Where on earth are we all going to live?
Our national obsession with property has led us into dangerous waters. At every level of the market
The British have a special relationship with their homes. We lavish attention on them; we fantasise about an extension here, a conservatory there; we willingly pay over the odds for a place to live because, almost regardless of social class, home ownership has become the ultimate national objective.
Now, this live-in liaison is facing its sternest test. In the course of the past decade, house prices have risen inexorably. First-time buyers are unable to get on to the housing ladder until well into their thirties, and there is a worrying lack of available housing - both for key workers and well-off families. Interest rates have risen four times in the past year. No wonder some commentators are predicting a house-price crash. The government is facing a desperate need for more new homes; the issue of extra taxes for buy-to-let landlords; proposals to overhaul Britain's archaic planning system and build over the green belt; and the looming question of how to mop up the mess left after the housing bubble pops. Housing is shaping up to be one of Gordon Brown's biggest headaches.
Britain's property obsession is a relatively new trend. Until the First World War, only a tenth of UK homes were owned by their occupier, compared with almost half in the US. This was partly because much of the property was owned by the richest members of the population, but it was also partly a social phenomenon. Even the wealthiest young men would prefer to take rooms - lodgings - rather than buying or renting their own properties when coming to London. In most circles it was perfectly normal never to own your own house.
Things changed after the world wars, as successive governments embarked on policies to find "homes for heroes". Controls were imposed on landlords and millions of pounds were poured into homebuilding projects. Meanwhile, inequality was falling, meaning many more middle-class families were suddenly able to afford to buy a home.
Amid the postwar optimism of 1950s Britain, home ownership slowly but surely became enshrined as a talismanic social objective, along with free health care, free education and low unemployment. The apogee was Margaret Thatcher's right-to-buy scheme, which saw thousands of council tenants buying their homes. All of this contributed to a sharp rise in home ownership. One government after another introduced lucrative tax breaks on mortgages, with the result that owner occupancy soared, recently reaching an all-time peak of 70 per cent. It was one of the biggest social and economic transformations in British history.
Britain's relationship with housing is not unique. In terms of home ownership, France is fast catching up and we remain far behind Spain. It is true that elsewhere in Europe, such as Germany, Switzerland and the Netherlands, more people tend to rent than buy. But this is due less to an ingrained cultural reticence about home-buying than to laws that make it more financially attractive to rent. Few realise just how much Britain's property-owning fixation was engineered by successive government's policies.
As prices have shot up it has slowly dawned on us that, as well as being nice places to live, homes can also make excellent investments, an idea which has only intensified our love affair with property. In the past few years, though, something has changed. After decades in decline, the proportion of people renting rather than buying a house stopped shrinking and is now rising faster and faster.
One reason is that those not yet on the property ladder are finding it all but impossible to afford to buy. But another more intriguing explanation lies in the fact that both Conservative and Labour governments have scaled back and abolished most of the tax breaks that pushed up home ownership in recent decades. Swiftly and silently, they have shifted the economics of property in favour of landlords rather than tenants for the first time since early last century. As a result, the shape of the market is slowly changing. More and more relatively well-off families are investing in property, often because they have seen the value of their pension fall and are looking for an extra source of income when they retire.
Landlords are already provoking resentment and, as their share of the market grows in the coming years, they are likely to become even more unpopular. A buy-to-let backlash seems highly likely in the future - Whitehall, sensitive to this, has already mooted a clampdown on landlords' unpaid tax. The influx of new landlords is not only crowding many potential buyers out of the market, it is also distorting the kind of homes available. Most of the new flats being built these days are targeted directly at buy-to-let investors - utilitarian blocks that are easy to let and cheap to maintain. For a number of years now, too few homes are being built with families in mind. This is intensifying the housing shortage on an island that is rapidly becoming one of the most overpopulated in the world. At the top end of the market, there are not enough homes with more than two bedrooms and even too few palatial properties for the financiers and jet-setters moving to London. Meanwhile, the flats that would only a few years ago have been affordable for the less well-off have shot up in value.
According to the National Housing and Planning Advice Unit, unless more houses are built, prices could be ten times the average buyer's salary within 20 years, compared with around seven at the moment. The average age of a first-time buyer has risen from 26 to 31 in the past decade alone, according to the Council of Mortgage Lenders - a sure sign that millions of young people are being priced out of the market. The Bank of England has reported that the number of new mortgages issued has dropped suddenly, indicating that prices are also simply beyond the reach of many families.
The two key measures that most economists regard as the best gauges of affordability are both flashing red. Mortgage payments are now taking the biggest chunk of salaries since the tail-end of the last crash. Meanwhile, the fact that house prices have dramatically outpaced the growth in rents means anyone thinking of leaping into the buy-to-let sector is likely to have to turn in a loss for at least a couple of years before they start seeing returns. In other words, the financial rationale for homebuying is the weakest it has been in a generation. But, of course, this being a cocktail of love and money, people are still buying - thinking with their hearts rather than their heads.
Many parts of the country are already experiencing a slump. The Yorkshire and Humberside region, for instance, is witnessing the biggest drop in prices for at least seven years. Four interest rate increases by the Bank of England in the past year have simply made many peoples' mortgage payments unaffordable. The fact that taxes and the cost of living have risen sharply has only made things worse. So the demand for housing has dropped suddenly, causing prices to stall. Whether there is a slowdown or a more dramatic crash, it is clear that the decade-long boom is almost over.
As the end of the era approaches, a few conclusions are emerging. If the government wants to arrest the decline in home ownership and cool the market, it must follow the example of its post-war predecessors: build new homes and introduce tax breaks for homebuyers. Waiving stamp duty for first-time buyers would be a simple and relatively cheap initial step. But a more radical option would be to allow home-ownership levels to decline naturally to those found on the Continent.
There are, after all, plenty of reasons to believe our obsession with homeowning is pretty unhealthy. Andrew Oswald, professor of economics at Warwick University, argues that too many of us own our homes. This causes serious damage to the economy, he claims, since it loads us all up with debt and prevents us from moving from city to city when different jobs beckon.
Abandoning the goal of widespread home ownership could be politically dangerous for any government. It would certainly be a bitter pill for the public to swallow. But given how torrid and irrational our relationship with property has become, it looks an increasingly attractive option.
Either way, if house prices do crash, it will be an important reminder for the British public that this love affair will never run smoothly.
Edmund Conway is economics editor of the Daily Telegraph
- Advertising planner Beth, 25 and her boyfriend found the pace of the market forced them to rush buying their first home. “Getting together the money, not only for the deposit but for all the extras, like solicitors and surveys, was difficult. Ideally we would rather have carried on saving in order to accumulate a larger deposit, but seeing house prices rise daily, made us decide to get on the market as quickly as we could. In the end we were very lucky to find a two bedroom maisonette that we could afford, but only because it needed a lot of work doing!”