The housing bubble requires radical intervention

http://www.theguardian.com/commentisfree/2014/may/02/housing-bubble-radical-intervention-market

Version 0 of 1.

The deputy governor for financial stability at the Bank of England, Sir Jon Cunliffe, made a speech on Thursday in which he expressed apprehension that the housing bubble in the UK risks destabilising economic recovery.

"There will always be a number of blinking warning lights – risks generated at home and risks coming from abroad – on our dashboard. The growing momentum in the [housing] market is now in my view the brightest light on that dashboard," he explained. He warned that the danger signs emanating from the housing market were like "a movie that has been seen more than once in the UK".

This came on the day that Nationwide reported that annual house price rises in London had hit double digits – a staggering 10.9% in the past 12 months, the highest rate of inflation since 2007 – and a duplex penthouse in west London was reported to have sold for £140m.

The reason for the bubble is very simple. Private capital investment in property is seen as safe, because it is attached to assets of ostensibly ever-rising value. It is easy to stimulate, by keeping interest rates low and pumping money into the banking system – whether as quantitative easing or as cheap lending to banks. It provides an easy and quick fix for governments (of all political hues) desperate to demonstrate economic recovery. Large sums of money change hands, the Treasury collects stamp duty, estate agents cash in on the resulting merry-go-round, foreign currency floods into the country as investment property is snapped up, the City takes its cut from the foreign exchange, pound sterling grows stronger, and sales of furniture, materials and building services rise.

Never mind that every economic indicator is beginning to read precisely as it did before the global financial crisis, as Cunliffe warns. Never mind that millions of people who aspire to own the roof over their heads, as a home rather than an investment, are priced out of the market. Never mind that transport services are put under huge pressure as more and more people commute to work from increasingly unlikely places. Never mind that the government's favoured inflation indicator does not include house prices, so its negative results remain largely invisible. Short-term political interest trumps long-term national interest, as it has done so often.

The rental market is closely related to this. The unaffordability of purchasing a property puts pressure on it. Buy-to-let transactions have fuelled this bubble and are set to do so further, as mortgage criteria for people buying a home were tightened last week, while buy-to-let is still only based on rental incomes, which continue to rise. This also has an effect on the social security bill and austerity politics: £9.5bn of the housing benefit bill ends up in private landlords' pockets and the figure is set to rise to £10.8bn by 2018-19.

Yet, when the leader of the opposition makes a relatively sensible and modest proposal to cap rent rises, pegging them to a sensible benchmark and making longer tenancies the norm, as they are in many other countries, all hell breaks loose. The proposals were wilfully misconstrued as "a cap on rents", when they are nothing of the sort. Neoliberal experts appeared on the news quoting an economist's view that "only bombing would be worse than rent control" and calling it "petty vandalism". Panellists on Question Time warned this is the way to become like Cuba, minus the balmy weather. (I wonder, what is the combined property portfolio value of the six people who sat behind the Question Time bench last night?)

Moving house is expensive, traumatic and disruptive, especially for families with children. Some unscrupulous landlords and agents extract this upheaval as rent from sitting tenants. It is win-win, whether the tenants accept the rise or whether they are turfed out, their deposit kept, and a new round of outrageous administration fees are generated for changing the name on a standard contract and hitting "print". This, in turn, pushes rents up by artificially inflating demand, especially just before the start of the school year, making buy-to-let investments more attractive and buy-to-let mortgages easier to secure – fuelling the bubble further.

The market requires radical intervention. Regulating tenancies to redress the balance between landlord and tenant is only one small aspect. Boosting supply by constructing much-needed private and social housing stock is essential. The renovation and regeneration of buildings currently sitting empty could impact on this. Releasing "spare bedrooms" into the market by giving tax breaks to one-property owners who could accommodate a lodger would help. An adjustment of interest rates would take the heat off in the short term.

Resistance to reform is predicated on an evangelical belief that the market knows best and must remain unfettered. Yet levers are being pulled all over the place to manipulate this market to various self-interested ends. Lord Lawson spoke on Thursday about the huge market distortion that help-to-buy schemes effect. As the 2007 US crash amply demonstrated, the market is occasionally unable to self-correct, with disastrous global consequences. The Bank of England is coming under pressure to pull the biggest lever of all if the trend continues – that of interest rates.

Market manipulation and distortion is absolutely fine when it boosts the rich, and totally unacceptable when it helps the poor. Real wealth – land, food, water, fuel, minerals – is finite. According to Oxfam, the wealth of the richest 1% of people in the world amounts to £61tn, or 65 times as much as the poorest half of the world. "Wait," say neoliberal economists, "it will trickle down any time now."