House prices are predicted to drop next year due to a mixture of financial instability caused by the misjudged mini-budget and the Bank of England accelerating interest rate hikes. This will be disastrous for many households struggling to afford increased mortgage repayments.
At the same time there are many struggling to buy their first home. In 2021, UK house prices grew at their fastest pace in over a decade, despite the economy still recovering from one of the worst contractions in 300 years. This disconnect between the housing market and the rest of the economy only benefits those who use housing as an asset for accumulating wealth.
The gains of this wealth are unevenly distributed across society. The average white family gained £115,000 in property wealth in the past decade, while the average Black household accumulated nothing, and almost half of housing wealth in the UK is owned by the over-65s. Many people are struggling to put together the large deposits required, and those in the rented sector or social housing face higher housing costs relative to those with mortgages, and greater insecurity of tenancy.
The dominant narrative has been that prices reached all-time highs this year due to shortage of supply, but as many economists have argued since the crash, it is bank lending, rather than supply of housing, that is a primary driver of house price rises. And high land prices result in even less social housing being built.
Lending into real estate generates a self-sustaining cycle of credit supply, credit demand and rapid house prices increases. And when fewer people can afford to repay their mortgages, lending dries up, confidence drops and the cycle works in the opposite direction, making prices suddenly drop.
Overnight people can find themselves in negative equity and be forced from their homes, and banks and real estate investors cash in. While this dynamic was understood in great detail after the last crash, memories are short, and the post-crash powers to reduce financial instability from the housing market have done little to dampen the inflationary effect of mortgage lending, or reduce the attractiveness of homes as financial assets. Government policies, from the stamp duty holidays to the resurrection of “right to buy”, have only exacerbated this problem. This destructive pattern of boom and bust needs to come to an end.
As we’re seeing with the departure of Liz Truss, governments in the UK have been made and broken on the back of mortgage rate rises, and with mortgage repayments already climbing and likely to soar, regardless of how big the housing downturn is, it is highly likely that the public will boot the Conservatives out of office at the first opportunity. Stabilising house prices is always going to be a difficult political sell, with 65% of England’s households being homeowners, or more accurately large debt/mortgage owners, and their family wealth inextricably tied to house prices.
Even Labour doesn’t want to change course, by targeting 70% home ownership through mortgage guarantees. However, public opinion may have reached a tipping point: in March, when prices grew at their fastest pace since 2004, more than half of British homeowners said they would be happy if their own home did not rise in value in the next 10 years if it meant houses were more affordable for those who didn’t own property.
The economic turmoil right now is revealing how fundamentally fragile the UK economy is. Escaping our structural dependence on house price rises driven by an oversized financial sector won’t be easy. However, there are some important places to start. We need to prioritise policies that protect renters and social housing, rather than treating them as an afterthought. This will entail vastly scaling up social housing, and implementing rent controls and renter protections to ensure high quality homes, with long-term security.
Banks also need to be reined in. Having a concentrated banking sector with 50% of its assets secured against UK property is not a healthy position to be in. We need a diverse ecosystem of banks lending into more productive and socially useful activities. Fairer taxation on property and land would dampen speculation and also unlock much needed funds for social housing.
Finally, we need our regulators to take seriously the task of stabilising house prices, ideally adding it as a secondary objective to the Bank of England’s policymaking committees.
The dysfunctional nature of our housing market can’t be fixed quickly or overnight, it’s intimately connected to our politics and culture. But since the last crash we’ve had more than a decade of missed opportunities when it comes to housing affordability, and it’s time for change.
Fran Boait is executive director of campaign group Positive Money
