Addressing concerns
House prices – ministers can’t have their cake and eat it
Every year, China sets a target for economic growth. For this year, it was 6.5pc, the same as last year and the year before. And what do you know, come rain or shine, the target is always met, generally with a little bit to spare. Second-quarter GDP – published this week with miraculous speed just 16 days after the quarter ended – showed growth of 6.7pc. That’s roughly where it has been every quarter for at least three years. Repeatedly, as if by magic, the Chinese economy produces the numbers its masters demand, one of the benefits, I suppose, of a command economy.
It scarcely needs saying that hardly anyone outside China believes what the numbers say – not counting the supine International Monetary Fund, of course, which is still towing the line – and even Chinese officialdom now seems to recognise that the economy is indeed slowing. Expect some further reversal shortly of the deleveraging campaign to keep growth where president Xi Jinping expects it to be.
As adept as the statisticians are at making up the numbers to fit the script, even they might this time need a little help.
Back here in Blighty, Philip Hammond, the Chancellor, must live with whatever the Office for National Statistics chooses to serve up. Secondquarter growth ought to show some recovery after the bad weather of the early part of the year, but it still won’t be anything to write home about.
The UK economy remains essentially becalmed, its sails lifeless beneath the merciless sun. It’s customary to blame this on Brexit uncertainties, or even the fading fiscal stimulus of the PPI compensation gravy train, but I wonder about a more down-to-earth cause. The housing market has long been a major source of economic growth for Britain, but this past year or two, it has become as lethargic as the wider economy itself.
A healthy housing market makes for a livelier economy; it both makes people feel wealthier, and therefore more likely to spend, and through increased transactional velocity promotes greater spending and economic activity in the round. True enough, there have been one or two signs of life in the recent data. The Halifax and Nationwide indices, together with the Rightmove “asking price” survey, showed modest gains in June. There has also been some pick-up in buyer inquiries and mortgage approvals, as well as a slight recovery in the number of houses for sale. What’s more, there is quite a bit of regional variation. Outside the now deflating London bubble, things don’t look so bad.
But these are little more than straws to clutch at. Aggregated, the market looks poor to abysmal, particularly at the high end. We can blame this on the chilling effect of Brexit if we like; certainly it has dampened foreign investment interest in the UK housing market. Foreign buyers tend to be high-end and London focused. If they are not buying, there is a trickle-down effect, which depresses the market overall. Many of the luxury high-end new-builds that have been springing up all over London this past couple of years are proving hard to shift.
For the country as a whole, a third of all properties on the market are at a reduced asking price, the highest proportion for this time of year since 2011. Some properties are struggling to get any viewings at all.
All the same, for the real causes of this hiatus we must look beyond the challenges of Brexit. Primarily, they lie in confused tax, housing and monetary policy.
On housing policy, the Government looks both ways. On the one hand, it wants to do something about affordability, especially for first-time buyers. Despite the slowdown in house price inflation, prices relative to earnings remain close to an all-time high. In London, they are still at an astonishing 10 times earnings.
The only reason people can afford such prices is that interest rates are so low, reducing the burden of debtservice costs.
This is creating its own problems, making it very hard for the Bank of England to raise interest rates to any significant degree without clobbering overstretched mortgagees.
On the other hand, however, actions by the Bank of England and Financial Conduct Authority have made the business of securing a mortgage much tougher, capping loan to earnings ratios, increasing required deposits, and forcing banks to put more capital behind such lending. Loose monetary policy has helped turbocharge house prices, but measures intended to counter these effects have made it ever harder to buy a house.
In any case, as the Treasury select committee concluded earlier this year, “the only sustainable way to address housing market affordability, both for first-time buyers and other households, including those in the rental sector, is to significantly increase the supply of new housing”.
It’s early days, but the changes announced so far to planning rules and local authority obligations look woefully short of what’s required. Still very high levels of immigration, significantly increasing the size of the UK population, look set further to exacerbate the shortage in supply.
The same confusion afflicts tax policy. The Government seeks – and needs – the rising revenues delivered by stamp duty land tax, but has pretty much poleaxed the market with high marginal rates on more expensive properties, together with additional levies for second homes and buy-to-let purchases. Even the partial exemption for first-time buyers up to a value of £500,000 announced in the autumn Budget may well end up being counterproductive. If the effect of the tax break is to raise prices, it may end up delivering a bigger benefit to existing property owners than it does to the first-time buyer.
At one and the same time, the Government actively seeks the sugar rush that rising house prices deliver to economic growth, but confusingly it also wants to see prices fall to more affordable levels. It also depresses transactions in the round by treating the housing market as a milch cow for tax revenues.
Little more than 10 years ago, only half of all house purchases qualified for stamp duty. Rising prices and unchanged stamp duty thresholds mean that today more than three quarters of transactions are taxed.
It scarcely needs saying that a more joined-up housing policy is urgently required. But first, the Government must make up its mind what it is trying to achieve.
‘The Government actively seeks the sugar rush rising house prices deliver, yet also wants to see prices fall’