The myth of affordable housing
Richard Northedge argues that the way to stop house prices soaring is to restrict mortgages — just like the old days The latest non-job in Britain’s town halls is the affordable housing officer, a bureaucrat with the brief of bringing down the price of property. What local and central government mean by ‘affordable housing’ is, of course, housing that is more affordable, but the fact is that all housing is affordable, otherwise it would not sell or let. Not all housing is affordable to everyone, however — but then it never was.
Affordable housing (lack of) is nevertheless one of the causes of the day for the something-must-be-down-about-it campaigners. There is a National Affordable Housing Programme. A coalition of Shelter, local government and several other usual suspects is demanding the government spend £11.6 billion to provide low-cost homes. The housing minister Yvette Cooper counters that Labour has doubled the investment in affordable housing over its decade, but, as house prices have trebled in the same period, she would be better off pointing out just why they are so ‘unaffordable’.
It is not sellers who drive up prices, nor housebuilders, nor even the price of bricks. It is not land values — they are high because builders outbid each other for sites. It is not even wicked estate agents. It is buyers who set prices. Every time a purchaser offers an extra £1,000 to secure a property, he or she has pushed up prices yet further. If there really was a lack of would-be first-time buyers, sellers would have to drop their prices; instead it is competition between those jostling to get their foot on the ladder that constantly pushes the bottom rung further away.
And the more money people have available to spend on property, the higher they inflate prices. So when the Abbey gives loans of five times salaries, or the Halifax provides mortgages 25 per cent bigger than the value of the property, as Ross Clark reported here recently, these mighty lenders are not helping people achieve their impossible dream; they are making it more unattainable for everyone else.
The same paradox is true of parents who complain that prices are so high — then give their offspring the resources to overpay, thus setting a new benchmark for others to beat. It is just possible, however, that these parents are intentionally fuelling the rise in house prices when they increase their asset allocation to the property sector by making a highly-leveraged tax-free investment in their children’s name: each £10,000 used to inflate their progeny’s pied-à-terre is multiplied several-fold when the rising market lifts the value of the parents’ more expensive main home.
In the days when Abbey and Halifax were building societies, they unwittingly did all they could to hold down prices by restricting loans. Buyers needed to find 20 per cent of the price from their own resources; they could borrow only two and a half times their income and they had to save regularly for six months or more first. That six-month apprenticeship proved they could meet regular payments, thus making defaults less likely. Saving has gone out of fashion, however: rather than forgo a holiday and put the money towards a house purchase, we now spend our weeks abroad, then complain we cannot afford a place to live. But although interest rates were in double figures in those distant days, there were still so many prospective borrowers that they had to join a queue that could last several more months before a meagre mortgage was made available to them.
Though it was a cartel waiting to be smashed, the effect of limiting the size of buyers’ loans and telling them to wait was to apply a useful brake to the market. But even that, we should remember, did not make housing ‘affordable’ if people could not borrow the money.
Nevertheless, prices periodically surged just as much in those days as they have recently, and slumped just as much as they might still do in future. Yet it is those surges to so-called unaffordable levels that make people want to buy. In housing, as in wages, we love inflation: without the possibility of it continuing we are no more likely to buy a home than we would purchase a lottery ticket after the prize-winners are announced. Even those high-minded people who claim to buy a house as a home rather than as an investment would rarely do so if they believed the value was about to plummet.
This is why many of the people complaining now about unaffordable housing failed to buy when property was more within their means. The streets were littered with houses for sale in the mid-1990s at a fraction of today’s prices, but most first-timers had no wish to put their savings into a market that had been falling for half a decade. Purchasers determined prices then just as they do today, and their lack of interest ensured that prices were low: sellers could no more make people pay over the odds then than they can now.
Politicians are nevertheless trying to bend these free-market rules by providing subsidised houses for ‘key workers’ nurses, teachers, council staff and everyone else who works for the state but whom the state does not pay well enough for them to be able to rent or buy a home without help. On top of the taxpayers’ contribution, an even larger subsidy comes from the private sector. Property developers are told to include a quota of affordable units alongside their unaffordable homes. It is the price for which councils sell planning permissions. It means that bus drivers can live in central London properties that even well-paid people cannot afford and ensures that those rich enough not to use public transport have bus drivers for their neighbours. Such social engineering amuses council officers.
However, sooner or later these affordable homes will be sold to people in nonessential jobs at market prices sufficient to provide the key workers with tax-free capital gains that more than compensate for their low pay. The firemen can thus use their windfalls to move even higher up the housing ladder — while a new generation of nurses and teachers will make their special pleadings to be helped into the market rather than accept that such a major purchase has always been difficult and for some will always be impossible. The rightto-buy never did come with a cheque attached upfront.
The suspicion — and the economic logic — is that if we wait, the housing market will cool and property will become more affordable for everyone. But for those who cannot wait for market forces to act, the best way to bring purchasing within more people’s means is to stop giving buyers the resources that drive up prices. Using the money supply to control inflation may no longer be fashionable among economists, but make it harder to borrow rather than easier, and housing will soon become more affordable for all.
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