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.
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.