business current affairs economics equality growth

Property prices: crack cocaine for the economy

I had to laugh at the news from the housing market this week. Property sales have been sluggish this spring, and the reason?  The weather has been too warm.  This is amusing because of course the economy declined to grow at the end of last year because the weather was too cold.  Anyway, apparently the weather was too good and we collectively decided to spend our bank holidays having barbecues instead of shopping for houses.

I suppose the analysts have to give some reason for the lack of action in the housing market.  This one may be scraping the barrel, but the alternative is to admit that perhaps the housing market has run far enough.  After all, property prices have dropped slightly since 2007, but the market has not corrected itself.  Property remains overvalued in the UK, and we are doing everything we can keep it that way.

It’s easy to forget how far we’ve come in such a short time. In 1997, the average house in the UK cost £76,000. Ten years later that had risen to £223,000 – a rise of 180%, while wages only rose by 40% in the same time.  If the price of everything else had risen at the same speed as the average house, points out the charity Shelter, then we would be paying £20.22 for a jar of coffee and £47.50 for a chicken.

It should be obvious that if the cost of housing runs ahead of wage increases, then housing becomes less and less affordable. This is a serious problem, given the wage stagnation in the UK over the last couple of years – we really don’t want house prices to rise right now, honestly.

Less affordable housing has a host of associated problems. Those who cannot save up a deposit cannot buy a house, and first time buyers lose out to those with assets behind them. This is a big driver of inequality. It’s also a big driver of debt – and Britain’s privately held debt ballooned in tandem with the housing boom, from £570 billion in 1997 to £1,511 billion in 2007. Among the less obvious effects are those on unemployment, where people are unable to move to find work because they are priced out of the areas of the country where there are jobs. Or consider that one in five 18-34 year olds still live with their parents, and that many people are delaying getting married or having children because they can’t afford their own place. It’s terrible for social mobility – a leg-up from parents is a common way of getting on the property ladder, but only if your parents have got the cash to spare.

We’ve always known that a runaway property market is ultimately a bad idea. Gordon Brown said so in his very first speech as chancellor. “I will not allow house prices to get out of control and put at risk the sustainability of the recovery” he said, before spending the next decade allowing house prices to get out of control. We’re still playing the same game, keeping interest rates artificially low. Osborne’s latest budget treats the symptom rather than the cause, offering help for first time buyers rather than sorting out the bigger problem of affordability.

Why did Gordon Brown break his promise? And why are we making the same mistakes again? Because at the superficial level, rising house prices look so great for the economy.

First, a booming property market means a flood of new money into the economy.  “As much as two thirds of the money in circulation in Britain was created as mortgage loans,” says David Boyle. And it’s good for individuals too. For those of us drawing humble salaries, the soaring value of our property is our only opportunity to make any serious money. Outside of the lottery, I suppose. When the housing market is moving at speed, ordinary citizens make tens of thousands without having to lift a finger.

It’s also good news for consumer confidence. If your house is gaining in value, you’re getting richer every day without doing anything for it. So you’re much more likely to splash out on other forms of consumption, expanding your house, travelling, buying a new car. You’re more likely to take on more debt or buy things on credit, because you’re sitting on this big promise of future wealth.

And of course, if the bank knows you’ve got that future wealth in your back pocket, they’ll give you all the money you want. Your credit rating will allow you to spend well beyond your means, for year after year – as long as house prices are rising.

Can you see where this goes? A runaway housing market creates runaway inequality across generations and across income brackets. It pushes us deeper and deeper into debt. But it also allows us to keep ahead of our existing debts. If the housing market slows, those debts catch up with us pretty quick. The housing market cannot rebalance itself without another recession. It’s one of several reasons why the economy is not out of the woods yet.

It’s also a good example of how the pursuit of growth for growth’s sake has taken us down a blind alley. An accelerating housing market is the crack cocaine approach to growth – with all the euphoria, cravings and paranoia to match. The housing market is responsible for an unquantifiable but pretty significant chunk of GDP over the past decade, but it’s an addiction, and one that will be painful to break.


  1. I hate to say it, but it’s not bad news for everyone. When I am ready to buy my first new home, I will get a better deal. Ying yang.

    Of course we in America are not so burdened as others.

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