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June 18 2004 http://www.timesonline.co.uk/article/0,,482-1149279,00.html

The hooligan housing lobby has gone berserk

Simon Jenkins

EVERY four years hooligan economists go berserk. Tanked up on alco-stats they charge across the countryside, hurling chairs into hedges and tipping trees into duckponds. They tattoo their faces with skulls-and-bulldozers and their bottoms with Housebuilder Federation logos. They chant "Nimby Bastards","John Prescott OK" and "Smash the F****** Greenbelt". They are a disgrace to England 7 and to economics.

This week saw three gangs on the rampage, Shelter, the Joseph Rowntree Trust, and the Treasury. First into mindless destruction was Shelter. Bellowing political correctness it shrieked an "affordability crisis" that was driving mortgage payments to "unsustainable levels" for first-time buyers. It was 40 per cent harder than a decade ago for someone on "an average regional income" to meet his mortgage payments. Build more houses. This was a crisis. Next came Rowntree. Its concern was no less bourgeois. It howled that well-to-do parents were having to give their children an average of 317,000 to get a first home, rising to 324,000 in the South East. Some parents were even taking out loans secured on their own properties to help. Build more houses. This was a crisis.

Finally came smashing windows and breaking bottles from Mervyn King and Gordon Brown. The Governor of the Bank of England suggested that house prices were too high and would crash, leading to a crisis. The Chancellor suggested that house prices were too high and would not crash. This would lead to a crisis. Build more houses. To a hooligan economist the word housing always goes with crisis. At such moments the layman instinctively turns to psychology. Did the economists suffer from attention deficit disorder? Did they miss out on the theory of markets or the glories of marginal utility? Did their parents serve them enough fish?

Surely house prices rise if people get richer and want to spend more on property. Governments can switch public money to make prices rise faster or slower. But they cannot make more land. All they can do is abandon countryside to town, but even that is finite.

Treasury statistics on Britain's so-called housing "shortage" are among the most mendacious that department has ever published. The notorious Barker report, produced at the bidding of the construction lobby, assembled hair-raising figures of "housing need" on the archaic basis of county household formation. This ignored prices, taxes, migration and just about everything. It was like deciding how many roads were "needed" by counting parked cars, or like concluding that Britain "needed" more retailers because Marks & Spencer is worth 39 billion. In other words, it is dumb.

There is no housing shortage in Britain. Millions are not sleeping each night on the streets. The Empty Homes Agency records almost a million properties going begging, including in the South East. Housing in fashionable locations is expensive but to call that a shortage is a hangover from socialist planning. The housing lobby offers only a banality, that not everyone can have the house they might like.

The price of houses has been rising for the past five years for the simple reason that people are better able to afford them. The price is immaterial in itself, except to owners and those lucky enough to be able to buy outright. For those who must borrow what matters is the cost of the house plus the borrowing. That borrowing is historically dirt cheap. Buyers can now service mortgages of three times earnings, against 2.4 times a decade ago. With fixed rates they can plan to borrow even more. As a result, average mortgage payments as a percentage of average household income are still below their last peak in 1990. Then the ratio was 20.5 per cent. Today it is 16.7 per cent. Even an economist can see that is lower.

Shelter carefully bases its "affordability crisis" on 1994. This is most convenient since by then the peak was passed and the mortgage-income ratio was down to 12.5 per cent. By comparing that figure with today's 16.7 per cent Shelter can trumpet a "crisis". Yet comparing the peak of a cycle with a trough is absurd. In his search for a crisis, Mr King turns to one figure that is at a record high, the crude ratio of house prices to earnings. But this ignores cheap borrowing. It is also in large part due to the boom in investors buying cheap urban properties to let. That boom has been so massive as to lead to falling rents, a fall that must help the bottom end of the housing market. I thought that was the housing lobby's chief concern.

Indeed the lobbyists' obsession with first-time buyers is odd. Getting people on to the housing ladder might be a worry for politicians, though surely not by means that merely drive up prices. A better policy all round would be to engineer the now promised crash. If prices fall, owners may suffer, but both buyers and renters would be better off. Shelter, Rowntree and the Chancellor should be cheering a crash. Yet I bet they declare it a crisis, as everyone did the "negative equity" crash of the early 1990s.

The British love hoarding property and governments have courted popularity by helping them. Since the war, the Exchequer has funnelled billions of pounds into mortgage subsidies for middle-class voters and rent subsidies for working-class ones. The public has paid through higher taxes and higher house prices. The beneficial outcome has been better housing all round. The British live more spaciously than any other nation in Europe. Millions of city-dwellers enjoy their own gardens, private as well as public, a boon unimaginable abroad. Now they are being encouraged to spend yet more on property by the collapse of pensions investment, partly caused by Mr Brown's tax on pension funds.

So-called "pensions refugees"are turning to second homes, helping rural North Wales, East Anglia and Cumbria to record rises in house prices. Second homes have doubled their total value in five years to a staggering 340 billion. Such purchases are further encouraged by Britain's low property taxes. A New Yorker with a country property would expect to pay ten times what his London equivalent pays in local taxes, even if the present 50 per cent discount were ended. Second homes are now 10 per cent of households in many southern English counties. Yet Mr Prescott's statisticians regard them as answering to "housing need". We are mad.

The lobbyists are blind to all this and look only at supply. They believe that the way to cut house prices is by breakneck building. Builders naturally want this on cheap and lovely green fields well away from derelict cities. They also claim that new building has slowed, though this is only because the mass demolitions of the 1960s and 1970s have ceased and hundreds of council estates have been tipped into the market. With them have come thousands of green acres prised out of farmland on government instructions. Yet this new supply has had no noticeable impact on housing costs. One reason is that housebuilders tend to hoard planning permissions rather than risk pushing down prices.

Demand and not supply is the issue. The boom will pass. There is no housing crisis, simply a market mechanism wrestling with circumstances. What is inexcusable is for lobbyists from both Left and Right to use a cyclical upturn in prices to lobby for an end to countryside protection. The thesis that house prices are determined by rich country dwellers holding back the urban poor is nonsense. If houses are expensive, it is the result of Treasury policy.

Yet an end of the present system of countryside protection is what the lobbyists have won from Mr Brown and Mr Prescott in the forthcoming planning Bill. It will be devastating. If the Government really wants to damp down housing demand, it should raise interest rates and tax living space. Prices would fall and first-time buyers cheer. If instead ministers proceed with their Bill, it will seem no more than a vendetta against rural Britain.