Instead of asking whether the housing market might ‘crash’, we should all question whether ploughing your entire life’s savings into a fickle market is smart at all
September 22, 2022 4:30 pm(Updated 4:31 pm)
“House prices go up, that’s just what they do,” a relative in his 60s said recently as we discussed the question on everyone’s mind right now: will house prices – which have reached historic highs – crash?
If the NHS is, as former chancellor Nigel Lawson put it, “the closest thing the English people have to a religion” then the housing market is our dogmatism.
Since Thatcher’s push for a “property owning democracy”, two false ideas have taken hold: first, that house price inflation is inevitable and second that rising house prices equal general wealth which is surely why the Prime Minister Liz Truss is rumoured to be cutting stamp duty “in a push for prosperity”.
With the cost of essentials higher than it has been since the Falklands War and the Bank of England increasing interest rates to 2.25 per cent (the highest they’ve been since 2008), the focus on the housing market – from my own family and government – is understandable. A home is the biggest expense most people will ever take on and a fall in value (negative equity) can have devastating consequences, just as rising monthly repayments can.
The British obsession with house price inflation – as a driver of personal wealth and economic growth more broadly – willfully turns a blind eye to the fact that pumping up the cost of housing is as risky as it is short-sighted. It is time to address the political narrative that inflating the price of homes as assets is somehow good for the majority of people or, indeed, the country as a whole.
House prices do not always go up. That is not “just what they do” and my relative who has lived through previous downturns knows that.
It would not be hyperbole to call Britain’s housing market volatile. In 2008 house prices dropped by 16 per cent when the bubble of 2000-2007 burst. Between 1989 and 1993 they fell by 20 per cent on average (32 per cent in London) after the government withdrew MIRAS – a scheme which allowed homeowners to claim tax relief against the interest payments on their mortgage. And in the 1970s there was house price stagnation despite a boom in homeownership because of the high inflation and unemployment amid industrial strikes and an oil crisis.
House prices feel like monopoly money but the knock-on effect of this volatility is very real. I have interviewed people who are still paying off negative equity following the 2008 global financial crisis because they took out 100 per cent mortgages with Northern Rock.
As economist Ian Mulheirn, who is currently at the Tony Blair Institute for Global Change but was previously an economic advisor at HM Treasury, told me over the phone: “When house prices go up, there are as many people who lose from that as people who gain.”
The affordability of homes has now dropped to a level not seen since the late 1800s. The losers, as ever, then, are those who have the least. If someone has bought at the top of the market in recent months with a small deposit and high loan-to-value mortgage, they are more vulnerable to a fall in house prices. But those who have smaller (or no) mortgages, equity and are looking to upsize benefit.
And as for the housing market being a driver of prosperity: housing wealth simply does not trickle down, enriching all of society as it flows. In recent years house prices have climbed but it has not made most people wealthier. At the end of last year, figures from the Office for National Statistics (ONS) showed that British households’ net worth grew to £11.2 trillion in the year 2020/21. That was an increase of 8.4 per cent on 2019 and the highest rate of growth seen since before the global financial crisis of 2008.
However, as analysis from the Resolution Foundation revealed, the least-wealthy third of households gained less than £1,000 per adult, on average, from rising house prices this century, while the wealthiest 10 per cent experienced an average gain of £174,000.
As for the idea that the accumulation of housing wealth benefits the economy as a whole, that’s shaky too.
It is true that the overall health of the economy is tied to housing: when house prices rise, as the Bank of England notes, homeowners feel more confident, so they spend and borrow more and when people move, they buy white goods and furnishings.
But, more broadly, while homes have been getting more expensive for years, the UK had the largest decline in GDP (the measure of the size and health of a country’s economy) among the G7 in 2020 (-9.3 per cent) and its relatively strong performance in 2021 was to some degree a recovery from weakness in 2020.
House price inflation, as Mulheirn puts it: “just moves wealth from one set of people to another and there is no net benefit to the economy.”
If Truss and her team do cut stamp duty they will likely find that it doesn’t do much for economic growth overall, though it might inflate house prices further short-term, causing buyers to pay and borrow more at higher interest rates for longer.
To truly deliver prosperity, the government should look beyond turning homes into overpriced assets. Instead of asking whether the housing market might “crash” we should all question whether ploughing your entire life’s savings into a market which has long-been defined by boom and bust is smart at all.
As Rachelle Earwaker, senior economist at the Joseph Rowntree Foundation, (an independent organisation working to solve poverty), told me over the phone this week: “Investment in housing is a really unproductive way of using investors money. It doesn’t lead to more growth in the economy, it doesn’t lead to more businesses being able to start up, it doesn’t at all help our transition towards net zero and it doesn’t futureproof our economy.” We would all be better off if, instead of encouraging people to gamble on housing, there was a push for investment in building social homes, making existing homes more energy efficient, generating sources of renewable energy and making sure that people have the skills they need to improve the country’s productivity.