Why zero percent?

Why we need a policy on house prices

Nearly 3.5 million private renters are unable to afford the average house and this number will increase further if house prices continue to rise faster than wages. Efforts to increase availability of mortgage credit to first time buyers does not address the fundamental cost of houses – on average 7 times income – and, when there are not enough houses to meet demand, will only send house prices even higher. 

Rising house prices hinder the ability to build enough houses because it increases the market value of land, thereby increasing costs to the developers.

Rising house prices also attract more speculators to the housing market as they believe it is an easy way to get rich. This increases demand for housing even and makes houses more expensive. 

As prices rise higher, would-be first-time buyers cannot afford home ownership and thus continue to rent. Those who can afford to buy houses are more likely to rent them out, and can easily pass the additional purchase costs on to their tenants through the rent. 

Rising house prices increase the cost of living for all and ties up more of the nation's wealth. The government needs to recognise that this is crippling the economy. 

The government needs to set a target of zero percent house price inflation and intervene if house prices rise above this level. 

What would it achieve? 

This of itself would:

  • Send a signal to land owners that they should not expect to get a higher price for their land, which will make them more likely to sell land for development.
  • Send a signal to property investors that they should not expect to make capital gains from simply buying houses, which will lead many to exit the market and reduce competition for houses.

With more private renters able to access home ownership and less upward pressure on house prices, the costs of and demand for private rented housing would fall. 

To achieve and maintain zero percent inflation at a time when demand is still outstripping supply, the government must:

  • Embark on an ambitious housebuilding programme, allowing councils to build more houses and liberalising planning policy.
  • Make property speculation less attractive an investment than alternatives such as the stock market by, for example, levying a higher rate of capital gains tax on property, removing mortgage interest relief and penalising owners of empty property.
  • Improve conditions in the private rented sector so that tenants are less desperate to escape the tenure and take on too much debt in the process of buying a house.

Currently, two-thirds of private renters are unable to afford to buy. Once house price inflation was under control, incomes would begin to catch up. We estimate that if incomes rose at 3.4% per annum in cash terms (the Office for Budget Responsibility’s forecasts), 1.15 million more private renters would be able to buy the average house in a decade. That means half of the country’s private tenants would have the opportunity to own a home of their own. 

Why not call for prices to fall? 

It is true that ten years is a long time to wait for house prices to reach anywhere near affordable levels. Individually, those of us who don't own property would like to see house prices crash overnight. However, we believe an inflation target of zero percent is the most economically viable option, as a house price slump would trigger another financial crisis.

PricedOut would like to see gentle falls in house prices so that people's incomes can catch up with house prices as soon as possible. However the purpose of a government target of zero house price inflation would be to use any price rises as a trigger for ministers to step in and get the housing market back on track.

The majority of the public are now opposed to rising house prices and according to polls the consensus appears to be for house price stability. Most people recognise that the status quo is unsustainable - particularly those home owners who have adult children who are struggling to afford a similar quality of life - but also mortgage holders who have seen their house rise in value but now cannot afford to move to a larger home. 

There is a huge opportunity to unite owner-occupiers and mortgage holders, private tenants and adults living with their parents against speculators and vested interests, to bring about change. By allowing incomes to start catching up with prices and being popular with the majority of the British public, zero percent inflation is the most politically viable solution to our housing crisis.

Practicalities 

The longer term goal is for prices to reach a more affordable ratio with incomes, and this should inform the government's approach to managing house price inflation. 

A zero inflation target should be weighted so that formal intervention comes if prices rose above this target. By pursuing policies like housebuilding and tax reform, prices in the most overheated areas, like London, should fall, which would help meet the national target. 

If prices overall start falling, this is not reason in itself to intervene. The government would probably step in to prevent falling prices causing wider economic problems, but any gentle fall should be welcomed for bringing us closer to a fairer, more affordable housing market.


Showing 5 reactions

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  • commented 2017-09-09 01:05:11 +0100
    Good work with targeting house price inflation! Not many people have thought about that as a solution.

