are thinking of doing this with LVT, which would increase the net cost of a house (and so reduce the ability of people to pay) since the house owners will presumably be required to pay the LVT ad infinitum, in addition to all the other things like council tax.

  • Richard Dean 15th Feb '13 - 4:33am

    @Simon Shaw. Apologies, I had forgotten that land prices are significant components of house prices in some areas. But are these not the rich areas? Would another approach be to move the land, in the sense of choosing places to build where land is less expensive? Even derelict land can be reclaimed with modern engineering methods.

  • Thanks Nev. You shine a light on a real problem. I am in my late 30s and I am still some way off being able to buy a home. That is simply not good enough. I think this will only grow as a political problem, as more and more voting adults remain unable to buy their own place.

    My partner used to work for a property development company and it was a usual practice for international companies to buy a number of flats and hold them, empty, as an investment, like holding shares or works of art. We’re talking about the top end of the market here, but it has a trickle-down inflationary effect on prices as fewer properties are on the market for everyone else who actually needs to live somewhere, and that in turn, I am sure, drives up house prices nationwide.

    As Nev suggests, a full battery of policies is needed to tackle this. This is become an ever-bigger political issue and we should get ahead of the game.

  • @Roland
    The idea that houses are ‘overpriced’ is predicated on the idea that a component of current demand is speculative, i.e. that people are making bad investment decisions and paying an uneconomic amount for property that isn’t justified by the yield. Given that net yields on property are historically very low (around~3% – hardly worth the labour, transaction costs and risk of buying a house to let) then there is some substance to this idea, especially in London where yields are very low. Given, also, the British public’s love affair with buying property regardless of its uncompetitiveness when compared with other sounder investments. House prices are the same as they were nine years ago in 2004 according to the Halifax (and are obviously lower in real terms), yet people still strangely believe that house prices go up magically. Artificial scarcity created through hoarding empty property is also part of this speculative demand.

    The other sense in which house prices may be described as too high is in the shortage of supply sense. This isn’t much of a problem across most of the country though, Yes, in this sense, demand is demand, and prices will only come down with increased stock/increased emigration/the plague.

  • While you’re right that this is a huge problem (possibly less right with your solutions), no politician is going to do anything other than wring their hands over it because the necessary massive fall in house prices will upset too many people and property owners are far more likely to vote than the people who are currently hurting from the price of housing.

  • Dominic Curran 15th Feb '13 - 10:56am

    @ Steve & @ Matthew Huntbach

    You are both right and wrong simultaneously. Yes, prices are a function of demand, and demand is partly influenced by credit availability. But you think that by restricting demand through restrictive bank lending you will cause a fall in prices. This is incorrect.

    We have seen restrictive bank lending since 2008, with deposits of up to 25% required in order to access the most preferential low interest mortgage rates. In your world, this would have brought prices down. Yet in London prices are now well above the 2007 peak. This is partly because of the ripple effect of foreign money coming into prime central London, and displacing ‘native’ cash rich purchasers into neighbouring areas. But it is also because there are lots of people who are equity rich from their current house who are able to trade up with that equity, even with restrictive lending.

    At the same time, many many others are stuck, unable to move, as they cannot access mortgage finance. So fewer homes are coming on the market. This means that those that do, and this applies widely but most certainly in areas where those with some money behind them want to live, end up in bidding wars, pushing prices up even higher than the London trend might suggest. Prices in some (outer London) postcodes have shot up by double figures since 2010 simply because there is a lack of supply.

    Fundamentally, in London, prices will not come down if lending is restricted because there is a lack of supply – in fact the city’s new housing supply has not kept pace with its population increase for at least two decades. In this context, restrictive lending (which i note didn’t stop house prices increases in the past) will only reduce the supply of homes for sale, which will widen the divide between the cash/equity haves and the have nots.

    Remember, average salary in London is around £30k. Average house prices are around £360,000. A couple on joint average earnings of £60k getting 3.5 times their income would be able to borrow £210k. Even if they could get a decent mortgage on a 10% deposit, they would still be over £100k short of buying an average home (yes, i know there are homes that are cheaper, but here are also salaries that are lower, so this ‘average’ will have to suffice for argument’s sake!). For the reasons above, prices are simply not going to fall this much, however desirable that might be to anyone under 30 who sees home ownership receeding ever further out of reach.

