The property price boom that helps the few, not the many

In 2021 the average price of houses in Taunton increased by 21 per cent: the highest rate of increase in the country. It is a sign of how utterly dysfunctional our housing market has become that this was announced as good news. According to the Daily Mail, for example, “while it was good news for market towns and commuter areas, it was bad news for London.” The bad news, apparently, was that in London, housing became a little cheaper. Mick Fletcher looks behind the madness.

Think about it for a moment. If the price of pretty much anything other than property shoots up, it is a bad thing.   Even if a potential price rise, like the fuel duty escalator, has a serious social objective – in this case seeking to discourage the use of motor vehicles – it is condemned as an unacceptable burden. To quote the Daily Mail again, “Boris Johnson today [5 October 2021]  hinted at a fuel duty freeze in the Budget as petrol prices hit an eight-year high. The PM said he does not want to increase ‘tax of any kind’ when he was pressed on whether a rise in duty will be shunned to ease pressure on motorists”.  

Such consideration for motorists isn’t extended to those seeking housing. It is hard to recall any politician promising to make housing cheaper. The distorting lens of the tabloid press ensures that any sustained fall in house prices would be politically toxic and isn’t the subject of serious discussion.

We have chronicled elsewhere some of the social consequences of the great divide between those who can afford to buy a house and those forced to rent. For many renters an insecure tenancy mirrors an insecure job in a world where risk is passed down to those least able to bear it. In the south-west in particular, those wishing to rent a home in the place where they were brought up are increasingly passed over in favour of holidaymakers and second homes. Luke Pollard, MP for Plymouth Sutton and Devonport, has recently launched a campaign highlighting the issue.

Poor public policy must take much of the blame for this widespread market failure. The systematic dismantling of the social housing sector which began under Margaret Thatcher is probably the worst single example. Since the introduction of the ‘Right to Buy’, which gave council house tenants the right to buy the property they rented at a substantial discount, the stock of social housing in the UK has fallen from nearly 6.5 million units in 1979 to roughly 2 million in 2017. The remaining properties have been concentrated in the least attractive areas and, rightly, allocated to the most disadvantaged applicants. Unfortunately, the consequence has been the stigmatisation of so-called ‘sink estates’. 

A good case can be made for allowing tenants to buy the homes they live in, but not for the restrictions that until very recently prevented councils from building replacements. Under the ‘Right to Buy’ scheme, houses were sold for far less than the cost of building new ones, and councils were even prevented from using all the receipts they did receive. The aim was clearly to force renters from council-owned social housing into the private rented sector, and we are now living with the consequences.

For those unable to buy a house, homes to rent are now less affordable, frequently offer lower standards of accommodation and are not allocated with reference to need. The situation has become so bad that a Conservative government has begun to relax the restrictions, reversing what was once a flagship policy in an under-reported but welcome U-turn.

The marginalisation of social housing is a clear example of a policy that is explicit and perverse. Less explicit but equally perverse are the policies that treat housing as a favoured investment category rather than a means of providing homes. There is no capital gains tax charged on owner-occupied housing. If it seems as though house prices might fall, government steps in with a stimulus such as the stamp duty ‘holiday’ to encourage spending. The response to higher house prices is always to talk of helping young people get on the so-called ‘housing ladder’, rather than any attempt to lower the hill they need to climb.

It is because of its favourable treatment and the fact that other investments currently offer poor returns that house prices continue to rise. Contrary to conventional wisdom, building more housing will not, within practical limits, make homes more affordable. The current house price boom has largely been driven by low interest rates, not a lack of property. Those who want to follow this argument through in more detail might usefully start with this blog by Simon Wren-Lewis or this from the Bank of England.

As long as the interest paid on bonds and bank deposits remains derisory, those with money to invest will turn to housing, secure in the knowledge that our politicians are locked into maintaining this irrational asset price bubble. Governments fear the political consequences of large numbers of voters with negative equity. They also fear the consequences for financial institutions of a sustained fall in house prices, remembering no doubt the origins of the 2008 crash. Yet as well as pricing the poor out of decent homes, the British obsession with housing comes at the expense of other investments with the potential to increase productivity.

Although it makes some people feel good, surging house prices benefit nobody, not even those who own all or part of their homes. As the Investors’ Chronicle points out, “House prices aren’t wealth”. The only way for most people to realise the increase in value of a house is to sell it. Downsizing might release cash but only in the same way as buying a smaller car or using less gas. Equity release might be sensible but simply transfers wealth from those who otherwise might have inherited more.

The housing price boom in Taunton is, therefore, good news for the few, not the many. It is a deeply distorting outcome of an irrational housing market that causes real pain to the poor and only the illusion of prosperity for the more affluent. Addressing the problem, however, remains wholly taboo.