There are few things more corrosive for a government than the perception that they are ‘out of touch’.
Whether it was the fuel duty protests during the first Blair government or the pasty tax row following the 2012 budget, when a government’s policy looks like it’s out of step with the daily experience of ordinary people then it can pose a serious threat to their legitimacy.
There may be disquiet amongst top government strategists, then, that a gap could be opening up between policy on house prices and what people think about house prices.
Last Tuesday’s announcement by the Office for National Statistics that house prices have risen by a startling 9.7% in England (including a 17.7% rise in London) will be unwelcome news to 66% of ordinary people, as Shelter reported last year. We believe that house prices should remain stable over the long-term.
Reflecting the profound lack of enthusiasm among the public at large for further house price inflation, the reaction from the mainstream press to recent news on house prices has been one of alarm. In response to Tuesday’s announcement, The Metro’s headline “Your home probably earns more than you” focussed on the growing disparity between incomes and house prices. While only a fortnight ago, the Daily Mail chose to report on warnings from Vince Cable with the headline “Buying a home is now ‘unaffordable’ for the middle classes”.
Gone are the days when increases in house prices were greeted with enthusiasm. With falling levels of home ownership and the ballooning number of private renters, the public perception of house price inflation is now that it is pushing the aspiration of home ownership further out of reach – or storing up trouble.
Given this, the Treasury Secretary’s remark last September that a housing bubble is “a million miles away” appears now like it might have been a hostage to fortune. But as recently as last week, the new Culture Secretary was still suggesting that people in his constituency (Bromsgrove) wouldn’t take seriously the idea that there is a housing bubble. House prices have risen 9.02% in Bromsgrove over the last 12 months, according to property website Zoopla, almost exactly the national average – including London.
For those strategists in Number 10, however, more important than debates about bubbles should be the detail of the policy response to rising prices.
So far, the response has had two parts.
1) Help to Buy has been offered as a semi-targeted subsidy to help a specific group (i.e. largely struggling first-time buyers) overcome high and increasing house prices.
2) The Bank of England has been brought in to put on the brakes if the market more generally spirals out of control.
In this way the response mixes the sympathetic with the sensible and the micro with the macro.
It sounds ideal.
The problem is that it isn’t working.
First, Help to Buy, while helping some people get credit who would not otherwise be able to do so, does nothing to more generally stabilise prices. If anything, by stimulating demand for homes, it may have the opposite effect.
Second, for a number of reasons, The Bank of England is in a bind when it comes to making a serious intervention. With CPI inflation already below target, any change in interest rates to put the brakes on house prices is problematic. More problematic is the potential knock-on that such an increase might have on the fragile economic recovery.
Still more problematic is Mr Carney’s admission that in London, where prices are increasing higher than anywhere else, the Bank can have only limited influence. This is because so many homes are bought outright in the capital. “Much of what’s driven in London” he said in his appearance on the Andrew Marr Show in February “is not mortgage-driven but is cash-driven…We change underwriting standards – it doesn’t matter, there’s not a mortgage. We change interest rates – it doesn’t matter, there’s not a mortgage, etc.”
At the root of these problems with the Help to Buy/Bank of England response to high prices is the fact that it exclusively focuses on demand. As Shelter has said on this blog often, focussing on demand alone won’t solve the current housing shortage (important though its regulation is).
There are specific demand-side issues (such as the value of London property as a global asset), but an exclusive commitment to demand-side policies will not be sufficient to stabilise prices. So long as fewer new homes are built every year than new households created, trend prices will continue to rise (even if they do so erratically).
When it came to both the fuel protests and pasty tax, the charges that the government of the time was out of touch gained traction because they were based upon policy substance, not just poor messaging. The worry for both parties in the current government should be that without the serious plan for new building that the stabilisation of house prices requires, the gap between policy and public opinion will widen.