House prices and the Left

The Duncan Weldon Economics Matters Column

Lots of talk about Brown and the Party leadership this week, but I think it might be time to discuss something else: the housing market. Not in a dinner party kind of ‘will house prices go up or down’ way, but taking a step back. The question we need to ask ourselves, as members of a progressive, centre-left party, is not ‘will house prices go up or down?’ but ‘do we want house prices to go up or down?’.

The house price boom over the past decade has been enormously helpful to the Government. It has boosted consumption and hence the economy directly as people have used their houses as cash machines through ‘mortgage equity withdrawal loans’ (40% of all mortgages in 2007 were for this purpose), it has boosted tax revenue through higher stamp duty charges and inheritance tax windfalls and it has created a feel good factor as vast swathes of the population have suddenly realised that they are now, on paper at least, rich.

It also raised the debt level of households and left the economy more vulnerable to shocks. The ensuring post-boom bust has been painful for many, especially those who took out the more exotic mortgages available in 2006/07 – 125% loan-to-value rations, five times income, etc.

All parties were to some extent complicit in this boom – the Tories might now argue that the Government mismanaged the public finances (a charge I reject), but they said little as house prices rose 160% over ten years. I think that rise represents the major failure of economic policy since 1997.

High house prices are not a good thing. And they are the last thing a Government of the left should be supporting.

High house prices do not make the country as a whole richer, they merely redistribute wealth between home owners and non-home owners, broadly put, from the young to the old. They lead to higher debt levels as people borrow more to buy. They decrease the international competitiveness of Britain, as companies here must pay higher wages so that workers can afford somewhere to live.

Last year I worried that the Government was going to try and support the housing market directly through purchasing a great deal of mortgage backed securities (MBS) in an effort to directly support bank lending. I also feared that Northern Rock, RBS and Lloyds would be pressured/directed to lend more to home buyers. Thankfully the steps taken have been few.

This might all sound a bit arcane, so think of it this way: Government efforts to prop up the housing market would amount to a policy of direct support for the owners of assets and be implicitly aimed at increasing inequality. I don’t want the Labour Party to aim to increase inequality, but that’s what such a policy would mean.

Thatcher revolutionised the housing market through the ‘right to buy scheme’. Britain is now close to being the ‘property owning democracy’ of which she spoke. Given that 70% of voters are now owner occupiers it is no surprise that governments, of all colours, will aim to give these people what they want. But this is not what centre-left politics should be about. We need to create a new housing market, where prices rise in line with earnings, where people think of their home as a place to live not a source of cash and where tenants (whether private, social or council) are not seen as lesser beings than owners. This will mean building a lot more homes, replenishing the social and council stock and probably being more prescriptive with banks as regards their lending policies. It is hard for any government to say to 70% of its electors, we don’t want the value of your assets to rise so quickly, but, for a centre-left government, it is necessary.