  • >No dice. London is totally different from the rest of the UK
    Is it?
    Every established major town/city has a reason for it’s existence, take that away and you can depress the local market – remember not that long ago the aerospace industry left Hatfield, resulting in 30,000 people loosing their jobs – yes one town lost more jobs ‘overnight’ than were lost in the entire UK coal industry it had a massive impact, but these effects haven’t lasted. Likewise ‘commuter’ towns can be transformed by simply closing their rail/tube station. Impose price ceilings/reductions and the same effects play out. If the town/city has a thriving ‘business’ eg students then there will be others wanting to invest their money and get a piece of the action.

  • @Dominic Curran
    “We have seen restrictive bank lending since 2008, with deposits of up to 25% required in order to access the most preferential low interest mortgage rates. In your world, this would have brought prices down.”

    In my world prices have come down. I live in the UK, where prices have fallen ~15% (see Land Registry, Halifax, Nationwide data)since the peak of the market in 2007. So, yes, restrictive lending leads to falling prices. There has also been a shift in attitude in how banks lend mortgages (compared with decades ago). Banks used to lend lower income multiples than today. Lending has become more restrictive since 2007, but only in terms of the deposit requirement. Banks are still lending much higher loan-to-salary multiples than a couple of decades ago. If they reverted to 3 times income then prices would fall further.

    “But it is also because there are lots of people who are equity rich from their current house who are able to trade up with that equity, even with restrictive lending.”

    Where does that equity come from? It comes from a buyer in the chain buying with a loan. Without people borrowing mortgages then that equity doesn’t exist.

    ” in fact the city’s new housing supply has not kept pace with its population increase for at least two decades. ”

    The population of London is currently lower than it was in 1945.

    @Roland.
    ” remember not that long ago the aerospace industry left Hatfield, resulting in 30,000 people loosing their jobs – yes one town lost more jobs ‘overnight’ than were lost in the entire UK coal industry”

    There are 185,000 fewer miners in the UK than in 1984, whereas British Aerospace employed only 7,500 in Hatfield in the mid-eighties (http://www.welhat.gov.uk/index.aspx?articleid=1055). I take it that you are trying to minimise the effect of the decline in the coal industry on the country by stating (very incorrectly) that a single town suffered more than the sum of the entire coal-field communities. Can I ask if you have ever travelled outside of the home counties?

  • Dominic Curran 15th Feb '13 - 1:51pm

    @ Steve

    I also live in the UK, although not the (majority) bit where prices have fallen. If you read the entirety of my posts, you’ll see that my point was about restricting lending in areas where it doesn’t matter if youget 3x income or 5x income lent to you – housing is still unaffordable. Restrictive lending has had no downward impact on house prices in London, and by restricting supply, has actually helped fuel prices increases.

    In an area of chronic undersupply, in which many people have a lot of cash (basically London),lending 3x income will simply mean that most people continue to not be able to afford to get on the housing ladder. As a poster above says, if people can’t sell their home for at least the amount that they have borrowed against it, and probably a bit more, they are unlikely to put it on the market. 3x income lending will simply enterench the divide between the property haves and have nots in London/the South East. The ippr acknowledged this when they recommended it !

    Your point about the population of London is frankly irrelevent. It takes no account of the reality of both land use change over 68 years nor of changing demographics (eg a house that accommdated a family of four in 1945 may well now only be lived in by the aged surviving mother). Its not wise to conflate household size with population!

  • @Dominic Curran
    “I also live in the UK, although not the (majority) bit where prices have fallen. If you read the entirety of my posts, you’ll see that my point was about restricting lending in areas where it doesn’t matter if youget 3x income or 5x income lent to you – housing is still unaffordable. Restrictive lending has had no downward impact on house prices in London, and by restricting supply, has actually helped fuel prices increases.”

