High house prices are one of the biggest dangers to the UK economy, according to both the European Commission and the International Monetary Fund (IMF). This was one of the main conclusions from the economic assessments that both organisations – which both announced their findings within a few days of each other in early June – have been undertaking (independently of each other) during recent months,.
The warnings came just as the Nationwide building society announced that national average house prices have risen by over 11% during the past 12 months, which is the fastest increase for seven years. The average property in the UK now costs £186,512, the highest figure recorded since records began in 1991. As ever, London’s housing market seems to belong to a different planet from the rest of the country: house prices in the capital are now almost 30% above the pre-recession peak reached in 2008, while across all other regions they have still yet to fully recover.
For many first-time buyers – and all those on low incomes – the prospect of every being able to own a house must feel like an increasingly distant dream. This is why the warnings from the European Commission and the IMF are important, as they may do a little more to focus policymakers’ minds on the dangers of allowing house prices to rise unchecked.
Of the two, the European Commission offered the more prescriptive assessment of how the UK government should address rising house prices. In its statement, the Commission encouraged politicians to “deploy appropriate measures to respond to the rapid increases in property prices in areas that account for a substantial share of economic growth in the United Kingdom, particularly London”.
In particular, they argued that more new housing needs to be built to address pent-up demand in the British housing market, while they also said they think the Bank of England should do more to monitor house price rises and levels of mortgage indebtedness, the implication being that there is a danger of lenders putting financial stability at risk if they lend too much money to overextended borrowers.
More controversially, the European Commission also called for the reform of Council Tax in England and Wales to make it more progressive. This is not a radical suggestion in itself: the idea that something should be done about Council Tax is widely held in policy-making circles – earlier this year the Joseph Rowntree Foundation even published a major report on possible ways of changing it – as it looks increasingly incongruous to still be taxing houses based on their assessed value in 1991, while it seems unfair that wealthier people living in more expensive properties can pay a lower rate of tax (as a percentage of the property’s value) than some people who live in cheaper properties.
However, taxing peoples’ homes is still widely seen as something of a “third rail” issue (i.e. untouchable) by most politicians, so it’s doubtful that this advice will be heeded (and the unpopularity of the European Union in Britain makes it even less likely).
The IMF didn’t offer any advice to the British government about how property should be taxed, although – just like the European Commission – they expressed reservations about the build-up of debt among households that have borrowed large amounts to get on the property ladder.
Although they noted that conditions in the overall economy seem to be improving, the IMF argued that “House price inflation is particularly high in London, and is becoming more widespread. So far, there are few of the typical signs of a credit-led bubble. Nonetheless, a steady increase in the size of new mortgages compared with borrower incomes suggests that households are gradually becoming more vulnerable to income and interest rate shocks.”
They suggested that this danger should be tackled through a range of measures, which could potentially include placing a cap on the number of low-deposit mortgages lenders can advance to borrowers, in order to prevent too many people from borrowing larger multiples of their salary than they can really afford (although typical deposit requirements have already risen substantially since the recession).
Unfortunately, the IMF’s number one recommendation is something that most British politicians would be loath to take serious action towards for fear of the electoral consequences: building more houses.
The IMF claims in their report that “Fundamentally, house prices are rising because demand outstrips supply. The UK has a secular problem with inadequate housing supply, associated with planning restrictions and compounded by depressed housing starts since the financial crisis. Macroprudential and monetary policies can only be temporary palliatives to an underlying problem…key inefficiencies remain. These include: unnecessary constraints on brownfield and greenfield developments; tax policies that discourage the most economically-efficient use of property; and underdeveloped rental markets with relatively short lease terms.”
All three of the major political parties often claim to support the interests of voters who dream of getting on the housing ladder; but whether any of them would be willing to go as far as the IMF suggests is necessary with reforms to make the “property owning democracy” a reality will be the true test of the strength of their commitment.