When David Cameron said this week that he is worried his children would not be able to afford to buy their own homes, he struck on one of the greatest economic problems of his premiership. The old British promise is that if you work hard and make the right decisions, you can advance in life and own your own home. This is the ladder that most aspire to climb. But for an entire generation, even the hope of home ownership is slipping out of view. A huge number of young Britons cannot hope to have the kind of life their parents enjoyed.
The Prime Minister must know he is on dangerous ground here. His own children, of course, will not have to worry — just as he did not have to worry. A fat handout from the Bank of Mum and Dad will be available to help the young Camerons raise a deposit for their first homes. It is people who hail from families with resources of rather less than the Camerons’ estimated £30 million who face being frozen out of the housing market for life. Or at least for as long as the era of rock-bottom interest rates lasts.
When George Osborne spoke about a “dangerous cocktail” of risk, he blamed everyone but himself: Korean missiles, spluttering Chinese growth, a choking European recovery. In fact, the biggest risk is that the Chancellor has built his recovery on a mountain of debt. It’s very cheap debt, to be sure, but he has increased the national debt burden more in five years than Labour did over 13 years. Nailing interest rates to the floor pours more vodka into the economic punch bowl: with every pound he borrows, the Chancellor fortifies his own ‘dangerous cocktail’. This creates all kinds of risks in an economy, and all kinds of crazy side effects. One of them is sky high property prices.
Just as last time, we have learnt not to recognise the side effects of cheap debt. We like to blame all kinds of people for high house prices: immigrants (and their children) who add to the population faster than houses can be built for them. The rich foreigners who buy up apartments in London, jacking up the prices of property across the south-east of England. Ed Miliband tried denouncing housing companies and landlords as ‘predators’. Then there’s the councils who refuse planning permission. Yet perhaps the greatest single factor is one that no one seems willing to acknowledge: the curse of low rates.
Britain is now well into a healthy economic recovery — the strongest in Europe — and still the Bank of England’s base rate wallows at an emergency 0.5 per cent. The cost of mortgages has also collapsed. Before the crash, the average rate for a 75 per cent mortgage was 6 per cent; now it is under 2 per cent. The maths is not difficult. The cost of borrowing is a third of what it was, so people can afford to borrow three times what they once did, on the same monthly repayment. Asset prices rise accordingly. We have been witnessing the era of low credit forcing house prices up by an extraordinary amount — to the delight of those who already owned expensive property, and to the dismay of those who do not.
This has been an extraordinary windfall to those who owned expensive houses in the first place. George Osborne’s six-bedroom house has risen in value by about £2 million since he bought it ten years ago. Ed Miliband has ended up owning one of the ‘mansions’ he wanted to tax. He bought his two–kitchened house for £1.6 million seven years ago. It’s now worth more than £2.5 million. The boom is not restricted to housing: the era of cheap credit has sent the value of all kinds of rare assets through the roof. During the crash, a vintage Ferrari 250 could be bought for £1.2 million: they now sell for about £10 million.
Rather than address the asset bubble, Cameron’s government has helped to inflate it further. With George Osborne’s Help to Buy scheme, the government is making mortgages artificially cheap in the same way that George W. Bush’s administration did when creating the great sub-prime mortgage disaster. It is as if nothing has been learned from that crash. The Prime Minister’s initiative this week has a little more to be said for it. Granting planning permission for 13,000 new homes on surplus public land is welcome, but some 240,000 are needed each year just to keep pace with population growth.
As Communities Secretary Greg Clark observed this week, 90 per cent of people consistently say that they would like to own their own home. The gap between this group and the 63 per cent who actually do own their own home represents a vast natural constituency for the Conservatives, and one whose interests they are failing to serve. They should do this by stabilising the market, not rigging the market.
For as long as the era of cheap credit continues, asset prices will remain sky-high — representing a grave injustice to young people who wish to make the same journey through life as their parents. Once, the Conservatives spoke about the danger of treating cheap debt as a horn of plenty. Now, Osborne is presiding over a recovery that is expected to see household debt ratios rise to where they were before the crash.
And the Bank of England? Osborne talks about rate rises being inevitable but the rise envisaged is barely worthy of the name. The Bank is expected to raise rates at a glacial speed — to just 1.75 per cent by the end of the decade. At this rate, it would take half a century for things to get back to normal.
The British economic recovery will not be complete until interest rates are back to their historical average. Until that happens, we cannot expect houses to return to an affordable rate – and nor will we be able to tell how much of the recovery is real and how much of it is still a debt-fuelled illusion. Britain is, still, increasing debt this year faster than almost any other country in Europe. For all his rhetoric, the Chancellor has not broken his debt addiction – and he is quite right to worry about the consequences.