When it comes to housing, we really do keep having the same conversation in Britain
Welcome to this week’s Home Front. You are not imagining it. When it comes to housing, we really do keep having the same conversation in Britain: homes are too expensive, and first-time buyers cannot borrow enough to buy them.
It is for that reason that Chancellor Rachel Reeves has announced changes to mortgage lending which will, in theory at least, allow lenders to give lower-income first-time buyers more credit.
If you have got deja vu, it is because we have heard it all before. And, as I wrote here, finding creative ways to get would-be homeowners into enormous amounts of debt only reinforces the feedback loop of high house prices.
There is a bigger problem emerging, though. And it impacts us all, whether we own homes or not.
Britain’s dysfunctional and “stalled” housing market has become a drag on the economy. And, unless something changes – fast – it will hinder the new Labour Government’s promise to go for growth.
Allow me to explain how and why.
In this week’s newsletter, we go inside the Bank of England (BoE) to talk to Rupal Patel, a senior economist, about how Britain’s central bank makes the interest rate decisions that not only affect those of us with mortgages, but also all of our lives.
I met Rupal at the BoE, in the heart of the City of London.
The Bank, which is separate from the government and not a political institution, is often subject to immense criticism, particularly in recent years, given their responsibility for raising interest rates to curb runaway inflation.
Some think tanks – such as the Institute of Economic Affairs (IEA) – have been vocal in their view that the Bank should have reduced interest rates, which remain at 4.25 per cent, much harder and faster.
Everything the Bank’s economists do is, however, as Rupal puts it, “a tight balancing act”.
“We have to make sure that interest rates are at a level which means that inflation comes back to target soon,” she explains. The rate at which the price of goods and services goes up is, of course, still above the 2 per cent target at 3.4 per cent.
Balancing an economy, frustratingly for politicians, takes time. It is also not simple.
As much as high inflation, which peaked at 11 per cent in 2022, would have been ruinous for Britain if it had continued, the opposite would be no better.
“If deflation occurs, it can be devastating for an economy,” Rupal explains. “For example, if you want to buy a pair of shoes but you know that tomorrow they’ll be cheaper than today, then you’ll put off that spending. If that happens across the economy, then shops close down and people become unemployed.”
So, whenever the Bank’s most senior advisors – the Monetary Policy Committee (MPC) – meet, they are walking a tightrope which allows them to keep the economy going, without allowing it to run too hot or cold. As Rupal puts it, “they have to think about what the population is going to be doing for the next two years”.
And that brings us to why housing is the biggest challenge that Labour currently faces.
Reeves has tried to stimulate the housing market by encouraging more lending to first-time buyers.
When there is more demand from homebuyers, house prices rise, and this, in turn, has historically meant that homeowners borrow and spend more because they can see their home growing in value.
The problem today, however, is that house prices are so high – in some places 8, 9 or 10 times above average wages – that they cannot really rise much more. Unless wages dramatically increase to meet them, which is unlikely to happen.
Through the 1990s, 2000s and 2010s, successive governments failed to address the fact that house prices were soaring above wages.
That leaves Reeves and our economy a bit stuck. We do not want prices to fall dramatically, but equally, if they rise much more, it will be almost impossible for new buyers and, even, some movers to buy any of the new 1.5 million homes that are supposedly going to be built.
The bitter truth is that short of building affordable housing or subsidising home ownership (as David Cameron’s government did with Help to Buy), there is not much that can be done to fix this mess.
“Usually wages go up with inflation,” Rupal says. “So, as the cost of things goes up in the economy, employers raise wages. But it’s really difficult for employers to increase wages by the sort of multiples [we’ve seen with house price inflation].”
“Unfortunately,” she adds, “because the housing market is a private market, there are few things that the Bank of England or even really the Government can do to make housing more affordable.”
Everyone – from economists to politicians and their advisors – knows this. The big question is whether Reeves and her team will be bold enough to try something different.
What do you think the government should do about Britain’s housing market? I would love to know vicky.spratt@theipaper.com
Rupal Patel is the co-author of Why Can’t We Just Print More Money: Economics in Ten Simple Questions
Key housing
A misunderstanding about whether social housing tenants’ relatives can “inherit” their family’s home seems to have erupted over on X (formerly Twitter).
So, just to clear things up. It is true that the relatives of a lead tenant living in social or council housing can take over their lease when they die.
Particularly, for instance, if they are the children of the deceased person and are already living in the home.
However, they do not simply “inherit” a social home. Instead, they take over the lease. They are still required to pay rent.
I often receive messages from young people – in their late teens and twenties – who live in social housing and have prematurely lost parents who did not put them on the lease before dying.
These people are often distraught because they have received notices asking them to leave their homes.
That is why “succession” exists for social tenancies. It is not a handout.
Vicky’s pick
As a millennial woman, you will be unsurprised to learn that watching Lena Dunham’s GIRLS defined by early twenties.
It was groundbreaking television with writing so on the nose that it was at once impossible to watch or turn away.
Dunham is back in a big way with her new Netflix series Too Much. It is the semi-autobiographical story of a young woman who blows up her life in New York and decides to move to London in search of a Mr Darcy dupe.
I had Covid last week, so it is safe to say I consumed the entire show in almost one sitting on Saturday. It did not disappoint. Welcome back, Lena.
I will refrain from commenting on the fact that the lead character seems to be Airbnb-ing an ex-council flat in East London during her stay in the Capital.