UK: There May Be No Alternative to Housing Boom and Bust

A few days ago Rightmove, the property website, reported that house prices have risen to their highest level for nearly three years. Nothing wrong with that, you might say, except Halifax, part of Lloyds Banking Group, had just said that prices have dropped to their lowest since July 2009.

Some of these discrepancies are explicable. Rightmove measures asking prices, which sellers may not achieve, while Halifax records prices at mortgage approval stage. There are other differences between house price measures – the Halifax’s index always appears more downbeat than the Nationwide – which I will not go into here.

The big picture is that house prices fell up to a fifth when the financial crisis struck nearly four years ago and cut off the supply of wholesale mortgage funding. Then, perhaps surprisingly, they rebounded by 10% or so, since which time they have been roughly flat.

The LSL-Acadametrics index, based on Land Registry data, tells the story well. House prices peaked at an average of £231,828 in February 2008, then fell 14% to £200,234 by April 2009, before rebounding by nearly 12% to £223,482 by February 2010. Last month the average stood at £223,352.

That is a lot of volatility in a short time but minor compared with the huge swings in housing transactions of the past four years. Last month, 45,000 houses and flats were bought and sold in England and Wales, according to Acadametrics. This was just 52% the long-term April average and barely a third of monthly transaction levels of more than 120,000 four years ago.

The housing market has hit what I would call a low-activity equilibrium, Turnover is depressed but there are few forced sellers: people are staying put. Prices may continue to slip in real terms, as predicted by the National Institute of Economic and Social Research, though I disagree strongly with the view that they will never get back to real (after-inflation) pre-crisis levels.

For that to happen something fundamental would have had to have changed. Housing is damaged at the moment, because of the squeeze on funding and depressed incomes. In the long run, housing will do what it has always done, rise roughly in line with incomes, which means rising in real terms.

The problem is that prices do not rise steadily. Steady is not a word you would associate with the housing market. A few days ago the Joseph Rowntree Foundation’s report, Tackling Housing Market Volatility in the UK was published.

The report, the product of two years of deliberations by a housing market taskforce of experts, including Kate Barker, Peter Williams and Mark Stephens, the report’s author, let fire with both barrels.

“The UK has one of the most persistently volatile housing markets, with four boom and bust cycles since the 1970s,” it said. “These cycles distort housing choices, drive up arrears and repossessions, inhibit housebuilding and heighten wealth inequalities.” Behind the current stasis, it said, there is a fundamental sickness.

“The current model of home ownership has become stretched beyond its limits. Increasing numbers are being priced out of the market and ownership levels are falling, particularly among younger people. There has been a long-run shortage of housing … and this has also made it harder to access social rented housing. Meanwhile, the private rented sector does not offer a sufficiently secure alternative to meet the needs of many households.”

The taskforce has some good ideas, at the top of which is the need to increase housing supply. Though housing starts rose in the first quarter housebuilding remains close to its lowest levels since the 1920s, having fallen sharply during the crisis from levels that were regarded as woefully inadequate before that.

It suggests a shake-up of housing taxation. Stamp duty, for example, should become a marginal rather than a “slab tax. At present, when you move above a stamp duty threshold you have to pay the higher tax across the entire purchase price, rather than just the wedge above the threshold.

It also suggests using housing taxes to dampen the house-price cycle. Another recommendation, which may be taken up by the Bank of England’s new financial policy committee, is the counter-cyclical use of restrictions on mortgage lending.

At a dinner to launch of the JRF report, it was said we will only really have changed as a nation when, instead of regarding rising house prices as good news, the front pages celebrated falls.

I doubt that will happen. Housing is a substantial component of household wealth and more evenly distributed than other wealth. Two-thirds of households are owner-occupiers. Whatever the social benefits of lower house prices, people cannot be expected to celebrate a fall in their wealth.

Greater price stability is another matter. We could all compromise around that. The question is whether it is achievable.

After two years working on the problem, the verdict at the launch was downbeat. A big increase in housing supply would not solve everything but would help hugely. Unfortunately, there is very little sign of it. The builders are convalescing, the planning regime is more anti development than ever and institutions are reluctant to commit funds to the private rented sector.

As for counter-cyclical tax and credit policy, it might help, but there have to be doubts about whether policymakers can ever successfully dampen the animal spirits of homebuyers when they get a head of steam up.

At this stage it may seem fanciful to talk of the next runaway boom in house prices. But, as things stand, it will happen.

My regular column is available to subscribers on This is an excerpt.

This post originally appeared at David Smith’s EconomicsUK and is reproduced here with permission.