Houses for votes
Ross Clark shows that for electoral reasons the government is rigging the market to ensure that the property boom continues
It is little wonder that Gordon Brown last week hurried to the pastel sofas of the GMTV studio to reject the warning by the Governor of the Bank of England, Mervyn King, that people should think twice about buying a home at current prices. There is one figure which the government is going to be watching even more closely than the opinion polls in the year leading up to the next election — the Halifax house price index. Never mind Iraq, never mind foundation hospitals, never mind the European constitution; there is only one matter capable of causing the catastrophic collapse in electoral support needed for Labour to lose the next election: that is a large drop in house prices.
Whatever they think of Labour's other achievements or non-achievements in office, there is little question that the average household feels enriched by the Labour years, and enriched for one reason: the value of property has gone up, and gone up far faster than general prices. Averaged across the country, houses are now worth 2.4 times what they were when Labour came to power on 1 May 1997. For most households, the apparent rise in housing wealth has outstripped any losses on the stock market. It has encouraged homeowners to treat their homes as their pensions or to withdraw capital from their homes in order to spend it on other goodies. Many have been tempted to go further and make speculative investments in the property market: ordinary people who would never dare borrow money to invest in the stock market have been persuaded to gear themselves many times over in order to build themselves a portfolio of a dozen or more investment properties.
Few appear to have grasped that this massive creation of wealth is illusory. We are, by and large, still living in the same crummy old houses as we were in 1997. It is not so much that they have risen in value as that money has fallen in value. To put the rise in house prices in an alternative context, the pound in the homebuyer's pocket back in 1997 is now worth just 41 pence. Rising house prices are as much a kind of inflation as rises in baked bean prices. They do not amount to the creation of wealth, but to the redistribution of wealth to homeowners from non-homeowners. House price inflation distorts the economy, lowers the standard of living for those who failed to buy a home several years ago and, by trapping people with large mortgages, greatly harms the mobility of labour which is essential to a dynamic economy. Worse, there is always the danger that the speculative bubble could burst, leading to misery and ruin on a scale which contributed to the collapse in support for the Major government in the early 1990s.
During his first term as chancellor, Gordon Brown was prepared to tolerate house price inflation. Over the past couple of years, however, he has begun positively to encourage it. Most blatantly he has done this by dropping the Retail Prices Index (RPI) as the official measure of inflation and replacing it with the Index of Consumer Prices (ICP). The Chancellor excused the change on the grounds that he needed to bring Britain's inflation figures in line with those of the rest of the EU. Yet clearly this is far from the whole story. While the former contained a minimal element of house price inflation, the latter includes no housing costs whatsoever: thus the official 'cost of living' index now excludes the cost of putting a roof over our heads, as if we all slept over the hot air vents above King's Cross Underground station. The effect of this statistical manoeuvre is to compel the Bank of England's Monetary Policy Committee (MPC) to ignore house price inflation when it comes to setting interest rates. While the base rate has risen from 3.5 per cent to 4.5 per cent over the past nine months, it would have risen far faster had the MPC been charged with moderating house price inflation, now rising at close to 20 per cent. Manipulation of the inflation figures is far from the only way in which the Chancellor has sought to stoke the housing boom. Over the next three years he has committed himself to pumping /690 million of taxpayers' money directly into the housing market. This he is doing through the so-called Keyworker Living scheme, which is designed to help public sector employees to buy homes in areas where they would otherwise be unable to do so. If you are a teacher, nurse or fireman, you can apply to the government for an interest-free loan of up to £50,000 (f100,000 in the case of some teachers) to help you buy a home on the open market. Disgracefully, officials at the the Office of the Deputy Prime Minister have added themselves — planners — to the list of 'essential' workers who qualify for the loans.
That London is losing teachers and nurses because of the high cost of housing is clearly a problem. But to attempt to solve the problem by subsidising the buying power of one particular group of buyers is economically illiterate: all it achieves is to exaggerate inflation, ultimately making life more difficult for everybody, not least for essential private sector workers such as plumbers and shop assistants who do not qualify for the handouts. One can only assume that the Chancellor appreciates the inflationary effect of the Keyworker Living scheme but is nevertheless intent on it for two reasons: firstly, to give Labour-supporting public sector workers a pay rise which will not show up in the figures for wage inflation, and secondly to keep the housing market pumped up for fear of the electoral consequences should the bubble burst.
Just when it seemed that the housing market might finally have peaked, last year, Gordon Brown hit on a further way to encourage it: he announced that as from next year investors will be allowed to shelter residential property investments from tax by holding them within a pension fund. Much though I hate to criticise a tax cut, to take this measure in the middle of a speculative bubble in house prices is madness. On the same day that the Chancellor made this announcement, he also removed many of the tax advantages of holding shares within an Individual Savings Account. He thus sought to encourage the flow of money from the stock market into the housing market, at a time when any encouragement ought to be in the other direction.
There are signs this week that the great party for property investors may finally be at an end and that prices may be falling in some areas. No one should discount the possibility that the Chancellor, yet again, will dream up some wheeze of stimulating the market and pumping up prices for a few months yet. But with any luck the inevitable crash will come before the general election, expected next May or June, so that Gordon Brown, who has done so much to stimulate the boom, gets the full credit for causing the consequent bust.
Previous page
