SPECIAL FEATURE: Housing bubble is political footsie
The value of bricks and mortar has long been engrained in the British psyche and governments know that.
Thatcher inspired a generation of social housing tenants to aspire to own their own home – switching that psyche from seeing a house as a home to a house as an investment for the future.
Subsequent governments have hopped on the housing bandwagon and rarely do politicians fail to include at least a nod to housing in a Budget statement.
The bald fact is – if you own your own home and prices are rising, you feel richer.
Engendering this feeling (note – not necessarily fact) is what much of the help in the housing market is really about.
Lest we forget, there is a general election approaching and while the Tories are still hammering the point that “we’re on the path to recovery but there’s still more austerity to come” they are also acutely aware that if people feel poorer they will be disillusioned and less likely to vote for that austerity.
Labour has very much keyed in to this dynamic. Its battle ground is the cost of living and it’s chosen rising energy prices as the piece de resistance in its election manifesto. People identify with the fear and frustration of rising bills in the face of a static wage.
The Tories meanwhile are playing the other side of the field. We may feel poorer in terms of the pennies in our pocket but for homeowners, headlines are giving a boost.
House prices around the country are recovering and in London and the South East – the Conservative heartland – they are roaring ahead.
Help for the mortgage market is behind this. A veritable cacophony of government backed schemes has finally got the organ grinder working again.
Help to Buy – a combination of government funded equity loans to top up people’s deposits and mortgage insurance to make it cheaper for banks to offer 95% mortgages – has given builders enough confidence that they have started to build again.
This is critical. It drives activity and income for a whole range of ancillary industries which boosts incomes and the wider economy. And it helps to relieve some pressure on house prices by increasing the supply of homes (at least a bit).
The other scheme – Funding for Lending – has offered mortgage lenders access to cheaper funding if they prove they lend that funding to families and small businesses. The government announced in the past couple of weeks that this support will stop for residential mortgage lending from the end of this month – slightly earlier than originally planned.
All of this adds up to several rather complicated outcomes. Because they are complicated – Labour and the Liberal Democrats are able to cry “house price bubble ahead!”
In fact, I am not convinced that this is where we will end up.
Government is not only aware that higher house prices will boost votes; it is also aware that a burst bubble is very bad news.
For this reason the Bank of England has been given powers to pour cold water on a bubble should it start to develop – that is part of the reason the Funding for Lending scheme has been turned off for housing finance from January 2014.
It should also be remembered that rises and falls given in percentage terms can be misleading.
A house worth £200,000 suffering the worst falls would have lost 40% of its value from 2008 to the bottom of the market making it worth £120,000.
That same property, gaining 40% in value since then (much more than is being seen around the country on average – even in London) is still only worth £168,000.
Hardly a house price bubble.
Today we have seen statistics from RICS predicting a bumper year for the housing market in 2014. Forecasts from the Council of Mortgage Lenders also today are equally optimistic, predicting that 15% more mortgages will be lent next year than were this year – a good thing for all those who want to buy or move house.
But the CML is deliberately cautious and careful to underline its belief that an “unbridled” housing boom is unlikely and lending is still low by historical standards.
Indeed the total lent by banks and building societies on mortgages this year is still less than half of what it was in 2007 when gross lending peaked at £362bn.
The difference between what they lent out and took back from mortgages repaid is also staggering. The CML estimates this will be £10bn for the whole of 2013 while at its peak, the difference reached over £100bn.
RICS’ figures meanwhile show that the balance of surveyors expecting further house price gains rose to 59% in November, a 14- year high.
The real danger is that money is lent to people who cannot afford to repay it. Too much money and not enough customers is what caused the lending boom in 2007 which in turn contributed to falling house prices when that lending contracted dramatically in 2008.
It is good news that the Funding for Lending scheme is about to be witched off. The wholesale money markets are starting to function independently again and the Bank of England is aware of restricting that return to “too much money” to lend.
While fears of a house price bubble will help prevent one, they are overcooked. And the continued help for the mortgage market has another purpose in addition to making homeowners/voters feel more positive.
The housing market is sometimes referred to as the engine of the British economy. Getting this engine into gear has taken a long time. Now that it finally is, we are seeing the fruits it is helping to bear in the wider economy.
We are six and a half years on from the images of savers queuing around the block at Northern Rock. It’s been bleak, but Britain is slowly getting back to health. The danger of cracking down on this phantom housing bubble too soon is that turning that engine off will have more lasting consequences for us all than just putting a lid on house prices.