    Restricting lending constrains demand for housing and has a downward pressure on prices according to standard economic theory and a vast amount of evidence. If lending had continued under the (unsustainable ) pre-2007 criteria then prices in London would be even higher today. Lending restrictions put downward pressure on prices, but they are not the only factor, and when another competing factor eclipses it then prices rise. You came to the conclusion that mortgage restrictions don’t have an impact on price on the basis that prices haven’t fallen in London. All you have done there is cherry-pick . Mortgage restrictions apply nationally. House prices in some areas of London may have gone up slightly since 2007 but they have fallen around 50% in Northern Ireland. The restrictions apply nationally and so should any comparison with prices.

    Restrictive lending has had no impact on the supply of housing in London, unless I’ve missed something in the news about large swathes of housing stock being demolished or a marked increase in stock being left vacant. Whether a house is let to a tenant or let to its owner (as this is effectively what home ownership amounts to) is irrelevant to housing supply (the number of houses available to live in).

    Around half the houses in the UK have no mortgage attached to them. Additionally, the vast majority of the owners that do have mortgages have a very substantial equity percentage. It’s only a small percentage that are highly leveraged. This means that the majority of home-owners can easily afford to drop the price they’re prepared to sell for provided the house they’re moving on to is also reduced by a similar percentage. Down-sizers would take a hit from a decrease in price, but up-sizers would be better off.

    There are forced sellers in any market – usually attributed to death, divorce and debt. Without mortgage finance in the market these sellers would have to significantly reduce their price, enabling everyone else in the chain to move (the first-time buyer paying cash and the hoards of equity rich who can afford to reduce significantly)

  • @Dominic Curran
    “Your point about the population of London is frankly irrelevent. It takes no account of the reality of both land use change over 68 years nor of changing demographics ”

    You were the one that made the following statement with no mention of demographics or change of land use (the original point I responded to):

    “in fact the city’s new housing supply has not kept pace with its population increase for at least two decades.”

    So, why are you attacking me for doing the same? You simply stated the population is increasing. I simply pointed out that it is historically lower than 1945. If my point is irrelevant then, by following your logic, your original point is also irrelevant

  • @Steve
    Re Hatfield,
    No I most likely miss remembered the details of the comparative stat’s, what I remember is that Hatfield was largely ignored by the media and the government (probably because it was in the Home counties) even though the impact caused by the loss of a major employer and associated industries was highly significant and of the same order of magnitude as that suffered by various mining communities.

    I used Hatfield as it was a good example of the level of a local economic change that would cause a rapid decline in house prices (it had very little effect on neighbouring towns). Yes the pit closures caused many local economies to suffer and decline but to me this was a national economic change brought about largely by the deliberate actions of politicians.

    But I think we are in agreement that the type of economic change necessary to cause a dramatic and rapid fall in house prices is highly disruptive and unpleasant for the communities at the receiving end.

  • “But I think we are in agreement that the type of economic change necessary to cause a dramatic and rapid fall in house prices is highly disruptive and unpleasant for the communities at the receiving end.”

    I don’t think that economic change is necessary to facilitate a downward trend in house prices and I don’t think that such a trend is either particularly disruptive or unpleasant, except for a very small percentage of the population. The percentage of home-owners that are highly leveraged is less than 10% and home-owners only account for ~60% of the population. New buyers would welcome the lower prices as would those, like myself, who have substantial equity in their homes and would like to pay less money to buy a bigger house. I’m quite happy to drop the price of my house by 90% provided somebody else sells me one for 90% less than today’s price.

    Getting back to that tangential discussion – I suspect Hatfield’s recovery was partly down to the fact that it was rather an isolated example of a town badly hit within its region (and obviously because of its good transport links to the emerging economy in London). Corby similarly recovered quickly from the loss of its steelworks. I don’t have the exact figures to hand, but unemployment in the early 80s recession remained under 10% in the SE compared with almost 20% in the areas of the North, Scotland, etc, associated with the rapid decline in heavy industries.

  • Matthew Huntbach 15th Feb '13 - 5:51pm

    Matthew Huntbach

    You are both right and wrong simultaneously. Yes, prices are a function of demand, and demand is partly influenced by credit availability. But you think that by restricting demand through restrictive bank lending you will cause a fall in prices.

