The relevance of house prices to the welfare state might seem pretty weak. In fact, there is more of a connection than one might think. Centralised state planning of permissions for development was started, as I understand it, by the same post-war Attlee administration that was responsible for various other aspects of the welfare state. The restrictive planning was intended, like much else, for the benefit of the people. But it has resulted in property in Britain being phenomenally expensive. This is to the disadvantage, above all, of the poor. This fact may be only tangential to the article on trends in property prices below which I wrote and which appeared in the Daily Express today. But I am posting it anyway. I expect to write more on British housing policy later.
House prices are on the way up again. Hometrack says that they rose 0.6 per cent in April, the biggest increase in a single month since 2004. Across the country, the proportion of estate agents reporting lower prices has fallen from half, last Autumn, to less than five per cent now.
It is true that the Nationwide reported only a nominal rise in April. But its price increase for March was a big one. The exact timing does not matter. Overall, virtually all price reports now tell us that the property market is on the move this spring. Those of us thinking of buying should probably get a move on. Those thinking of selling can probably relax a little. The buyers are on their way.
How far can this new upturn go? Are the boom conditions of the past back or will it fizzle out? We need a bit of history to put it in context:
In 1995, only eleven years ago, the average price of a home in Britain was £51,000. The average price is now over £160,000. There has been a massive increase. In the second half of last year, the remarkable boom finally slowed down and then stopped. Property prices actually fell. In some areas, including London, prices fell quite noticeably.
What caused the astonishing boom in British property prices which started well before 1995? There are many factors but one of the most crucial was surely the major reduction in interest rates. In the 1980s, mortgage rates were often well over ten per cent. It cost a great deal to borrow. Lower interest rates brought the cost right down, increasing the fire-power of competing buyers. A second factor has been the much great competition among lenders. One used to have to get into a mortgage queue in order to borrow. Borrowers were supplicants hoping to get a favourable hearing. Now the queue is among lenders - to hand over their money. The cost and availability of mortgages have both improved dramatically.
Price rises came to a grinding halt last year largely because interest rates were on the rise again. This increased the cost of borrowing and pushed up unemployment, too, another dampener.
But now, most people believe that interest rates are near their peak. Borrowers are no longer in such fear that interest rates might continue upwards to a level that they cannot manage.
So how far can the current rise go? It will not be a boom as extraordinary as the one we had over the past two decades. The one-off radical drop in interest rates cannot be repeated. But prices are likely to continue rising in a way that will substantially affect the wealth of all who own property.
In the short term, the latest upward trend was only established in October and there would need to be a compelling reason for it to run out of steam in only half a year. Secondly the stockmarket has been rising for three years now. The bull market in shares augurs well for houses because the stockmarket tends to be ahead of the game. One direct effect is that those working in the City are getting big bonuses again.
Over the past few years, London prices have not risen as fast as those in the rest of the country. But aided by these City bonuses, London is now pushing ahead at the fastest clip. The good news for the rest of the country is that rises in London prices tend to spread out over the following years.
Not everything is positive. Council tax has become a bigger burden because Gordon Brown has found it to be a good way of hiding the overall increase in his taxation. Council tax is primarily levied on housing, not people. So it has become a kind of tax on home ownership. Mr Brown has also hit housing through increased stamp duty which, since the rate of duty increases with prices, is now hitting more and more people harder and harder. The same applies to inheritance tax. People do not want to die leaving their children an asset which will, in part, be taxed at 40 per cent. So the elderly will increasingly be more inclined to sell, or trade down.
More immediately, our electricity and gas bills have gone up and will probably be bumped up again. That reduces the cash left for servicing mortgages.
But the positives are currently outweighing these negatives and there seems no reason to think this will change soon. So prices will probably continue to rise this year and, in the long term, prices will be virtually forced to rise. The logic seems inescapable: demand for housing in Britain keeps on rising but the supply is hardly budging at all. It is a pressure cooker.
Growing demand comes from the way we increasingly live in small households because more of us are elderly or divorced. It comes from growing incomes, inflation and immigration, too. In response, new housing amounts to a mere one per cent of the existing stock. Planning law in Britain is highly restrictive. So the increase in demand cannot be met by an equivalent increase in supply. Prices have to rise. In the coming years it won't be at the 17 per cent a year rate which it was for the recent two decades. But, by combining inflation with the growth in incomes and then adding in something for the 'pressure cooker effect', it is easy to come up with a long term average of at least six per cent a year and quite possibly seven or eight per cent.
What happens if property prices rise at an average of seven per cent a year? Prices nearly double in ten years. Housing remains a good investment.
Posted by James Bartholomew • Indexed in Housing
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People are 'willing' because they need somewhere to live; it's not a new carpet we're talking about. The prices aren't ridiculous; they are very high as a result of supply and demand. But why on earth aren't houses being built at the required rate? I have no doubt planning restrictions play a large part in that. But what of these claims by groups such as the CPRE (Campaign to Protect Rural England) that developers are holding out on building homes on land already cleared for development in order to maintain the high prices? Doesn't make sense to me but I'd like to get to the bottom of it(something you can supply currently sells for a high price, so don't sell any of it ?????). I'm not sure the CPRE should be taken too seriously though. They believe the way to solve the housing crisis is for the government to provide more social housing. I assume this means that government built Soviet-style blocks paid for with other people's money somehow don't impact negatively on our environment like privately built housing does. It's funny; I'd always thought the exact opposite.
Posted by: Brad at May 3, 2006 06:58 PM
So it has become a kind of tax on home ownership.
If only it was a tax on home ownership! (Or better yet on land ownership, but that is another debate). Don't forget that people renting property generally have to pay council tax as well.
Posted by: Ed at May 8, 2006 02:10 PM
A century ago a house & a car cost about the same. Now cars are are about 1/20th & considerably more comfortable. If modern manufacturing technology & mass production (pioneered by Mr Ford)was used together with land actually being allowed to be built on most of that difference could be removed.
Posted by: Neil Craig at May 11, 2006 03:11 PM
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Do you think incomes are rising fast enough to keep up with the rate of increase of household bills for mortgage payments to roughly double in 10 more years?
Our economy is heavily dependent on debt right now - government debt keeping the public sector employed, consumers reliant on debt to pay for new goods through credit cards and mortgage equity withdrawl.
At some point servicing debt, even at our historically low and stable interest rates, becomes high enough that consumer spending slows significantly, unemployement goes up as a result, nobody can afford more expensive houses, the market stagnates, we hit a recession and either prices crash or we head the way of Japan in the 90's.
As long as people are willing to pay ridiculous prices for houses, requiring both partners to be in full-time employment to pay the mortgage, this will continue.
Posted by: pl at May 3, 2006 09:12 AM