As Laura Perrins wrote on TCW last week, the topic that is really vexing the young Corbynistas is house prices.
I wonder if Hammond and May, and before them Cameron and Osborne, really understood what drives house prices. If they wanted house prices down, they could get them down tomorrow.
The important thing to remember is that house prices are determined by several important factors, not just one.
The first: It is not just the number of people per se that raises prices – if it were that, India would have some of the highest house prices in the world, yet this is obviously not true – but the number of ‘eligible people’. That means those who can either buy a house with cash or have a good enough credit rating and job to warrant a mortgage, or who either pay rent themselves or are funded by the government to pay rent. And this is the crux of the problem: housing benefit pushes up the prices of housing for everyone, as a housing benefit recipient’s ‘bid’ is effectively stronger than anyone else’s because the government will pay ‘the going rate’, whatever that is. This is particularly the case in London. The solution is to give people an absolute amount of housing benefit and if that means that they have to move out of rented accommodation in Kensington and Chelsea to Norfolk or Hull or Redbridge, so be it.
Many migrants are getting housing benefit or tax credits towards their rent almost immediately, giving them instant effective housing demand. This is the important point I am making. Migration without money does not drive rents or house prices, it is tax credits and housing benefit that does this.
The second factor is where the houses are. The current housing crisis could be called the ‘Zone 2’ crisis because this central area of London is where a lot of young people want to live and think that they have a ‘right’ to live. It is particularly in London and the South East where house prices are completely out of sync with incomes. A quick look at Rightmove will show dozens of places, mostly in the north, where you can still buy a house for £100,000. In a few places such as Middlesbrough we are still knocking down houses. No one wants to live there. They say there are no jobs but the real reason is desirability. Many people are home workers on the internet and still do not move.
We used to have regional economic policies to help offset these imbalances. I cannot remember the last time I heard anyone mention regional policy. How about moving the BBC to Middlesbrough for starters, followed by all the Oxford and London-based charities to which we, as taxpayers, give enormous grants? Not only would this take the pressure off the South East but it would help the job situation in Middlesbrough.
Thirdly, building regulations: Every year these get more and more onerous. I converted six barns over a period of ten years and each barn had to meet more and more electrical, glazing, insulation and window regulations. In one case, the planners made me pay £10,000 extra to have a ‘flat’ profile on the windows and doors, meaning all had to be handmade, rather than off the shelf. Each regulation adds to the costs. There is no reason why a house should cost £150,000 to build. Go to Thailand or Malaysia to see examples of perfectly decent housing produced for £50,000 or less. We built prefabs after the war. Nothing particularly wrong with them but they would never even get started as far as current building regs are concerned.
Another driving force is the number of single-unit households, both old and young, which continues to rise exponentially. As many as 7.7million people lived alone in 2016. All these people need more separate homes so the number of units keeps increasing.
Contractors are yet another factor. Each week millions of people move Monday to Friday to work whilst having a permanent home somewhere else. For example when a bypass was built round Norwich, most of the contractors came from all over the country. So we had hundreds of rooms and houses being taken up by people who already had houses elsewhere. It’s the same with the NHS. It has thousands of subcontractors and contract workers who work for themselves, moving around the country each week. This is the result of economic policies to take the cheapest labour, not the local, or use temporary workers, rather than employ permanent staff.
Then there are interest rates: if you lower interest rates to zero, what do you expect to happen to house prices? Yields went from 15 per cent to 5 per cent in Norwich and have gone even lower in London. As a result, house prices quadrupled in Norfolk and went up ten times in London. You can get house prices down simply by raising interest rates but this will be politically unpopular with all those who currently own houses, and practically our entire economy seems to be based on house building. So by lowering prices, you then halt or even collapse your economy, thereby putting people out of work. You will make housing more affordable to those in work but surprisingly, when house prices are really collapsing, the young then do not want to buy because people want to make money on housing, not lose. (And it is jealousy that drives the Left – the ‘it’s not fair syndrome’.) Add to almost zero interest rates billions of pounds of quantitative easing (money printing) and you get the £100m house.
It was not migration that drove the price of this house but international money printing by all central banks on an industrial scale.
Finally, the crony capitalism of the Conservatives. ‘Help to Buy’ was only for new build and resulted in the price of new build versus second-hand houses going up so much that the discount these buyers received was almost all eaten up in higher prices. It also resulted in the boss of Persimmon Homes getting a £120million bonus. If there was ever a sign that this was a bad scheme, this is it.
What we are actually doing is creating a class of subprime borrowers who will find it hard to pay their mortgages once the initial subsidised period comes to an end. In effect this is how the US crisis started.
House prices will stop going up and will probably go down, at least in real terms, even if immigration continues. Why? Because interest rates are going to rise, older people with the assets are going to die and there will be no one with enough income to buy the £600,000 house on a three-times income multiple.
Housing is a sitting duck for tax increases. Momentum in Bristol have already started talking about having council tax rates of £10,000 on £1million houses.
As governments get more and more desperate for taxes, it is only a matter of time before this moves down to all privately held houses and will happen under whatever government we have.
Despite our so called ‘housing crisis’, we actually do not have a lot of people living on the streets, say 4,000 out of a population of 70million (and many of these have been offered shelter or housing they do not like).
The housing crisis is really about generational anger, that ‘the old have made all that money on houses and we cannot’.
But falling prices cause more devastation than rising ones, as places such as Middlesbrough, Mansfield and Detroit can attest.