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18 March 2023

However the housing crisis ends, we will all lose

The boom has caused untold misery, but it has gone on for so long that the crash, when it comes, is going to be terrifying.

By Jonn Elledge

In 1986 a conservative economist named Herbert Stein came up with a maxim which, strange man that I am, I’ve always found rather comforting: “If something cannot continue forever, it will stop.”

Stein, who had led the Council of Economic Advisers for the government of Richard Nixon, seems to have meant this as a small-government battle cry: there’s no need to do anything to deal with the balance of payments problem, he was saying, because external constraints mean that mess will clean itself. But I find it comforting, nonetheless, because one of the things that surely cannot continue forever is the madness of the British housing market.

Housing costs, these last few years, have become ever sillier, consuming more and more of younger people’s incomes as prices edged further towards the stratosphere. One day, Stein’s Law suggests, that has to stop.

There have been good reasons, the last few months, to suspect we might be approaching that stop. One cause of the long boom in house prices is surely the lengthy period of weirdly low interest rates that followed the 2008 crash: make it cheaper to borrow money, and you’d expect the price of the things we use borrowed money to buy to rise. Since the end of 2021, though, the Bank of England base rate has been steadily creeping upwards; last autumn, Kwasi Kwarteng’s main contribution to the history books was to send them spiking yet further, and then immediately get fired. All this points to a bust.

[See also: Why are London’s housing estates choosing to be demolished?]

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Adding to the vague but definite sense that the music was about to stop was the broader cost-of-living crisis. The British economy has hit problems before, of course – the last 15 years, the worst for growth since the industrial revolution, have brought little else. But since these problems have mostly manifested as flatlining wages, there’s been a group of people (generally older, generally richer, often retired) who have been sheltered from them. The problem with food and energy price inflation, though, is that everyone is affected: this seems likely to do the same thing for house prices as it’s done for Tory poll ratings.

It’s perhaps unsurprising, then, that the Office for Budget Responsibility is predicting that the bust has finally arrived. “Our central forecast is that house prices fall by 10 per cent from their high in the fourth quarter of 2022, a one percentage point larger fall than in our November forecast,” it said on Wednesday (15 March). It blamed the squeeze on real incomes, low consumer confidence and the widespread expectation that mortgage rates will rise further, adding that prices may already have fallen by as much as 6 per cent since the middle of last year.

So, this is it, right? Surely, surely, this has to be it. The market has finally peaked. Yet more data, this time from Halifax, this week showed that the average cost of a first home in London now stood at £587,700, and the typical deposit was £188,700. I know the pound’s collapsed, but even so: there just aren’t enough rich foreigners seeking shitty flats in Dalston to make that sustainable. This has to be the peak, right?

Except there are just a couple of things that are still very slightly niggling. One is that, well, we’ve kind of been here before. The pandemic was going to hit house prices. Before that, Brexit was, and before that it was the financial crash (it did, but not nearly as much as one might have predicted). We seem to have got into a cycle where, whenever anyone wants to stash their money somewhere safe, they stick it in the British property market. Only this week Bloomberg put out a podcast suggesting the house price crash is “more wishful thinking than reality”.

[See also: The end of the housing delusion]

Then there’s the fact that rents – less driven by the cost of money, and thus a purer measure of demand for housing – are higher than ever and show no sign of coming down. In the year to December average rents were up 10.8 per cent across the UK. That’s partly driven by London, where the average rental property now costs £2,074 a month – I’m just going to pause here to let you take that one in – but even excluding the capital UK rents were up by 9.4 per cent. It’s safe to say the quality of what you get for your money has not improved at the same rate. There are simply a lot of people seeking not enough homes. If Jeremy Hunt’s Budget this week included measures to address this problem, he’s kept them very quiet.

The big problem is that whatever happens to the housing market at this point, a lot of people are going to get stuffed. Continued growth will push prices yet further out of reach, meaning worse living standards for those scratching to get on the ladder, and yet more money tied up in bricks and mortar instead of anything productive. (Every time someone starts talking about the “productivity puzzle” I get an overwhelming urge to drag them round to the nearest branch of Foxtons and scream “LOOK”.)

On the other hand, though, the boom has gone on for so long that the crash, when it comes, is going to be terrifying. People who’ve worked their backsides off to get on the ladder are going to be ruined. Some will lose their homes. And the damage it does to our animal spirits means that a reduction in house prices will, in the short term, be a cause – as well as symptom – of yet more economic malaise.

I’m not sure what a “good” result is any more. I said at the top of this thing that Stein’s Law can be comforting. It can also be terrifying.

Read more:

The great housing con: why the coming crash will rewrite the UK economy – Audio Long Reads

What is Labour’s housing policy?

A generation locked out

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