Housing isn’t just about homes: it drives the economy
Despite appearances, the government’s early-autumn mini-budget is not aimed at reviving the housing market but with rescuing the economy – just as last September’s actions were not about baling-out Northern Rock but saving Britain’s banking system.
Raising the stamp duty threshold to £175,000 and arm-twisting the building industry to formalise their interest-free loan schemes makes sense. Allowing councils to share the equity in homes that have no equity and transferring risk from lenders to state does not – but that part of the £10bn package is meat for another day’s blog.
If you were inventing an economic model today you wouldn’t base it on housing but do not underestimate the importance of the property market as the driver of the UK economy. Most economic growth in the last decade came from consumers remortgaging their homes to turn capital gains into cash.
It would have been better if property prices had not soared – but we no longer have state credit controls, ministers no longer set interest rates and Gordon Brown’s increases in stamp duty, when chancellor, were both badly received and ignored by eager buyers.
Yet sharp price falls are not a good remedy for that ill. Not even for first-time buyers. True, prices are cheaper than last year, but people want to buy an asset that is rising in price, not falling, and they want an asset that will be stable in the future not prone to wild fluctuations.
And if the rise in house values provided a feelgood factor even for those who did not convert the gain into cash, regular headlines about price falls provide a feelbad factor that discourages people from spending. Just as consumer expenditure kept shops flourishing and factories producing in the boom, the housing-led cut backs on consumption will result in fewer orders and fewer jobs.
And for every worker who loses a job, perhaps 10 fear it will be them and trim their finances accordingly.
But a fall in prices has a disproportionate effect on the owner’s equity – and the mortgage lender’s security. For owners who have borrowed 80 per cent of their home’s current value, a 10 per cent price fall halves their equity and 20 per cent wipes it out.
Bank loans that seemed well secured at that 80 per cent rapidly become risky as the value falls. Mortgage rates that are still little higher than base rate are thus far too cheap, but if some borrowers already face repayment difficulties because of deteriorating job prospects, lenders cannot charge the right risk premium.
And if owners do default (which people are more inclined to do when they have no equity left to lose) that means losses for lenders, weakening their ability to trade as bankers – possibly fatally. Even good borrowers, commercial or private, suffer when banks have to cut back.
Add in the effects on mobility of labour if owners cannot sell up to chase jobs elsewhere and a declining housing market can be not only the cause of a weak economy but also the result of it – a vicious spiral from which it is hard to escape.
That is why, however limited the effect may be, the government needs to revive the housing market. It is trying to save the economy (and, of course, its own chance of being re-elected by Brirtain’s homeowners).
