(need registration to read). I think the writer is spot on.
Give the falling property market a push
By Neil O’Brien
Published: August 3 2010 20:14 | Last updated: August 3 2010 20:14
Last month British house prices fell for the first time since February, prompting gloomy headlines about a possible second recession. The fact that rising house prices are reported as a good news story, however, remains rather curious. We do not celebrate when a loaf of bread goes up in price, or cheer for a hike in the cost of a car. For homeowners, of course, the rising cost of houses is offset by a rise in the value of the asset they hold. Prices also rise during good times, while recessions bring falls. But in reality rising house prices do not cause growth, they help to choke it off.
For any number of reasons, David Cameron should be taking steps to drive down the price of housing. For a cash-strapped government the costs should be obvious. Expensive houses mean bigger wage demands from public sector workers. They have also pushed up the housing benefit bill by £8bn since 1997, while blocking people from leaving social housing, doubling the waiting list and locking many families in dependency. Rising prices have also choked off a right-to-buy programme that used to generate billions in revenues.
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For individuals the cost is less obvious, but no less real. Property prices are embodied in everything you consume. The sandwich you buy at lunchtime costs more if the person who made it has to pay higher rent. Furthermore, rising house prices transfer wealth from poor to rich, and from the young to the baby boomers. They contribute to the inter-generational tension that Tory minister and thinker David Willetts has christened “The Pinch”. By 2009, nine out of 10 first-time buyers needed support from their parents, entrenching the transmission of wealth or poverty from one generation to another.
It would be helpful, therefore, to reduce the price of housing. Fortunately, decades of rising prices have mainly been the result of supply constraints imposed by the government itself. To get a sense of how much value is locked up by our rigid planning system, look at how much permission is worth. Land designated for agriculture costs, on average, less than £20,000 a hectare. The same land with residential planning permission costs an astounding £1.87m.
Tight planning controls mean less house-building, and therefore higher prices. Government figures suggest that 100,000 fewer new homes every year raises prices by 12-14 per cent over the next decade. As Alex Morton points out in a forthcoming paper for Policy Exchange, the past decade saw just 160,000 new homes a year – less than half the 360,000 built each year in the 1960s. Our new homes are smaller too, making the real reduction in supply even greater.
As the homelessness charity Shelter recently pointed out, if other costs had risen as fast as house prices since 1970, a supermarket chicken would now cost £47. Indeed, this constriction in supply is now so severe that home ownership rates have started to fall back for the first time since the first world war. Of course, it is not wrong to want to stop development near your house. Indeed, it is often entirely rational. But the social costs are substantial, if more widely dispersed.
Setting a new target to reduce the price of housing would make this trade-off much more visible. How would a target work? Just as with the Bank of England, the minister for housing could be instructed to write a letter to the chancellor when prices veer too far off target. Such a letter would set out steps to get them back on track. Alternatively, rising prices could automatically trigger a relaxation of planning laws.
Such a target need not result in the type of negative equity that so frightens homeowners. Professor Tim Leunig at the London School of Economics has shown that prices could fall by “around 2 per cent in nominal terms per year” without creating or increasing negative equity, because people pay off their mortgages at the same time. If we were less ambitious, we could target nominal stability over the long term, and simply let inflation reduce the real price.
To be fair, the new government is reforming planning law. But its objective is not clear. Ultimately, if we do not want spiralling prices, then, as Mr Cameron noted during the election, “we’ve got to build more houses”. That is the right aspiration, but to achieve it his government should be bolder, and move to break Britain’s house price ratchet once and for all.
The writer is the director of the think-tank Policy Exchange