Stable house prices won't happen by themselves

Grant Shapps has impressed in the housing brief, arguing that house prices rising faster than wages is not a good thing (with which Policy Exchange’s report, Making Housing Affordable, agreed). He has probably been encouraged by the fact that some recent polls have shown even a majority of owners want prices to stop rising. Perhaps having your kids live with you until they are 40 just isn’t a popular option? More so, rising house prices only benefit those who downsize (now rare) or own multiple properties; and in the wider economy it mostly discourages productive investment and encourages borrowing – hardly good things.

But while Shapps’s aim is laudable, he needs to be clearer about how we get there. Ultimately, there are two things to do if you want stable prices, increase supply and stabilise demand. You need to have a framework that builds stable house prices into government policy.

In terms of supply, create a planning system that builds more homes in a way that doesn’t horrify existing residents. That means attractive homes with green space, gardens and parks, and good infrastructure attached. It does not mean throwing up ugly little boxes and then being surprised when people turn NIMBY to stop their local area being trashed, as recent government policy attempted. Only 40 percent as many homes were built in the last decade as were completed in the 60s.

Regulation is crucial to controlling demand. While the FSA shouldn’t over-regulate mortgages, the period between 1999 and 2007 saw total outstanding mortgage debt rise from around £0.5 trillion to £1.2 trillion (11.6 percent compound growth). This was a typical bubble, exacerbated by Buy-to-Let lending. In the short term, greater supply could probably not have stopped this bubble (see Ireland); though in the long term it would have brought down prices more (see Ireland). Also, remember that immigration added around 1 million households to the UK’s existing 22 million in the previous decade.

To be fair, the Coalition is already moving ahead on some of this, but they need to do more, and to focus minds I suggest the following framework. First, incorporate housing costs into official inflation (the CPI measure). It is insane that housing, a huge cost for most, is not already part of it. Secondly, write an annual letter from the Housing Minister to the Prime Minister detailing annual house price rises. If prices rise by more than 5 percent a year, the minister should indicate how price rises will be slowed. This is essential. Promises of intent are one thing, accountability for decisions another.