Why we must end the UK’s addiction to property

There is nothing aspirational or equitable about courting another recession.

They say an Englishman's home is his castle but the UK has a particular problem with our addiction to house-price inflation. Before the crash, house prices trebled in the space of a decade. Great for those that bought at the right time, but not for others.

As a nation, we are used to borrowing beyond our means. The UK mortgage market had the second-highest loan-to-value ratio of any OECD country before the financial crisis.

At a household level, first-time buyers who were offered 125 per cent mortgages and found themselves in negative equity following the crash.

There are roughly a million people who owe more than their homes are now worth. UK households still have more mortgage debt, relative to their income, than households in any other major economy.

There have been four housing bubbles in the UK in the past 40 years. They can be hard to spot but they invariably lead to economic bust when they burst. Macroeconomic stability matters and volatility in the UK's housing market has played a destabilising role.

One solution is to increase the supply of housing, as proposed by Kate Barker in her landmark 2004 review. But while building extra houses is absolutely necessary to constrain excessive house-price growth in the long term, housebuilding is slow to take effect. But we also have to tackle demand. And housing market demand is mediated by the availability of mortgages.

A new IPPR report published today, Forever Blowing Bubbles? Housing's Role in the UK Economy, argues that policymakers need to learn the lessons of the credit crunch. The report argues that the UK's addiction to house-price inflation is bad for the economy and that a central plank of government economic policy should be to ensure that there is greater stability in house prices.

Regulation to end speculation

IPPR's critics suggest that such an approach threatens to thwart aspiration and hinder social mobility. But there is nothing aspirational or equitable about courting another recession. And there is absolutely no reason to believe that the next housing bubble will serve first-time buyers any better than the last.

The onset of loose lending around 1999/2000 correlated strongly with the start of a downward trend in the number of first-time buyers. Far from helping home ownership, it drove it further out of their reach.

Conflating aspiration with higher levels of mortgage debt is a mistake. People with high levels of debt – notably high loan-to-value ratios – are much more likely to fall into negative equity.

Monetary policy has a part to play – house prices should be a more explicit consideration in its formulation – but it is a blunt instrument, with the hikes in interest rates needed to dampen future housing booms likely to come at the cost of excessive pain to the wider economy.

Fiscal policy – such as stamp duty or council tax – is certainly important in egalitarian and distributive terms, but tangential in terms of its actual impact on house pricing, and politically highly fraught.

The Joseph Rowntree Foundation's Housing Market Taskforce concluded its work earlier this month with some interesting recommendations on property taxes. But mortgage regulation is the most important tool in controlling demand in the housing market.

Deposit requirements on buy-to-let mortgages should be raised and lenders should ensure that rents cover repayments. Small-time speculators seeking a fast buck in the form of excessive capital gains from the buy-to-let market need to be deterred. Instead, we should be encouraging institutional investors into a more professional and more secure private rented sector to build to let.

Short-term thinking

In particular, when it comes to mortgage lending, the government and regulators need to hold firm in the face of industry lobbying and impose a 90 per cent cap on loan-to-value ratios and a 3.5 times cap on loan-to-income. Put simply, a mortgage of no more than £90,000 could be lent to buy a home worth £100,000 and a couple where each is earning £25,000 could borrow no more than £175,000.

We need to strike the right balance, allowing people to take out affordable mortgages while reducing the risk of excessive borrowing creating instability in the economy as a whole.

Mortgages are usually a 25-year commitment and high loan-to-income ratios allow borrowers to take out large mortgages that appear affordable at very low interest rates, but with no guarantee that interest rates will remain low, heightening the risk of defaults and repossessions. A 90 per cent loan-to-value ratio allows for a 10 per cent fall in the price of the investment before negative equity takes hold.

As Shelter has found, this is an argument that first-time buyers support, even though it may make it more difficult for them to get on to the housing ladder. They recognise that loose lending and cheap credit are a recipe for future instability both in our housing market and in our wider economy.

Andy Hull is a senior research fellow at IPPR.

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The "people" have spoken on Brexit - listening to them is another matter

The Athenians had another word for them. 

Commentators are right to point to the fury and frustration of the "left behind", who are, everywhere it seems, rebelling against establishments they believe have betrayed them. 

But they may understate the threat we now face. Many of those who voted for Brexit or Donald Trump were not just rejecting economic injustice or "broken politics" but also perhaps the very principles of our system of government. For them, democracy itself may have lost its appeal.

If that is the case, we can’t blame the elites alone. We, "the people", are complicit. In associating democracy almost exclusively with economic advancement, we have begun to forget that it is also, and principally, about shared values, rights and responsibilities. In the UK and the US, voters in their millions have traded one against the other. The citizens of the Netherlands and France may soon do the same.

It's too early to panic. Perhaps we’ll come to see that Brexit was not the calamity some of us predict; perhaps President Trump will turn out to be better than we fear he may be.  

But we would be foolish to ignore the precedents. 

The great democracy of ancient Greece lasted two hundred years. But then, subverted by demagogues and oligarchs, and overwhelmed at last by autocrats, it disappeared from the world for 2,000 years. For all that time, the citizens of today’s democracies were the subjects of tyrants, elites and ideologues but never of themselves.

Modern history provides no greater reassurance. Even when democracy has apparently been secured, it has consumed itself at the ballot box with awful consequences. We are not in that place. But in the UK and the US we have taken a step in its direction.