    Hopefully there’s actually an argument that your central bank should be taking house price inflation seriously, as is being argued in Australia: https://www.taxpayersparty.com.au/open-letter/house-price-inflation/

    Imagine if it turned out that your central bank has a responsibility to deal with house price inflation. It would make achieving affordable housing a lot easier.
  • commented 2017-07-02 15:01:07 +0100
    @Graham,
    Thanks for the only considered response I have recieved in a year! In outline you are saying that the demographics of households has changed resulting in more demand for individual housing. I agree. I write as the father of two 20-something offspring who will never own a house. I support your aims but you do not address the root cause.
    My repost would be as follows: given that there are, according to Govt statistics, 200k homes empty 6 months or more; plus, available on Rightmove today a further 400k homes for sale, can you really argue that we are short of homes? If we increase building by 250k this year, will it make a difference? No, because we already had 600k homes available. You will just have a further 250k of unaffordable housing. The media is full of industry experts whose jobs rely on housebuilding, telling us we have a housing shortage. The facts from ONS just don’t support this.

    You misunderstand the money. It is not self-certify or increased income multipliers that are the root cause. A bank does not lend Granny’s savings or someone’s pension. You sign a Mortgage document promising to pay back say £200k. They park that in the Assets column. They then balance it by typing 200000 into an account in your name, and then charge you interest on it for 25 years. Brand new money, from no-where, that just went into housing. The average house price just went up by 6p. Multiply that by 1.2M transactions per year (2015 figure) and you quickly have unaffordable housing. £1 in 1971 has deflated to 8p in 2015.
    https://en.wikipedia.org/wiki/Pound_sterling#Value
    The bulk of this went into housing and the stock market. Pull up a graph of M4 Sterling and compare it with house prices.

    You won’t stop house prices rising until you take the magic money tree away from private, profit seeking companies.
  • commented 2017-07-01 10:44:05 +0100
    @Mike. I agree that house price inflation has been largely enabled by the increase in leverage/income multiple provided by banks over the last few decades. However that was first prompted by people having to compete more for somewhere to live. Even if population didn’t increase much as a pcnt over 97 to 07 the way we live has increased competition for houses. People living longer means more people live in houses that were big enough for a family that has now grown up and moved out. Hence 30 years ago the 2 adults and 2 children lived in one house, they now live in 3 houses. This effect is increased by people living alone or in smaller families which we are doing more of .. basically anything that reduces the person per dwelling ratio will increase competition for dwellings.

    Image if overnight by some magic the number of houses in the UK doubled… don’t you think prices would fall overall? There would be high competition between the builders of all the empty places to sell them quickly before they needed to spend money on maintaining them. This would drive down the prices they demanded.

    So I agree the income ratio for mortgages needs to be controlled but we also just need more places to live.
  • commented 2016-06-10 20:07:05 +0100
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  • commented 2016-01-04 20:43:55 +0000
    I fully support your aims, but your root cause is mistaken. Houses are unaffordable in the UK because of new money created whenever a high street bank grants a mortgage {ref: “Money Creation in the modern economy”, Bank of England Q1 2014, or Wikipedia “Money Creation” or many other sources]. It is impossible to build houses faster than banks create money from fresh air. Therefore ANY demand – which will always be present as people move jobs, demographics change etc – is inevitably going to push prices up faster than inflation. If the UK was short of houses there would not be 200,000 empty homes in the UK. It is entirely an affordability issue: for example below is some data referenced to your 1997 point of prices @ 3.5 salary.
    1997 – 2007 crash:
    Housing stock increase: 8%
    Population increase: 5%
    Mortgage lending increase: 307%
    House price increase: 206%.
    Clearly supply and demand does not set house prices. Fortunately this indicates a way to achieve your aims: house price sanity can be restored by stripping private banks of the power to create money. The UK Parliament has done this before (partially in response to a property bubble): the Bank Charter Act 1844. For a modern version, check the Vollgeld Initiative in Switzerland, due to which this exact point will be put to referendum.
    If you’ve got this far then well done. Happy to discuss in detail, email me.
    MikeyG63.