Dinner table chat about house prices turns nasty


Will Hutton
Sunday July 8, 2007
The Observer


At a gathering of my wife's family last weekend I was sharply reminded of the generation gap when it comes to property. The over-35s are winners with their cushion of equity, which grows vast the nearer they are to pensionable age; the under-35s have debts that make them feel fearful at becoming losers in the property jungle.

I had conversations that I am sure are reproduced all over the country. A mother spoke of her fears that it would be impossible to move to a larger flat in the same neighbourhood to accommodate a second baby. Another said that my generation did not understand how hard it was for young people to get started these days without well-off parents.

Britain has created a monstrous house-price-inflation machine that is beginning to devastate lives, segregate communities and dominate our culture. And do serious damage to the process of wealth generation. Last week's rise in interest rates to 5.75 per cent, with further interest-rate increases certain, is the price of a freedom to borrow.

We want that freedom, while deploring the irrationality it has produced. Which is why complaining about the latest interest-rate increase is pointless. The Bank of England is only doing its job - trying to hit 2 per cent inflation. It confronts never-ending inflation in house prices that makes home-owners richer, and who become ever more ingenious in translating that wealth into higher consumer spending and lower saving.

The property market is the epicentre of the problem. A recent report from the National Housing and Planning Advice Unit, chaired by economist Professor Stephen Nickell, argued that despite the doubling in house prices over the last 10 years, today's property market is still not overvalued. Higher demand, with another 223,000 new households forming every year is meeting stagnating supply. In 2000, house prices on average were four times incomes; now they are seven times and over the next 20 years will rise to 10 times.

It is an argument that is hard to counter - in which case there is trouble ahead. The Bank of England needs to see a sharp deceleration in house-price inflation in order to meet its inflation target. But if today's prices are as solidly underpinned as Nickell argues, and set to increase by another 50 per cent in the years ahead, then interest rates may have to rise very high indeed in the immediate future - certainly to 7 or even 8 per cent - to get the result the Bank needs.

What policy-makers obviously want to see is an orderly slowdown in prices rather than actual falls, while something is done to avert Nickell's forecast. Yet the whole exercise is fraught with risk. The market is frothy; many individuals are overborrowed. Anybody buying a house today risks seeing the price falling sometime in 2009 or 2010. House prices will probably begin to increase again afterwards, but today's risks are acute.

There are already casualties; repossessions are rising sharply and businesses closing, overwhelmed by debt. Parents are trapped into living with their middle-aged children. Neighbourhoods are becoming ever more segregated by class. And conversations like the one my family was having last weekend will become political. More affordable housing, as the government recognises, is a political, social and economic necessity.

The simple answer is to build more houses, especially social housing, but that means eroding the green belts and relaxing planning laws - unpopular ideas. There are tougher measures, too. If housing faced higher taxes, either through inheritance tax, a wealth tax, lifting stamp duty, or limiting tax-free capital gains on housing, then house-price inflation would slow. And if Britain repealed its far too generous concession that non-residents and non-domiciled individuals can buy and hoard houses without paying tax, that would dent overseas demand. All have been ruled out because of a recoil at higher taxes.

But the mood is changing. It seems the middle class has begun to decide that the current mayhem is not in its interests. Privately some Tory policy-makers are toying with finding ways to use the tax system to slow down house-price inflation, pondering whether it really would be political suicide.

The Labour party has been paralysed, writing off taxing as leftist and impractical. But the politics of the house-price inflation machine are beginning to change. It may have made many over-50s very rich, but for the rest the social division, the private heartache, the risks of massive indebtedness and yet dearer houses make no sense. Right-wing policies have created a world we don't like. The pendulum is swinging back.