Rights and responsibilities

The dilemmas we face are as old as democracy itself.

Almost 2,500 years ago, the Athenian statesman Pericles set out for his fellow citizens the precepts of their remarkable democracy. He spoke of the equality of their rights before the law. But he laid particular emphasis on their duties to each other. The word he used for the "socially useless" individuals who placed self above public interest provides the origin of our own word – idiot. 

What would Pericles make of us? Certainly, we remain jealous of our rights, especially when we feel that they are threatened by others. But our preoccupation with personal aspiration has long since eroded our sense of common cause, whether measured by our engagement in civic affairs, our contribution to community life or the civility of our relations with others.

On these grounds, we are doubtless idiots.

A reasonable principle

But for the Athenians, democracy was founded on a third key principle. Alongside rights and responsibilities, they regarded the exercise of reason as indispensable to good politics. As Pericles put it:

“We reach decisions on public policy only after full discussion, believing that sound judgement, far from being impeded by debate, is arrived at only when full information is considered before a decision is made."

Can we honestly claim that in the EU referendum or the US Presidential elections, voters collectively exercised sound judgment based on reliable evidence, rational deliberation and open-minded debate? 

More likely, we recognise that what passed for public discourse throughout both campaigns was poisoned by deceit. The goal of the politicians who set out to mislead was clear. But instead of punishing them for their cynicism, millions suspended their disbelief and voted for them, often quite consciously choosing not to test their instincts against the evidence or their own opinions against other views. As much as they were misled, they also misled themselves. 

This was precisely the concern of democracy’s earliest critics, Plato and Aristotle among them. They worried that the system was inherently unstable not least because the people could be too easily swayed by their emotions and too readily seduced by shallow populists into decisions which were neither reasonable nor just - nor sensible. 

Representation

But if democracy is in danger, where are its defenders? When the people have been so badly misled and when the potential consequences are so serious, who should protect them if not their elected representatives? Isn’t that why in both UK and US we favour a representative system?

At least until now, we have accepted that our elected politicians have a duty not just to check the power of government but also to mitigate public opinion when it undermines sound or just policy. Our legislators should be the servants but not the slaves of their electorates.

The 18th century statesman Edmund Burke went further than most in believing that he would be betraying his constituents were he to sacrifice his judgement to their opinion. When in 1778 he defied them on the issue of free trade, he expressed the hope that if he forfeited their votes:

“It will stand on record an example to future representatives of the Commons of England, that one man at least had dared to resist the desires of his constituents when his judgment assured him they were wrong."

He lost his seat but perhaps retained his integrity.

As the democratic franchise was extended, other thinkers worried about the potential for conflict between public opinion and sound policy. In the 1830s, the French philosopher Alexis de Tocqueville, a close observer of the developing American democracy, warned against any decision "which bases its claim to rule upon numbers, not upon rightness or excellence". John Stuart Mill, in his great essay On Liberty, feared for the rights of minorities when government is mandated by majority opinion.

All these critics favoured government by elites, be they philosopher kings or aristocrats. Our societies are considerably more liberal than those they envisaged, and that is to our credit. But even if we reject their politics, we should acknowledge that recent events have given their concerns new currency.

Whose people?

Indeed, the EU referendum was everything they dreaded - a triumph for unreason, a basis for unsound policy, a threat to democratic principle and, potentially at least, a suppression of the rights of minorities. 

But at the very moment when our tradition of representative democracy should be protecting us, it seems that Parliament’s responsibilities have been radically reinterpreted. The Prime Minister has repeatedly asserted that “the British people have spoken” and that, even though she herself doubts its wisdom, their decision cannot be challenged. It has taken the intervention of the High Court to remind her of the role of a sovereign Parliament in the making of public policy.

We know, if only because right-wing newspapers have identified them for us, who are the enemies of the people. But who are those "people” whose judgement the PM regards as sacrosanct? 

Are they “the whole nation” for which she has publicly pledged to govern – or the 37 per cent of the electorate which voted for Brexit? Must the overwhelming majority which did not now remain silent and unrepresented? And in such circumstances is democracy served or subverted?

Too many politicians, cowed by campaigners whose objectives they fear, bullied by press barons they despise and apparently indifferent to their own constitutional responsibilities, have set aside their own judgement of the public good and fooled themselves into believing that when the people speak, their will must be done whatever it is and whatever its consequences.

But ultimately there is no such thing as "the people", only an aggregation of groups and individuals with a plurality of beliefs, opinions and interests. Talking about them in the definite article obliterates those differences. Precisely because it is so definite, it is intolerant, oppressive and undemocratic.

Back from the brink

Now, more than ever, we need parties and politicians with the courage not just to listen to but also to lead public opinion, and to stand against it when they believe it wrong. 

More than ever, we need a media which acknowledges its responsibility to inform as well as to influence, and show a far greater commitment to the truth.

More than ever, we the people should recognise that a strong and healthy democracy demands more of us than we seem prepared to give.

Democracies have come and gone – in ancient Greece and modern Europe. If ours is to prevail, we must both individually and collectively acknowledge our responsibilities as well as our rights and, critically, we must restore the importance of reason – and reasonableness – to the ways in which we deliberate, debate and decide.

As it is, we have already entered an age of unreason. Unless we come to our senses, it’s impossible to predict when or where it will end. 

Peter Bradley is director of Speakers’ Corner Trust and a former Labour MP.