Homes no one can afford

What can be done about a price bubble? If, as has been suggested in recent months, there is a housing bubble in the UK, is it anybody’s job to step up, pin in hand, and pop it?

In the US, the Federal Reserve Bank issued a statement in early 2012, stating that it’s mandate included keeping inflation below 2 per cent “thereby fostering price stability and moderate long-term interest rates and enhancing the [Federal Open Market Committee’s] ability to promote maximum employment.” The Bank of England has eight Strategic Priorities listed on its website—and like the Fed, nowhere does it mention confronting asset price bubbles.

Such asset price bubbles are not good news. They pose a nasty economic hazard and an equally troublesome political conundrum. If nothing is done, the bubble only gets bigger; and nothing can expand for ever—as physics indicates, not even the Universe can do so. So the answer then is to pop the bubble as soon as possible, reasoning that it will burst anyway, so best to do it at the smallest point possible, ie now. But what politician would be re-elected if he or she collapsed the value of the homes of the electorate? It is politically impossible.

Today, the Office for National Statistics revealed that English homes are worth more than at the 2008 pre-crash peak. In the South East, prices are rising at 2.6 per cent per annum. In London, prices are increasing at 9.7 per cent per year.

The government’s Help to Buy programme, whereby first time buyers are assisted in becoming home-owners is laudable. But it is also entirely pro-cyclical. It stokes the boom, encouraging people to buy homes, so inflating the bubble even further.

An understandable retort at this point is: But so what? If people’s homes are becoming more valuable, that’s great—Britain’s economy is so frail at present that anything that helps the recovery is welcome. And if house price rises are to sustain us in times of need, then why not simply “let them eat bricks”.

There are three reasons for which this is the wrong reaction. First if property prices keep on rising, then fewer and fewer people will be able to afford them—and what is the point of homes that people cannot afford? Second, as a bubble becomes larger, buyers—and also Government though its Help to Buy scheme—will accrue ever more debt as prices rise, which means that, thirdly, if the housing market does collapse, then the fall-out will be all the worse. People will have mortgages greater in value than the value of the homes on which they are secured: they will be in negative equity, saddled with debt for decades. Banks will have to write off large amounts of bad loans. The government will find itself the owner of billions in bad housing debt.

So what will the Government do about this bubble? The answer—nothing. The only real option is to build more homes, not just in the south east, but everywhere—much has been said about the need for housing starts, but little has been done about it. Vince Cable had a good idea about confining the Right to Buy scheme to areas of the country in which prices are inflating at the slowest rate. It’s a good idea—but as it is Cable’s suggestion, the Government is unlikely to adopt it.

And so the asset price bubble is expanding apace, the government is standing behind loans to home buyers at the bottom of the market, all around there is growing consumer debt and an increasing sense of a market being buoyed up by nothing than its own momentum.

No one at present has a plan to do anything about this.