{"id":343,"date":"2018-03-19T20:19:59","date_gmt":"2018-03-19T20:19:59","guid":{"rendered":"https:\/\/mint.10yearsafterthecrash.com\/?p=343"},"modified":"2019-07-04T10:01:04","modified_gmt":"2019-07-04T10:01:04","slug":"the-coppola-column-our-house","status":"publish","type":"post","link":"https:\/\/www.themintmagazine.com\/the-coppola-column-our-house\/","title":{"rendered":"Our house"},"content":{"rendered":"

In 1985 London\u2019s Victoria and Albert Museum put on an exhibition entitled National characteristics of design. It looked at various aspects of manufacturing, fashion and other sectors in eight leading industrial countries and proposed ways in which they reflected the culture of the nation. For each country, one product was singled out as epitomising the self-image of the nation where it was created. For Britain it was Church\u2019s shoes. Exquisitely hand-made yet so eye-wateringly expensive only the few could afford a pair. For Germany it was the Braun electric razor: a sleek embodiment of high-performance and efficiency.<\/p>\n

\u200b<\/span>Despite our occasional differences the Brits have long held the Germans in high regard. Over the generations we\u2019ve admired their tanks, their warships, their footballers\u2026 their manufacturing industries, their banks\u2026 And now, it seems, their housing.<\/p>\n

\u200b<\/span>On Twitter the other day, someone was praising the German housing system. \u201cIf only the UK\u2019s housing market was more like Germany\u2019s,\u201d he said, \u201call our woes would be over.\u201d But the differences between German and UK housing systems have parallels with the sentiments of crafted luxury versus efficient utility highlighted in the V&A more than 30 years ago.<\/p>\n

The UK\u2019s housing market is the way it is because of deeply rooted cultural beliefs and practices, which have determined government policies and financial practices for decades. Many British people dream of having a place of their own,<\/a> an asset that no-one can take away from them, a territory on which they can put their own stamp. The Germans don\u2019t share that dream. They save like crazy in their little banks and, latterly, in cash under the bed<\/a>. British people prefer to put their savings in bricks and mortar. Even when we save in banks, we like our money to be invested in bricks and mortar. Hence the popularity of building society savings.<\/p>\n

Germany\u2019s housing system is very different from the UK\u2019s. For a start, home ownership is nowhere near as high. To a large extent, this is because it is much harder to obtain a mortgage, since Germany\u2019s banks take a conservative and risk-averse approach to mortgage lending. Loan-to-value, even for first time buyers, is typically 80% or less, which makes a debt deflationary housing market collapse such as Britain experienced in the 1990s unlikely. Germany has not had a housing market collapse since the early 1930s.<\/p>\n

\u200b<\/span>As a result, Germany\u2019s housing market is thin and illiquid compared to the UK\u2019s. Conversely, its rental market is much deeper and more diverse. This is despite Germany\u2019s longer secured tenancies and rent controls<\/a>. There is some evidence that the private rental market can be hard to access, but not a great deal of evidence that regulation restricts supply, as some economists argue. However, since the 1950s Germany has built twice as many homes as the UK, including homes for rent. It may be that since most people in Germany rent their home, the depth and liquidity of the rental market reflects the more generous supply of houses relative to population in Germany better than the smaller mortgage market does.<\/p>\n

\u200b<\/span>Despite the controls, Germany\u2019s rental market is not immune from rent spikes. Rents in big cities such as Frankfurt and Munich have recently shot up<\/a>. However, Germany\u2019s rental market is generally stable. This also helps to keep house prices stable, since \u2013 as Quartz points out<\/a>\u2013 buying a home is often a hedge against rising rents.<\/p>\n

\u200b<\/span>So, if the UK could somehow develop a deep and liquid rental market while clamping down hard on the mortgage market, it could become like Germany. Housing market crashes, default and negative equity would be a thing of the past, and renting would provide security for young and old alike.<\/p>\n

So you can\u2019t airbrush the British out of the British housing system. Rather than trying to turn it into something entirely different, we need to understand why the UK\u2019s housing market is the way it is, and find ways of making it work better without fundamentally changing its nature.<\/p>\n

\u200b<\/span>But what is its nature? Matt Whittaker of the Resolution Foundation describes it as \u201ccrazy\u201d. Why would we want to keep a crazy housing market? Wouldn\u2019t it be sensible to transform it into something entirely different?<\/p>\n

\u200b<\/span>Let\u2019s look at the facts. This chart from the Resolution Foundation shows that there has been a sustained boom across most of the UK since 2000, and particularly in London and the South East:<\/p>\n

\u00a0\"\"<\/p>\n

This is the boom that has priced young people out of the market.<\/p>\n

\u200b<\/span>But if we look at the position since the 2007-8 property market crash, it is evident that the gains are highly skewed. London has seen huge rises in property values, but in the North of England, Scotland and Wales prices have barely moved. And in Northern Ireland, prices have actually fallen.<\/p>\n

\"\"<\/p>\n

Average house prices of \u00a3130-\u00a3160k in the regions furthest from London do not look particularly expensive given a national median wage of about \u00a326k. Median wages may of course be lower in those regions, but it nonetheless it is no surprise that significantly more young people own their own homes in the North of England than in London. Talk of a UK housing \u201cbubble\u201d, as in this post<\/a>, is thus a London-centric view which fails to take account of the reality across the UK.<\/p>\n

London is a magnet for both people and money. Migration to London, not only from outside the UK but, more importantly, from other areas of the UK, pushes up prices in London and the areas around it. Additionally, international investors looking for safe, high-yielding assets are drawn to prime property in London and, to a lesser extent, other city centres (see Ann Pettifor on this here<\/a>). Meanwhile, net migration from other parts of the UK depresses property values in those places.<\/p>\n

