Britain is in Another Massive Housing Bubble, but it’s Not News: its Historical Obsession with Housing Has Cost the Country its Place in the World
by Andrew Alexander
The views represented in this article are solely those of the author and may not be construed as in any way representative of the views or policies of Oxford Royale Summer Schools.
It is not fanciful to suggest that the British are obsessed with housing.
Far from being a neglected area, as is often asserted, housing policy has been arguably the most important area of domestic policy in post-war Britain.
Public demand for housing has pushed all main parties at Westminster into policy sets which have been at times counter-intuitive and often completely counter-productive from the perspective of the national economy. This position persists today and will exacerbate in 2014 under the guise of the expanded Help to Buy scheme.
The Importance of Owning a Home
The British would strongly prefer to own, rather than to rent, their own homes. This is in sharp contrast with continental Europe where, in Germany for instance, cities like Hamburg see around 80% of the population live in rented accommodation. In Britain, by contrast, being a long-term client of the rental market is not seen as desirable, not least by the significant portion of the population that aspire to own their own homes.
I think there are three broad reasons for this, two of them which are more-or-less UK specific, and it is worth outlining these prior to going into the impact of these attitudes on policy making, as it will demonstrate how deep-rooted and intractable the attitudes faced by policy makers are. That these conflict with several other deep-seated British attitudes – a love of the countryside and a belief in unspoiled nature, a dislike of strangers and a belief in the inviolability of personal space, a strong preference for the old over the new – should also be noted, and it is this fact which has prevented any British government from coming up with a coherent response to the national demand for property.
Demand for property in Britain is based foremost on the perfectly rational instinct to want to have the security and peace of mind that ownership brings, coupled with the knowledge that your largest monthly outgoing – the sum paid for lodgings – is going towards the purchase of an asset for yourself, rather than your landlord. This instinct, already strong in the British, has been augmented by demand arising from a similar instinct in foreign buyers. The absence of property rights in many emerging economies, coupled with the absence of ownership restrictions in Britain as well as iron-clad ownership law here, means that it isn’t just the British who exercise their instinct to buy in this market, it’s the world’s wealthy also.
Secondly, there is the perfectly understandable manner in which, as the property expert Sarah Beeney pointed out, the long-standing tie between property ownership and the vote in Britain has created a folk memory in which property ownership is an important badge of status and of economic, social and political maturity. This attitude has in turn helped contribute to a set of policies which have historically privileged home owners and home ownership over the remainder of the economy and so has proved itself to have more validity than we might think in the age of the expanded franchise.
Finally, demand for property comes from the experience which the British public have enjoyed of British politicians managing the economy. There is a strong sense in Britain that holdings of cash, or being reliant on a wage or pension at a time when increases are liable to be negative in real terms, is foolish – holding an asset that cannot be inflated away, such as bricks and mortar on finite land, is one way of mitigating inflationary pressure. The suspicion that the reported inflation figure – currently hovering between 2% and 3% — is under-reporting the true state of income erosion is probably correct; certainly using CPI as calculated in 1979, inflation has not been under 8% per annum since the Thatcher government, according to the calculations of one Oxford academic I was speaking with recently.
The impact of the British obsession with housing was most visible in the post-war period. It had two effects, one highly visible but of limited long-term importance, the other highly important but not easily observed.
The most visible effect was the ejection of Clement Attlee’s government in 1951. Students of modern British history often question why the reforming government which introduced a very popular welfare state once elected in 1945 was unceremoniously ejected from office just six years later. One of the main answers is that it failed to build enough new homes to keep pace with demand – a consequence of the housing portfolio being handed to Aneurin Bevan who already had his hands full with Health. In any case, the Labour government built around 1.5m council homes, but these were of notoriously poor quality. Eight new towns on the outskirts of London were also created at the time – including Crawley and Milton Keynes – although again these only took life with improved building standards under the successor administration. Indeed, it was the Conservative vision of the home-owning democracy that was largely responsible for the hegemony that the party went on to enjoy between 1951 and 1964.
While the toppling of the Labour government over housing was symbolic, more devastating was the diversion of post-war recovery funding from the U.S.A. into housing rather than industry, along German lines. As Correlli Barnett made plain in his The Audit of War series, the privileging of housing over investment in plant, machinery or infrastructure not only squandered a large capital sum on non-productive assets, it also allowed Britain’s enormous head start in infrastructure terms to be squandered. It is a nonsense to imagine that the U.S.A. decided to assist the vanquished more than the victor when Marshall aid money was distributed – Britain received $2.7bn to West Germany’s $1.7bn, a third more. Despite this enormous advantage, the UK spent one third less on industrial investment over the four years of Marshall aid — the more sentimental, more electorally pleasing role as builder of council houses appealed to a British government which had recently proved in the Second World War that it was perfectly capable of the mass organisation and planning required for an industrial policy of the type which provides the basis for Germany’s present success as an exporter.
