The Spiralling House Prices in the UK

During 2013 housing prices in London rose by around £40,000 for the average flat or house, the cost of a typical London home to just above £475,000, by 2015 the average London home is valued at £500,000.

The continuing government initiatives (the latest being the Help to Buy ISA) are introduced by the government as an attempt to help resolve the housing crisis by enabling more people to be able to purchase the new homes.  However these new initiatives only serve to increase the demand for homes, that in turn increases the price of homes which involves the government in an ever revolving self-defeating circle: The more Help to Buy equity loans and guarantees that they provide, the more the average price of the house increases which in turn means that the government have to increase the size of their equity loans and guarantees. It does not take a genius to realise that this is unsustainable-so why are the government continuing to act in this way?

To understand the government’s motives (and in this would apply to any government whatever their political colour) is important to look at the bigger picture. During the frenzied years of the mid to late 2000’s which saw a dramatic overheating of the housing market, hundreds of thousands of new mortgages were secured against properties which continued to rise in value (helped by the then government’s housing initiatives again, in the form of equity loans). This meant that large financial institutions, banks and the government had a considerable financial stake in the UK’s rising property market.  The government were receiving record tax revenue through SDLT and the banks were receiving record amounts of interest from the record number of mortgages. Government ministers and MPs from all parties were being wined and dined by the banking industry, people were able to borrow easily and get the home of their dreams, everybody was enjoying the party.  

In 2007-2008 the “out-of-control express train” that was the UK property market slammed into the buffers with the resulting financial chaos and the need for the government to bail out the banks.  When the economy crashed, the money invested in the property market by the banks and the government began to lose value with the value of these assets “falling through the floor”. The Government (both the then Labour government and the new coalition Government) were faced with no option other than to protect the value of these assets and this cannot be done if the value of property decreases. The government is thus in a position whereby they have to ensure that the value of property does not decrease and if the banks, building societies and government are to ensure that their investment in the property market brings dividends, the house prices must rise.  Indeed, the more that the government puts into the Help to Buy scheme, the more they will lose if property prices do fall.

Another fallout from the “mortgage madness” of the mid-to-late 2000s is that there are a considerable number of home owners with existing mortgages at low rates of interest.  If the value of property was to decrease significantly, these property owners would be in a position of negative equity very quickly and would be trapped in their homes causing a spiral whereby those that cannot move cannot sell, resulting in a lack of properties on market which in turn will exacerbate the current housing shortage.

The main cause of the housing crisis is often cited as the lack of new properties being built.  Although this is undoubtedly true, solving this problem is more complex than it appears. Rising property prices results in an increase in the value of land making the cost of constructing new properties increase and then again the circle continues as this results in higher house prices.   Higher house prices result in higher rents meaning that people have less to spend or save towards purchasing a house, this should in turn mean that demand decreases which in the original capitalist theory of ‘supply and demand’ should mean that prices will fall; however as mentioned earlier, the government cannot afford for that to happen hence the government schemes such as Help to Buy.

The obvious solution is to increase the supply of social housing as happened during the housing crisis of the 1930s and the period immediately after the Second World War. However, we live in a very different economy today and building a new social housing estate in the middle of London (which has one of the largest housing crisis), for example,  is likely to have a detrimental effect on the value of the existing properties in the area; the same is true of many parts of the UK as “nimbyism” prevails as part of our national culture.  It is possible to hear many eminent public speakers on all sides of the political divide make speeches on the need for more social housing; however it would be interesting to note their reaction when it is announced that a new social housing estate is being built next to or at the back their property!

In many ways, the government is acknowledging the “nimbyism” factor with their recent initiative on discounted “Starter Homes” (for those under 40 year olds on a low income)  which in essence provides a government subsidy for developers to build on brownfield sites being old industrial and commercial sites that have not previously been deemed to be suitable for housing.  It is also notable that the government intend to relax some of the building regulations requirements for these houses.

At first sight, the biggest contributing factor to the spiralling property prices in the UK, being the shortage of housing, should be easily resolved particularly in light of the fact that it is estimated that in excess of 80% of the land within the UK is undeveloped land.  However successive governments have produced a very tangled web, it is very difficult to see how this web can be untangled, it is a brave government that seeks to do so.


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