London\u2019s high prices reflect London\u2019s dominance not only in the UK economy, but in the world. They are a measure of London\u2019s success as an international city. Any housing strategy that tried to pop the \u201cUK\u2019s housing bubble\u201d without addressing the \u201cmagnetic London\u201d problem would indeed be irrational.<\/p>\n

\u200b<\/span>Not only that, it would be extremely damaging. If prices fell evenly across the whole UK, people in London and the South East would be relatively unscathed, apart from those who bought with high loan-to-value mortgages within the last decade. But many people in the North of England, Scotland, Wales and \u2013 particularly – Northern Ireland would face large falls in their net worth. Potentially, some could end up in negative equity even if they have owned their house for over a decade.<\/p>\n

\u200b<\/span>And for many people on low-to-middle incomes, their house is their only significant asset \u2013 after all, British people like to save in bricks and mortar. A serious reduction in their net worth would be awful for them, especially if they are approaching retirement. At present, we have no funded solution to the social care crisis that is already upon us and will become much worse as baby boomers get older. We are relying on the wealth tied up in residential property to fund it. If that wealth were to disappear due to a major fall in house prices, younger people would have to pay far higher taxes to fund social care.<\/p>\n

So although engineering a substantial fall in house prices appears attractive to those who want a fast solution to the undeniable fact that many younger people in London and the South East cannot afford to buy houses, it is not a solution to the UK\u2019s housing problem.<\/p>\n

\u200b<\/span>It\u2019s also not clear that it is necessary. By historical standards, housing is affordable. As this chart from Neal Hudson shows, those who lived though the sky-high interest rates of the late 1980s and early 1990s paid a much higher proportion of their incomes in housing costs than today\u2019s young people do:<\/p>\n

\"\"<\/p>\n

This does, of course, raise serious questions about the implications for financial stability of raising interest rates much above the unprecedented lows that have prevailed since the 2008 financial crisis. But if interest rates remain low \u2013 and there is no doubt that monetary policy decision-makers are very aware that raising them too much could risk a house price crash \u2013 today\u2019s first-time buyers don\u2019t appear particularly stretched by historical standards. Of course, this chart is an average across the UK: young homeowners in London are probably significantly more stretched than young homeowners in the North of England. But then so were the London homeowners of the late 1980s. London\u2019s high house prices are by no means a new phenomenon.<\/p>\n

\u200b<\/span>However, the Resolution Foundation says that young people today do face higher housing costs as a proportion of income than previous generations did at their age:<\/p>\n

\"\"<\/p>\n

Since mortgage costs are not particularly high as a proportion of income, the problem would seem to be high rents \u2013 again, particularly in the capital and the areas around it.<\/p>\n

The most immediate need therefore appears to be rebalancing, rather than a general fall in house prices and rents. London\u2019s prices are far higher than anywhere else in the UK, and there is a \u201cripple effect\u201d out to areas around London. These high prices flow through into sky-high rentals in the capital and surrounding areas. Bringing house prices down in London and the areas around it, while raising prices in other areas, would flatten the housing market across the country, reducing rents where they are high and raising them where they are low.<\/p>\n

Part of the reason for high prices is undoubtedly supply. The UK\u2019s housebuilding record, particularly for affordable homes, is dismal. But anyone who thinks that building lots more homes in the crowded South East will significantly reduce prices there does not understand how construction markets work. Construction involves up-front investment, usually debt-funded, to deliver a longer-term return. Builders need to know that the return will justify the investment, so when the market is falling, they don\u2019t build. They batten down the hatches and wait for the market to turn \u2013 which of course it eventually does, since falling construction tightens supply and therefore raises prices.<\/p>\n

It\u2019s also not clear that feeding agglomeration is a good social strategy. London is progressively draining the rest of the UK. The house price divergence reflects this. Since the 1980s, successive governments have taken a laissez-faire attitude to the growing dominance of London, apparently convinced that the wealth of London will trickle out to other areas. To a degree, this is true \u2013 house prices in areas around London show that clearly. But areas further away from the agglomeration become progressively more depressed.<\/p>\n

\u200b<\/span>Currently, house prices are falling in London and surrounding areas:<\/p>\n

\"\"<\/p>\n

Source: Royal Institute of Chartered Surveyors, Jan 2018<\/p>\n

\u200b<\/span>Currently, also, rents are hardly rising in London, and even in other areas they are not keeping pace with inflation:<\/p>\n

\"\"<\/p>\n

As I have noted here<\/a>, falling prices and stagnant rents in London and surrounding areas could signal the start of a welcome rebalancing in the UK\u2019s housing market \u2013 but only if the effect is confined to those areas. If house prices start falling across the UK, then rebalancing will not happen.<\/p>\n

\u200b<\/span>But this market-led rebalancing will not be sufficient. If there is one thing we can learn from<\/p>\n

Germany\u2019s model, it is that the housing market works very much better when no region or city dominates economically. Even Berlin is not dominant in the way that London is. Germany\u2019s housing market is not \u201ccrazy\u201d like the UK\u2019s because Germany does not have the UK\u2019s wide economic imbalances between different regions.<\/p>\n

\u200b<\/span>Restoring the UK\u2019s housing market to health will involve revitalising industry and regenerating communities across the whole UK, raising productivity and wages, and helping people to find meaningful well-paid work wherever they are, not just in the capital.<\/p>\n

The UK\u2019s housing market is not irrational. It works the way it does because people prefer to own than buy, and because for many people a home is not merely a place to live but their principal form of savings. These characteristics are deeply rooted in the British psyche and fundamental to our way of life. But the enormous regional house price differences that arise from the wide economic imbalances in the UK economy can, and should, be eliminated.<\/p>\n","protected":false},"excerpt":{"rendered":"

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