The electorate were fully complicit in this choice. Placing housing at the centre of the 1951 Tory manifesto allowed the Conservatives to wrest control of Downing Street back from the Attlee government. Harold MacMillan was charged with building 300,000 houses, and his success proved the basis of his eventual elevation to the premiership after the Suez debacle. In other words, the British fascination with housing was such that the political class were incapable of producing the capital investment required for a modern market economy and were instead reduced to attempting to fix the rate of sterling and making interventions in the gold market in order to maintain world power status which they would not invest to secure, hence the frequent sterling crisises between the Attlee and Thatcher eras.
The Right to Buy
The Conservative dream of a home-owning democracy had its roots in traditional political theory. A party representing the maintenance of social order stood to benefit if there was an expansion in the proportion of the electorate who also had a strong financial incentive to support the existing structures of law and governance. In this view, the more people who were home owners, the less the national thirst for state activism and confiscation of property, and therefore the more limited the prospects of the Left given that, at this point, Labour were seen as a threat to public property rights through Clause Four. The same instinct informed a large part of Tory thinking with respect to the privatisations of the era – small shareholdings were thought to make capitalists out of radicals.
Right to Buy was an extension of this train of thought to a portion of the population which were dependent upon the state as their landlord – an audacious political gambit and a successful one in those terms. The longer term consequences have been arguably as poor as those which followed from the decisions of the post-war governments to prioritise their building in the first instance, however.
Having invested a significant sum of money in building up a large, state-owned housing stock, the government proceeded to sell it at a discount. This was not necessarily a boon to social mobility – even at a discount a family needed a mortgage, and that mortgage would, more often than not, entail a middle-class income. In this manner, the social divide could be seen to have been entrenched by Right to Buy. At the same time, the government neither allocated the income from Right to Buy to local councils in its entirety, nor made any central provision to add to the stock of social housing. As a result, the long-term cost in terms of having to house the needy in privately owned accommodation at market rents, will far exceed the initial revenue windfall.
In another sense, Right to Buy represented an older idea – the notion that to matter in society, you needed to own a stake in the land. The fervid housing market in the 1990s and 2000s was a testament to this. The application of a large discount to market value ensured that property – rather than being seen as foremost a means to the important end of finding somewhere to live – was elevated to an asset class, a means to make capital gains through ownership. If half of the genius the British have devoted to home purchase, renovation, rental and the design of countless vehicles to facilitate this had been given over to enterprise in the productive economy, the nation would be vastly wealthier. If half of the capital sunk into housing prices, which increasingly bear no relation to local wages, had been diverted to industry, the country would have the finest stock of plant and machinery in the world. Whereas the government house building boom channelled capital away from investment activities capable of generating exponential returns in the 1940s and 1950s, the private house buying boom had exactly the same effect from the 1980s onwards.
Help to Buy (a more expensive house)
This brings us to the present situation under the second phase of Help to Buy. As the programme currently stands, the government will either subscribe 20% of the equity for the purchase of a new build apartment for those with a 5% deposit, or they will insure the next 15% of a 5% depositor’s mortgage in exchange for a fee.
This is not as risky, from a liability perspective, as might be thought. The mass American foreclosure on housing was due in part to mortgage laws which allowed a home owner to simply walk away from their obligations by handing the keys back to the bank. In Britain, foreclosure means bankruptcy, a far more serious condition which would inspire most owners in negative equity to remain in situ if the market deteriorated.
The real risk to this mad-cap policy is social. Again, it does not bridge the gap between the middle class and the poor – in order to buy a house, your income multiple needs to warrant a mortgage capable of purchasing a property. In the South, certainly, this implies a middle-class income. Instead, the policy acts to push up prices by negating the saving process, thus pulling up the drawbridge for those who do not currently earn enough to participate. The acceleration of house prices, and the stagnation of wages, means that if you cannot buy today, you are highly unlikely to be able to buy in the mid-term without a significant inheritance.
Moreover, the same investment decisions which hampered Britain in the 20th century are being combined and renewed in the 21st. Bank money and government energies are being diverted into an industry which can only cannibalise an existing resource in land. Instead of a policy package and lending mind-set which prioritises industries promoting wealth creation for the mass of Britain, these are targeting the enrichment of the few rather than the many.
As a rule, when a market is as distorted, inefficient, expensive and hopeless as the current housing market, it takes the government to have been involved. The wrong policies at the wrong time for three quarters of a century have achieved this for Great Britain. Perhaps, for all of our sake, it would be better if it left the market to its own devices for the foreseeable future.