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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Where Labour has no chance, hold your nose and vote Lib Dem

May's gamble, MacKenzie's obsession and Wisden obituaries - Peter Wilby's First Thoughts.

In 2007 Gordon Brown allowed rumours to circulate that he would call an early general election for the spring of 2008. When he failed to do so, he was considered a coward and a ditherer and never recovered. Theresa May has tried a different strategy. After firmly denying that she would call an early election and killing off speculation about one, she suddenly announced an election after all. Will this work better for her than the opposite worked for Brown?

The Prime Minister risks being seen as a liar and an opportunist. Her demand for “unity” at Westminster is alarming, because it suggests that there is no role for opposition parties on the most important issue of the day. If Labour and the Lib Dems are smart enough to co-operate sufficiently to rally the country against what looks like an attempt to instal an authoritarian, right-wing Tory regime, May, even if she wins the election, could find herself weakened, not strengthened. I never thought I would write this but, in constituencies where Labour has no chance, its supporters should hold their noses and vote Lib Dem.

Taken for granted

I wonder if May, before she took her decision, looked at the precedents of prime ministers who called unnecessary elections when they already had comfortable parliamentary majorities. In 1974, after three and a half years in office, Edward Heath, with a Tory majority of 30, called a “Who runs Britain?” election during a prolonged dispute with the miners. He lost. In 1923, Stanley Baldwin, a new Tory leader sitting on a majority of 75 obtained by his predecessor just a year earlier, called an election because he wished to introduce tariffs, an issue strikingly similar to the one raised by Brexit. He also lost. The lesson, I think (and hope), is that prime ministers take the electorate for granted at their peril.

China’s long game

Commentators compare the crisis ­involving North Korea and the US with the Cuban missile crisis of 1962. It doesn’t feel that way to me. For several days that year, nuclear war seemed, to my 17-year-old mind, all but inevitable. I went to the cinema one afternoon and felt surprise when I emerged three hours later to find the world – or, at least, the city of Leicester – going about its business as normal. Two nuclear powers were in direct confrontation. The US threatened to invade communist Cuba to remove Soviet missiles and blockaded the island to prevent deliveries of more weapons. Soviet ships sailed towards the US navy. It wasn’t easy to imagine a compromise, or who would broker one. Nobody doubted that the two sides’ weapons would work. The Soviet Union had carried out nearly 200 nuclear tests. North Korea has claimed just five.

For all the talk of intercontinental missiles, North Korea at present isn’t a credible threat to anybody except possibly its neighbours, and certainly not to the US or Britain. It is in no sense a geopolitical or economic rival to the US. Donald Trump, who, like everybody else, finds the Middle East infernally complicated, is looking for an easy, short-term victory. The Chinese will probably arrange one for him. With 3,500 years of civilisation behind them, they are accustomed to playing the long game.

Mussel pains

Whenever I read Kelvin MacKenzie’s columns in the Sun, I find him complaining about the size of mussels served by the Loch Fyne chain, a subject on which he happens to be right, though one wonders why he doesn’t just order something else. Otherwise, he writes badly and unfunnily, often aiming abuse at vulnerable people such as benefit claimants. It’s a new departure, however, to insult someone because they were on the receiving end of what MacKenzie calls “a nasty right-hander”, apparently unprovoked, in a Liverpool nightclub. He called the victim, the Everton and England footballer Ross Barkley, who has a Nigerian grandfather, “one of our dimmest footballers” and likened him to “a gorilla at the zoo”.
The paper has suspended MacKenzie, a former Sun editor, and Merseyside Police is investigating him for racism, though he claims he didn’t know of Barkley’s ancestry.

Several commentators express amazement that Sun editors allowed such tripe to be published. It was not, I think, a mistake. Britain has no equivalent of America’s successful alt-right Breitbart website, disruptively flinging insults at all and sundry and testing the boundaries of what it calls “political correctness”, because our alt right is already established in the Sun, Express and Mail. To defend their position, those papers will continue to be as nasty as it takes.

Over and out

Easter is the time to read the cricket annual Wisden and, as usual, I turn first to the obituaries. Unlike newspaper obituaries, they record failures as well as successes – those who managed just a few undistinguished performances in first-class cricket and, most poignantly, some who promised much but died early. We learn of a 22-year-old Indian who, during demonstrations against the alleged molestation of a schoolgirl, was shot dead by police and whose grieving mother (invoking the name of one of India’s greatest batsmen) cried, “Bring my Gavaskar back!” In England, two young men drowned, having played one first-class match each, and a 22-year-old Sussex fast bowler, described as “roguish” and “enormously popular”, fell off a roof while celebrating New Year with friends in Scotland. In South Africa, a young batsman was among five municipal employees killed when their truck crashed; the local mayor fled the funeral as his workmates “chanted menacingly” about unpaid wages.

Among the better-known deaths is that of Martin Crowe, probably New Zealand’s best batsman. In a Test match, he once got out on 299 and reckoned the near-miss contributed to the cancer that killed him at 53. “It tore at me like a vulture pecking dead flesh,” he said. Cricket can do that kind of thing to you. 

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 20 April 2017 issue of the New Statesman, May's gamble

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