No bubble, no slump

Simon Nixon says property prices will continue to hold steady because we’re not building enough new homes You’ve got to hand it to David Cameron. He’s just taken on this big new job, he’s got a baby on the way in less than three months, and he chooses now of all times to move house. My advice, based on painful experience, is: don’t do it, Dave. The job and baby are enough. When it comes to the house, stay put.

My wife and I went for the same treble at the start of 2005, moving one week after the birth of our first child — and it pretty much poleaxed us for months. Cameron needs a clear head for all these big decisions he’s got to make, such as whether to wear a tie to talk to John Humphrys. The last thing he needs is to spend his weekends trying to find a parking space at Ikea.

But the passage of a year has given the Camerons a huge advantage over the Nixons: David and Samantha won’t have to endure the stress of worrying that the bottom is about to fall out of the housing market. Instead, all the evidence suggests that house prices are holding up nicely, which is one in the eye for all those doom-mongers who spent the past four years predicting that a crash was imminent and inevitable.

Nationwide reckons that prices will end the year up 2.4 per cent — a modest rise, but a rise nonetheless. In the last few months there were more buyer inquiries, more mort gage applications and approvals, and more transactions completed. All the major forecasters are now predicting further modest gains in 2006.

At last I can relax and enjoy my ex-council house opposite a crack den on the wrong side of the railway from Cameron’s Tory heartland of Notting Hill. The only thing that keeps me awake at night now is the hoodies fighting outside my window. I’m no longer even scared to open the Daily Mail. But it does beg the question: how come so many people called the market so spectacularly wrong in 2005? That’s a question that should interest Cameron too, since his political fortunes may hinge on the answer.

The problem was that people got too hung up on looking at the past as a guide to the future. Between 1999 and mid-2004 house prices rose 120 per cent. As a result, the average house now costs nearly six times the average annual income, compared with a longterm historic average of three times. The assumption was that sooner or later house prices would inevitably fall back to the longterm average, as they had after previous bubbles.

But this time they haven’t. That may be because there was no bubble to burst. Far from being the product of irrational speculators, the boom was a rational response to changes in the market. There are three rea sons that high prices now seem here to stay.

First, Britain isn’t building nearly enough houses. We’ve got some of the oldest and pokiest housing stock in Europe, according to a study by the think-tank Policy Exchange. Some 45 per cent of our houses were built before 1945, more than any other developed country. We are building fewer houses now than in the 1930s. According to government figures, there has been a 30 per cent increase in the number of households over the last 30 years, but a 50 per cent fall in the number of houses being built. Each year we fall 30,000 houses short of the number of households being created.

Second, people today are able to borrow — and mortgage companies are willing to lend — much higher multiples of salary. That doesn’t mean borrowers and lenders have taken leave of their senses. It is simply a rational response to low interest rates and inflation. When inflation was 12 per cent and interest rates were 15 per cent, anyone borrowing four times their income would be paying 60 per cent of their pre-tax salary in mortgage payments. Clearly this was impossible. But with inflation at 2 per cent and interest rates at 5 per cent, the same person would be paying only a perfectly affordable 20 per cent of their pre-tax salary.

Third, with interest rates so low, property investors are willing to accept much lower returns on their investments. Long-term government bonds yield little over 2 per cent more than inflation compared to 4 per cent a decade ago. That has sent income-hungry investors scrabbling to snap up anything that offers a decent inflation-proof return, whether it be stocks, fine wines or buy-to-let flats. The OECD thinks the market has driven returns down too far, leaving house prices 15 per cent overvalued. But assets can remain overvalued for a long time if people are confident that conditions will remain stable. Besides, rents tend to rise with earnings — and with earnings growing at 4 per cent a year any overvaluation will gradually erode.

The consensus now is that house prices will drift sideways for the next few years, doing little more than rise in line with inflation. That’s a big relief for me and David Cameron and anybody else who bought a house in the last 12 months. But Cameron’s joy should be tempered by the knowledge that this will make his political job that much harder.

From a narrow political perspective, it means he can forget about the economy going disastrously wrong between now and the next election. There’s not going to be a great house price crash to catapult him into Downing Street. The economy has passed its point of maximum danger. All the signs are that consumers are recovering their nerve and that barring a global crisis — the economy should grow by about 2.5 per cent next year.

But the self-anointed voice of the future will need to address the dire social consequences of sky-high house prices if a future Conservative government is to have any relevance to younger voters. The Joseph Rowntree Foundation reckons there are 1.25 million families who don’t qualify for housing benefit but are too poor to buy the cheapest properties in their area. Small wonder that the average age of the first-time buyer is now 34. And with no inflation to erode their debts, most will stay in debt for most of their adult lives. No wonder people are delaying starting families and failing to save for retirement.

No one wants a return to high interest rates and high inflation. But Cameron must pledge himself to tackle Britain’s outrageous planning system. Twenty-five years ago, it took eight to 12 weeks to get consent for a non-contentious site, according to the House Builders Federation. Today it takes between eight and 18 months. After years of dithering, the government is finally promising proposals to speed up the process. In his new spirit of co-operation, Cameron should not hesitate to support them.

But he also needs to be much more radical. The current system suffers from far too much government interference, both at central and at local level. John Prescott thinks he is better placed than the market to decide what houses people should live in and where they should be built, so he sends out detailed targets to local authorities. If he had his way, we’d all live on top of one another in twobedroom flats in inner cities, rather than in the family-sized houses with gardens that we actually want.

The priority must be dramatically to boost the supply of land. Cameron is said to be eager for a ‘Clause Four moment’. He should pick a fight with the Nimby tendency, and pledge to scrap that 1930s anachronism the Green Belt. Sure, there’d be an almighty row with the Home Counties bourgeoisie. But why should an entire generation be beggared so that a handful of stockbrokers in Godalming can be spared the smoke from their neighbours’ barbecues? As a statement to the world beyond Notting Hill that the party has genuinely changed, it would speak far more eloquently than not wearing a tie.

Simon Nixon is executive editor of breakinWviews.