New flats in the former Olympic Village in Stratford, east London. (Photo: Getty)
Show Hide image

This is no recovery, it is a spending boom powered by unsustainable house price rises

Having failed to usher in the export-led recovery he promised early in the coalition, the Chancellor instead latched onto house price inflation as one of the mainlevers of a consumer spending boom.

London’s property-owning classes are looking increasingly smug again as barely a week seems to pass without fresh data that their homes are spiralling exponentially in value. The latest update from the Nationwide shows house prices in the capital up by an astonishing 18 per cent in the past year. It’s not just London, now, either: with price rises rippling out across the rest of the country, the feelgood factor is spreading. But should it be?

There are important objections to be made about the growing divide between London and the rest of the UK, as well as the plight of first-time-buyers having to borrow ever greater multiples of their salary (if they can afford to buy at all). Then there is the knock-on effect to prices in the private rental market, rising homelessness, the list goes on. Even homeowners who may think they are benefiting from the rises are in fact getting poorer if they ever hope to move to a bigger property.

But there is a deeper reason why we should all – including propertied Londoners – be concerned about recent house price growth rather than taking heart at its renewed vigour, which is that the strength of the market in recent years has sowed the seeds of its own volatility. Of course there are fears of a bubble and whether the growing price-to-income ratio is sustainable. The truth may be that it already isn’t sustainable, but for one factor: hot money.

London property has in recent years become the investment vehicle of choice for international capital seeking a safe haven, as we at Civitas detailed in a recent report. In the wake of the worldwide economic downturn, turmoil in the Middle East and super-loose monetary policy, our capital’s housing stock has soaked up billions of pounds in global capital flows. This has only been encouraged by George Osborne.

Having failed to usher in the export-led recovery he promised early in the coalition, the Chancellor instead latched onto house price inflation as one of the mainlevers of a consumer spending boom that, he hopes, will get the Tories through the next general election. He didn’t just bet the house on this strategy – he bet everyone’s house on it. It is an easy gamble to embark on because so many homeowners are too easily convinced that large price rises are in their own best interests.

But central to encouraging house price growth in an already expensive market is encouraging buy-to-let (and even “buy-to-leave”) investors, many of which are non-resident. There are arguments to be made both for and against overseas buyers,but one potentially catastrophic problem is already looming into view, the only thing worse than so much foreign capital driving up prices: that now this money suddenly vanishes.

As central banks begin to raise interest rates around the world, as sterling strengthens with the economic recovery, much of this hot money will disappear. The threat of this taking place within the next year or so is raised in a new report from Deutsche Bank but there have been warnings for some time. The consequences of this for the rest of the market, and for the wider economy, could be deeply unpleasant.

But investors using the housing market to make money, and the volatility that follows, are not the root cause of the problem. What lies behind all of this is a collective weakness among voters for seeing their properties grow in value. Hopefully this will recede as the number of people priced out of the market continues to rise. But until it does, politicians will never build enough homes to level out prices, and the economy will remain beholden to a rollercoaster housing market.

David Bentley is co-author of the Civitas report ‘Finding Shelter: Overseas investment in the UK housing market’.

Getty
Show Hide image

Labour trying to outdo Ukip on border control is the sure path to defeat

Only Diane Abbott has come out fighting for free movement. 

There is no point trying to deny it. Paul Nuttall’s election as Ukip leader is dangerous for Labour. Yes, Nuttall may not be a credible voice for working-class people – he ran as a Tory councillor in 2002 and has said that “the very existence of the NHS stifles competition”. Yes, he may be leader of a party which has (for now) haemorrhaged donors and supporters. But what Nuttall’s election represents is the coming of age for a form of right-wing populism which is pointed directly at Labour’s base. Along with the likes of Ukip's major donor Arron Banks, Nuttall will open up a second front against Labour – focused on blaming migrants for falling wages and crumbling services.

In the face of this danger, and the burning need to create a narrative of its own about the neglect of the communities it represents, Labour’s main response has been confusion. Barely a week has gone by without a major Labour figure repeating the touchstone myths on which Ukip has built its working class roots. Speaking on the Andrew Marr Show, Emily Thornberry openly backed the idea that migration has dragged down wages. “Do I think that at the moment too many people come into this country? Yes I do”, she said.

Another response has been to look for policies that transcend the debate altogether, while giving a nod to the perceived “concerns” that voters harbour about immigration. When Clive Lewis spoke to the Guardian some weeks ago, he also repeated the idea that free movement “hasn’t worked for many of the people in this country, where they’ve been undercut” and coupled this with compulsory trade union membership for those coming to Britain to work – a closed shop for migrant workers.

It is unsurprising that MPs on the right of the party – many of whom had much to say about the benefits of migration during the EU referendum – have retreated into support for immigration controls. This kind of triangulation and retreat – the opposite of the insurgent leftwing populism that Labour needs to win elections – is the hallmark of Labour’s establishment politics. Those who want to stand and fight on the issue should be concerned that, for now, only Diane Abbott has come out fighting for continued free movement.

At the moment, Labour is chasing the narrative on immigration – and that has to stop. The process that is shifting the debate on migration is Brexit, the British franchise of a global nationalist resurgence that is sweeping the far right to power across the western world. Attempt to negotiate a compromise on migration in the face of that wave, or try to claim it as an “opportunity”, and there is simply no limit to how far Labour will be pushed. What is needed is an ideological counter-attack, which tells a different story about why living standards have deteriorated and offers real solutions.

The reason why wages have stagnated and in recent decades is not immigration. Among the very few studies which find that migration has caused a fall in wages, most conclude that the fall is marginal. The Bank of England’s study, cited by Boris Johnson in the heat of the EU referendum campaign, put the average figure at 0.3 per cent for every ten percentage point rise in migrants in a given sector of work. That rises to 1.8 per cent in some areas.

Median earnings fell by 10.4 per cent between 2007 and 2015, and by 2021 are forecast to be lower in real terms than they were in 2008. For many communities, that fall in wages comes on top of the destruction of industry; the defeat of the trade union movement; the fire sale of Britain’s social housing stock; and years of gruelling Tory austerity. Nuttall’s Ukip will argue that economic and social insecurity are the result of uncontrolled immigration. To give an inch to that claim is to abandon reality.

Labour cannot win against Ukip by playing around with new and innovative border controls – it has to put forward a vision for a radically different kind of society. Under Jeremy Corbyn, Labour is closer than it ever has been to the kind of radical social and economic platform that it will need to regain power - £500bn of investment, building a million new homes a year, raising minimum wage and reinstating proper collective bargaining and trade union rights. What it needs now is clarity – a message about who to blame and what to do, which can cut through the dust kicked up by the Brexit vote.