House prices in Britain have bounced back from the recession so fast and furiously that there is anxiety among the well-housed MPs and bankers that ordinary people, even those earning quite healthy salaries, cannot afford to ‘get a foot on the housing ladder’. (It’s the sort of thing they fret about in an election year.)
So what does the Bank of England do, to prick the growing housing bubble?
Make it harder for ordinary people to get mortgages.
First, by – well, making it harder for lenders to agree to lend, by toughening-up the individual lending criteria, ostensibly to prevent borrowers becoming overstretched – as if they haven’t always been. No-one ever buys a house they can afford to buy. And secondly, by threatening to raise interest rates sooner than they would otherwise have done.
Apart from making the economic outlook even rosier for buy-to-let landlords, this regressive policy, bearing as it does on the majority of less-well-off housebuyers, makes no sense on many levels. For one, it will reduce the supply of affordable housing, as the housing now becomes less affordable to finance. Is that what Governor Carney intended?
Houses are not tins of baked beans, or iPhones. Every house, even on an estate of pretty similar properties, is different. Different style, different number of rooms, different location, different outlook, different running costs. And every homebuyer is different. Different income, different family circumstances, different job, different hobbies, different aspirations, different set of emotional baggage surrounding their housing preferences.
Then, house prices are negotiable quantities. No two houses are the same price, and no-one expects to pay the asking price, especially out here in the sticks. Only in London will you find yourself in a bidding war at some ridiculous figure.
So a one-size-fits-all macro-economic solution can’t work. Housing is not susceptible to analysis on a simple supply-demand graph, with the two curves intersecting at the locus of satisfaction – the price – where a simple change to either the supply or the demand side will bring all prices down.
You can look at it like that, but in a market where every transaction is individual, you will find it almost impossible to affect or even to predict either the supply or the demand – or indeed the price – on a global scale. Both will vary naturally from region to region of the country, depending on externals like the availability of jobs and amenities, the desirability or otherwise of certain locations, the local economy, the appeal to buyers’ emotions.
You can quickly build more estates on the edges of country towns and villages, but you can’t raise the production quota for quaint old country cottages and manor houses, that are also in demand – and you can’t easily improve the transportation infrastructure, the availability of work, schools, shops and pubs.
In a city, it’s harder to find space to build. You can build upwards, but you still need the groundspace, while the desire for single dwellings with gardens is as strong as ever. Not everyone likes to live in the sky.
On the demand side, two years ago lenders weren’t lending easily to homebuyers because they’d been forced in the wake of the banking crash to increase their capital reserves. And they’d already been burned in 2007/8 by lending on too high a loan-to-value ratio, they weren’t going to make that mistake again. The ‘sub-prime’ market, we were told, had been responsible for almost bringing down the entire banking system of America. (Actually, economic recession was the precursor of the sub-prime defaults, but that is another Post.)
Now lenders were raising absurd objections. In my own case, the sale of my house fell through because the building society valuer claimed it needed a new roof. Two further surveys proved that it absolutely didn’t, but by then the damage was done, the buyer had taken fright.
Yet not all borrowers on high ratios defaulted on their loans. People proved they can adapt.
The Bank of England’s latest wheeze, to force lenders to grill mortgage applicants for three hours about when they plan to start a family, what size of engine has their car got, and how many times a week do they eat out, to base the amount they’re prepared to lend on a scientific analysis of what they imagine is the applicant’s ability to repay, entirely ignores the obvious fact that when faced with adversity, people adapt. They change their behaviour, cut-back, get a third job. They don’t just throw in the towel, they tighten their belts and wait for better times to return. While, in a rising market, the lender cannot lose: they have first call on the property and in extremis can repossess it.
Whereas, by restricting lending again, on top of the unofficial lending squeeze the banks are already operating, the bank is making it even harder for first-time buyers to get on the ladder. We will swing rapidly from threatened unbridled economic growth to a new recession. The ultimate effect will not be to increase the supply of new housing, thereby encouraging prices to fall, because if no-one can buy, no-one will build. And if vendors cannot achieve the prices they need to move, they won’t move.
And then, we need to consider whether there really is a housing bubble, anywhere other than in the overdeveloped and under-supplied South-East of England, in London (a different economy altogether) and in just one or two favoured areas around the country? Prices have been rising differentially, varying from continuing to flatline in some areas to an absurd 18% increase in London in 2013/14, driven by foreign buyers seeking tax shelter. Penalising all buyers nationally fails to take these major price differences into account, is regressive and punishes both buyers and sellers in the less-favoured regions.
The best thing the Bank of England and the Government could do right now is to promote economic growth in the regions, to make them more attractive to working homebuyers.
Wales, for instance, has a regional salary level some 12% below that of England as a whole. If a large helicopter could lift my house and deposit it in central London, the area where I was born and brought up, you would get no change out of £2.5 million for it. As it is, I cannot sell it for £150,000. I live in a perfectly agreeable area, on the edge of a university town next the sea, within an easy walk of all amenities and the main local employers. But no-one is moving to Wales. It remains an economically underdeveloped, uninviting region.
If the Bank and the Treasury could spread the wealth without falling into the old trap of grant-assisting development – an approach which, with €1.6 billion of EU Objective One funding led in Wales merely to an exponential growth in the number of quangos created to spend the money, expenditure upwards of £60 million on promoting the minority Welsh language, and to no visible increase in jobs, infrastructure improvements or inward investment – or, indeed, to the number of Welsh-speakers – then perhaps it would reduce the pressure on housing in London and the South-East, and the bubble would deflate softly and quietly, I could sell my house and retire abroad.
Instead they are just making it harder for people in the low-income regions to buy and sell properties. Of course, in London and the South-East it will have no effect, other than to push-up wages and bonuses in line with housing costs. Rich people don’t need mortgages.
It seems we have a new Governor of the Bank of England who is a brilliant man, no doubt, but somewhat lacking in the lateral thinking department. One feels that perhaps he should stick to banking, as the UK property market seems to be something of a mystery to him, being as he is a thoughtful and rational, not to say boring, Canadian.
A small estate of smaller houses has been put up across the road. I would like to say it has mushroomed, but it has been 18 months now and the men are still busy digging and laying pipes and cables amid heaps of soil. Mushrooms would have fruited and spored by now.
Like Prince Charles’ Poundbury community in Dorset, each house has been carefully designed to be subtly organic-looking, and gaily painted in cream and white. I have tried to imagine who will live in them. At first, I imagined the usual sort of zombie neighbours from hell: men with spiders tattooed on their heads; obese teenage mothers pushing prams full of sliced, white bread (oh, sorry, that’s your child); devil dogs; abandoned cars; a forest of satellite dishes, Romanians.
The other day, however, I noticed something really scary. None of the houses have chimneys! It was a clue. Now, I see an estate of bland, quasi-autonomous cybercouples, polite as Mormons, quietly humming as they go about their inscrutable business, wishing one another good morning over portion-sized bowls of cornflakes, using Bluetooth-enabled devices to open and close their curtains and quiz the fridge on its contents, self-driving Google cars in their tiny driveways….