    No, I went on to make the same point that you made, that inheritance money fed back into housing is also a factor increasing prices. My initial point was to counter the very simplistic arguments made before. Restrictive lending would be a factor in lowering the rate at which house prices would otherwise rise, but I do agree there are other factors still pushing them up.

    One thing you have not taken into account, however, is that while we have seen restrictive lending in terms of deposits required, we also have had interest rates which are historically very low. When people work out how much they are prepared to bid for a house, they look at how much they will pay monthly. If interest rates are low, for a given amount of loan that will be low, so people will therefore feel they could take out larger loans. Consider how very much higher mortgage costs would be per month if interest rates now were 10%, and therefore how that would cause people to bid far less in property purchase.

  • Matthew Huntbach 15th Feb '13 - 6:03pm

    Stuart

    My partner used to work for a property development company and it was a usual practice for international companies to buy a number of flats and hold them, empty, as an investment, like holding shares or works of art

    Indeed. This is why the line “build more houses to solve the housing crisis” is simplistic and will not work without other measures which make it unprofitable to hold onto housing for investment rather than use. It is also necessary to deal with the fact that people buying to rent at the moment can outbid people buying to live in the house. The consequence is that the people who are outbid by the buy-to-let merchants are then forced to turn to those merchants and end up paying even more than they would in mortgage. There is also the way in which buy-to-let is supported by housing benefit: new low cost build will be snapped up by private landlords bidding more than low waged people can bid, and the private landlords have a guaranteed rent income from housing benefit.

    So, if you are going to build to meet need, you have to make sure the new build goes to those in need. It won’t so long as it’s sold on a market basis where it goes to those who are most able to bid for it rather than those who most need it.

  • Matthew Huntbach 15th Feb '13 - 6:12pm

    Jennie

    While you’re right that this is a huge problem (possibly less right with your solutions), no politician is going to do anything other than wring their hands over it because the necessary massive fall in house prices will upset too many people and property owners are far more likely to vote than the people who are currently hurting from the price of housing

    Yes, that is why the political right-wing invests so much effort into persuading the sort of person whose votes could change things that electoral politics is a bad and dirty thing, not worth bothering with, it’s sort of noble not to vote on the grounds “they’re all as bad as each other”.

    And that is why I see movement like “Occupy” as patsies of the political right. They are all part of this anti-politics “don’t vote, all politicians are the same” mentality. This whole move away from electoral politics towards pressure groups and silly protest is a disaster – it has been happening for decades, and this is where it has got us. The political right wins because their people go out to vote, and they don’t need activists to get their vote out, they have money to pay for it., the political left loses because the people who would support it electorally have been persuaded that politics is nothing to do with them.

  • @Matthew Huntbach
    Whilst I agree with almost everything you say on this issue, I don’t entirely agree with you about inheritance. Whilst a large level of inherited landownership is clearly a bad thing for an economy (because of the misdirection of wealth to the undeserving who played no part in its creation, exacerbating wealth inequality and disincentivising the working population), it has little effect on house prices. An inherited house can only have its value realised by selling it to someone that is working to pay for it. Where inheritance can become a problem is when an inherited house is kept as a second home and used very infrequently. This kind of hoarding reduces the housing stock available to the working population. LVT of course is the answer.

    With regards to interest on mortgages. Yes, low rates makes the initial purchase price look cheaper, but interest rates are low because wage inflation is next to nothing and those debts won’t be inflated away in the same manner they were in the 70s/80s/early 90s. Someone taking out a high loan-to-income mortgage today will still be paying a similar proportion of their wages on the same mortgage in a decade if they only receive a 1% per annum pay rise every year. I’d much rather buy a tardis and buy a house at 70s interest rates and wage inflation as I know the house will cost me a smaller proportion of my wages over the term of the mortgage.

