The house price bubble has cushioned how we think about ourselves and do politics for decades, and continues even today. For the sake of younger members of society we must now recognise that it must end.
In 1961, the average house price was just over £2,400. 50 years later, in 2011, this stands at more than £162,000, having fallen from a 2007 peak of £180,000. House prices are 68 times higher now than 50 years ago. In that time, prices generally have risen by 16 times – so house prices have risen over four times faster than the effect of inflation alone. In 1961, the average annual wage was about £800, so a house cost about 3 times the average wage. Fifty years later, average wages are £25,000 so a house costs well over 6 times the average wage.
Why has this happened? The easy answer is ‘supply and demand’ – many people accept that the problem arises from a shortage of homes. But in 1961 there were about 14 million homes in England; now there are about 22 million. Population has grown in that time but house building has easily outstripped this. In England in 1961 there was a home between three people; now there is one for 2.3 people.
Of course there are some good reasons for thinking that house price growth reflects real economic factors – people want more space, family units are less stable, the amenities offered in the house are much better than 50 years ago. But there have also been other forces at work. Housing has been protected by tax privileges – interest relief (into the 1990s), zero VAT and capital gains tax. House purchase increasingly came with an expectation of price growth – we all had to get on the ‘ladder’. So the price of a house includes an element of expected value growth – an expectation that becomes self-fulfilling if enough people believe in it. This is the bubble effect. We cannot ignore the fact that, even after the falls of the last four years, house prices still come ‘bubble wrapped.’
The housing bubble has been kind to politicians. Two thirds of the population thought they were getting richer just by sitting at home, a wonderful driver of the ‘feelgood factor.’ Profits on newbuild for home ownership have been extracted by ‘planning gain’ to fund social housing, leisure and education. Confessing that house prices are too high is not easy, politically or financially. But as a society we must now recognise that house prices cannot grow again and in fact must gradually fall for many years to come.
The house price bubble was the major cause of the 2008 banking crisis. Young people, even with good jobs and years of experience, cannot buy. It is they above all who are paying the price of the 50-year housing bubble. For their sake, as well as for the sake of a sound economy, it is now time to face the facts.
—-
Paul Lusk