Is the era of house price inflation over for good? I ask because the Labour party is considering giving the Bank of England responsibility for limiting house price inflation, by restricting mortgages if prices look like rising too much. Grace Blakeley, whose report for the Institute for Public Policy Research (IPPR) think-tank inspired the idea, has proposed a target of zero price increases for five years followed by 2 per cent a year. This would mean that prices don’t rise in real terms.
There is a case for such a move. As Charles Goodhart, a former Monetary Policy Committee (MPC) member has said, rising house prices reduce the value of our money just as much as rising goods prices do, so they should be part of an anti-inflationary policy. And high house prices do some real economic damage. They encourage high debt, which is potentially destabilising. They divert spending towards rent and mortgage payments and away from new goods and services, thereby reducing dynamism and innovation. They encourage people to commute long distances, which increases stress and cuts productivity. And they encourage 'property development' at the expense of more productive forms of entrepreneurship.
But would such a target work? Its mere existence might do so. If people know that policy-makers want to stop prices rising in real terms, house price expectations will fall. And this will deter speculative buying.
On the other hand, though, the idea has its limits. One is that house price booms tend to be local, and yet the Bank of England’s policy tools are national. There’s not much point limiting mortgages in Bradford to stop prices rising in London. And such restrictions would deny mortgages to people who haven’t saved big deposits, but grant them to those who have access to the Bank of Mum and Dad. I doubt this is what the Labour party wants.
Worse still, the Bank has only one tool to curb house prices – limiting mortgage lending – whereas more and better might be needed, such as taxing land, encouraging renting, changing planning laws or radical reform of the banking system as Ms Blakeley wants. (Many of you might add increasing housebuilding to this list. In truth, though, many economists such as Josh Ryan-Collins at University College London and the Tony Blair Institute’s Ian Mulheirn doubt that prices are much sensitive to new building. This is because house prices depend upon demand for the stock of housing, and new building is a tiny fraction of this stock.)
Personally, I suspect this debate is a little redundant because in coming years the market might do an effective job of limiting house price inflation.
Nevertheless, there is a massive issue here for investors. The house price inflation we’ve taken for granted need not be a permanent fixture. In fact, as a team of German researchers have shown, it only really began in developed economies around the 1970s – first as a hedge against inflation and then as a result of credit liberalisation. In the first half of the 20th century, house prices were mostly flat in many nations.
Perhaps we are about to revert to that pattern. If so, it requires big changes not just in the banking system, but in investor psychology, too.