  • daft h'a'porth 15th Feb '13 - 8:48pm

    @Matthew Huntbach
    You know which party walked into illustrating the ‘politicians are all the same’ trap, though — and it wasn’t the Occupy movement. When all parties behave similarly there truly is no point in voting. That’s just game theory in action. Silly it may be to bother protesting (I personally think it’s silly, if also at times good to know that anybody out there actually cares), but you’re wrong that it’s because people are persuaded that politics is nothing to do with them. If they believed politics was nothing to do with them they wouldn’t bother to protest. This is their way of saying: offer us a credible alternative and maybe we’ll vote for it. The fact that credibility escapes almost all politicians at present is not actually the fault of the Occupy movement ;-)

    Tell you what, though – if you invent a political left that actually IS on the left I’m sure it’ll get quite a few votes. If only for the novelty value.

  • >With regards to interest on mortgages. Yes, low rates makes the initial purchase price look cheaper,

    I suspect that once the general trend is for house price increases to be insufficient to cover the interest on a mortgage plus some, people’s attitudes towards treating their home as an ever growing financial investment will change.

  • @Steve re tangential discussion

    Interesting that you bring Corby up, as in some ways Corby and Hatfield have a similar history of decline.

    Both were effectively the remnants of a much large industry in the area: Hatfield aircraft production, Corby ironstone excavation and steel making, which in the main declined in the 1960’s (the Northamptonshire ironstone industry practically dying over night, with the south Hertfordshire aerospace industry declining more gradually.
    However, their recoveries are different, Hatfield’s being much more rapid whereas Corby’s has been slower and requiring/benefiting from significant state investment. Certainly today we are starting to see the emergence of a new and more confident Corby – which bodes well for the amount of development planned between Kettering and Corby.

  • @Roland
    “Interesting that you bring Corby up, as in some ways Corby and Hatfield have a similar history of decline.”

    That’s why I mentioned it. It’s another example of a town hit hard by a decline in a particular industry, but rather an isolated example for its region (south East Midlands, or just the South given it’s south of the historical dividing line between the north and the south of England, the Trent) compared with the devastation visited upon other regions in the 1980s, e.g. the North East. The spare capacity was lower in the south than the north, so it got used up sooner when the recovery came.

  • “What we need to do is to ensure that the pain is borne by those who can best afford it… and who caused the problem in the first place.” So which measures do you propose that will inflict pain on the politicians and bank-directors who caused these problems?

  • Dominic Curran 18th Feb '13 - 1:21pm

    @ Steve

    I suggested that your point about the population of London in 1945 was irrelevent because stating population without housing capacity is meaningless – in fact I’m not really sure what point you were trying to make as your sentence sort of stood on its on in a bit of a non-sequitur way. What did you mean by it?

  • Dominic Curran 18th Feb '13 - 1:38pm

    @ Steve
    “Restrictive lending has had no impact on the supply of housing in London, unless I’ve missed something in the news about large swathes of housing stock being demolished or a marked increase in stock being left vacant. Whether a house is let to a tenant or let to its owner (as this is effectively what home ownership amounts to) is irrelevant to housing supply (the number of houses available to live in).”

    Contrary to your assertion, restrictive lending has had a profound impact on the supply of new homes in London, as developers both can’t get the finance to build them and new buyers can’t acess to credit to get the finished product, hence the 1st time buyer schemes and guarantees that government have introduced. It is telling that in central London the supply of new luxury housing has if anything stepped up due to the large number of cash buyers around. Notwithstanding planning restrictions, builders will, int he main, build if they can sell their product. One (big) reason why they are not building so much is that there is hardly anyone around to buy the homes.

    I was suyrprised to read that half the owner occupied homes in England have no mortgage – that’s a bigger number than i had realised. Presumably those outright owners are counting on those homes to pay for their social care, as well as provide a deposit for the their’ kids home, and to help with their tuition fees!

    I wasn’t intentionally cherry-picking London, by the way, it’s just the housing market i know about, and I don’t like to pronounce on subjects about which i know little. The key difference about the capital, though, is there is a massive amount of supressed/unmet demand, which i suspect doesn’t apply with the same force in most of the rest of the country – although southern England generally no doubt suffers from it – in a situation of continuing (and massive) demand, restrictive lending will contribute to the effects i mentioned above.

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