The press often gives the impression that our economy is irredeemable. However, it is important to realise that the world economy never stopped growing in the course of this recession and that the UK is very much part of a globalised economy. We live in a time where billions of people are chomping at the bit to join the high-consuming middle classes. Unlike in times gone by, these people now have the education and infrastructure to achieve their goal. The world, therefore, has the potential to grow at an explosive rate and there is every reason to believe that a Britain full of international banks and multi-national corporations will be able to join the party.
The resiliency of the aggregate world economy helped many UK businesses to survive the recession. More importantly the few businesses that perished were, or will soon be, replaced by new more competitive businesses. I saw a statistic the other day that said that 48% of UK small businesses either maintained or actually grew their businesses in this recession. The statistic for large businesses will be better and worldwide business statistics will be better still. Another important thing to realise is that UK unemployment has not reached the levels of previous recessions. This is made even more significant when productivity and population are taken into account. Our productivity and population are both higher than they were in previous recessions, which makes the relatively low unemployment numbers look even more remarkable.
It doesn’t matter if some of the world’s growth has been stimulus driven. Real businesses have been created on the back of the stimulus and existing businesses have lived to fight another day. It is this ‘other day’ that is important. If we didn’t stimulate the UK economy, other countries would be better prepared for the coming world boom and we would be left behind. In effect, the stimulus and bank bailouts are a bet on world growth. The bet will be lost if there is no world growth. The stakes are high but it’s still a bet worth taking because if the world doesn’t grow, we lose anyway. At the risk of causing utter outrage, it is quite possible that Brown will one day be lauded for his quick, bold and decisive action. Brown may even one day boast that in our darkest hour, he skilfully maintained our AAA rating.
Some people think that an improving economy will make property more affordable relative to their freshly bolstered earning power. Another group of people think that the economy will fail and that they will therefore be able to buy a house at a drastically reduced price. Both camps are wrong. House prices are largely a factor of affordability and neither boom nor bust will improve the affordability of houses
Economic ruin will indeed cause a drastic reduction in house prices. Unfortunately, the people who hope for this scenario will still not be able to afford a house because they will not have a job and/or their earnings will be drastically impaired.
An economic recovery might bolster earnings but these bolstered earnings will be more than absorbed by the evil duo of higher taxation and interest rates (we need to pay for the debts racked up in the recession). House price affordability will therefore not improve. Of course house prices might actually fall in the course of a recovery due to the aforementioned effects of taxation and interest rates. Sadly, any fall in house prices will not be accompanied by an increase in affordability because increases in taxation and interest rates will easily over-power any increase in earnings.
At the risk of striking a sinister tone, an economic recovery that is accompanied by reduced house prices will make property attractive to corporations, funds and wealthy investors. If you’re lucky they might rent one out to you.
There is only one thing that can improve the affordability of houses. A massive and sustained burst of house building will do the trick. If you can’t afford a house, I suggest you start campaigning for the release of building land.
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Tags: economics, house price crash, house price news, House Prices, housepricecrash, housing market, News, Politics
An excellent article Joseph and well argued.
I agree about house price affordability being linked to the availability of land with planning permission. The average price per acre of agricultural land is as low as £2-4 thousand. The same piece of land WITH a piece of paper saying it could be built on could be worth a million pounds. Land is not in short supply but building land is.
There is however another point regarding affordability and that is the cost and availability of mortgages. Few can purchase outright and the difference in a mortgage at 5% or 15% is something thoses of us paying mortgages in the late eighties/early nineties certainly remember!
Building zoned land obviously is part of the issue but so is the cost and availability of borrowing. Supply & Demand. Economics 101
There’s also the question of fixed rate and variable interest rates.
Leo: The cost and availability of mortgages does indeed have an effect on house price affordability. The problem is that interest rates and mortgage availability are inextricably linked to the state of the economy. As per my article, this link creates all sorts of trade offs where one positive factor may be tempered or cancelled out by another negative factor.
Everything plays a part but ultimately it’s only the actual supply of houses that can make a real difference. It is no coincidence that the incredible house price increases of the last few decades have coincided with a drastic reduction in house building
During the 1920’s and 1930’s nearly 5 million new homes were built in the UK, which represents approximately 25% of our current housing stock (excluding flats). There are several interesting books that talk about the millions of working class owner-occupiers that benefited from this post Edwardian building boom. We really need to repeat the exercise before high house prices cause some nasty social problems
25% of our housing stock built between the 1920s and 30s is a staggering stat when you think of the improvements in building quality and imaginative architecture during that period. Many house built back then still have an ultra modern appearance and were light years ahead of their time.
As many know I am not a fan of modern day mass produced housing estates however the more creative designs and aspects of modern housing I believe owe a lot to the period pre WW2 imagination which doesn’t really get the attention it should.
It was a time when the old world and new world met highly successfully and had the best of both.
Totally off topic but Cardiff’s new shopping maul is the largest in Europe and quite impressive. I highly recommend it to anyone looking for that bit of Christmas shopping.
Joseph
Another consideration is of course deographics both the number, age &family circumstances of the population. If, as government reports have suggested the population is to grow to 70M (despite what Brown has said today) then we will need a large amount of FAMILY housing. (not inner city new build flats)
Interestingly I have read that there is the equivilent of 500000 empty properties in cities (empty potential flats above shops etc).
Unless we want to increase zoned building land then to increase supply perhaps leglislation limiting the number of homes an individual may own might be necessary. ie rich city types not being allowed a home in the country as well as a city pad. Perhaps MPs might like to set the example by not having their second homes. Dreaming aren’t I!
Leo: Empty houses and flats in a time of shortage is a travesty. I would gladly back any legislation that applied a higher tax burden on second homes and on houses that are wilfully left empty. However this is still messing around on the margins. All we would be doing is eking a few more bedrooms out of the current housing stock. We need a massive building program. My best estimate is that if we were to give up just 4% of the greenbelt, we would be able to comfortably house a population of 75 million. I realise that the idea of developing a small portion of the greenbelt will be unpopular with some sections of society but its either that or face social problems down the line. It really bugs me when the government suggests that we should stick to high-density developments in Brownfield sites and other semi-blighted areas. Families need a real house with a decent garden. Providing the population with a decent quality of life will always pays dividends
Joseph I agree about the lack of building. Problem is that the ‘Nimby’ attitude is so strong and powerful. Many of those living in the ‘nice’ places: Lake District, Cornwall & even my own Somerset are, well, articulate and afflent enough (not commenting on whether that includes me!) to be able to use the system to fight planning applications in their areas. Its hardly fair to say that new builds should only be brown field or in ‘ugly’ parts of the country.
My sugestion:
1) stop immigration into the country. 62 million is more than enough. As for housing stock
2) use the tax system to stop second home owners pricing locals out of their area
how about introducing VAT on home purchases where the asking price is above a certain multiple of local income (the revenue to be used to build local social housing.) eg Cornwall has an average income of £15k. If meaningful stamp duty type taxation were introduced – say VAT at 15% – on any purchase price over say £90k (six times local income) would that reduce demand?
Leo,
1) Yes, but manage it. There are some people who have skills and qualifications that are usefl to us but provided it’s balanced with people leaving that would be fine be me.
2) No. Firstly, don’t mess with the market there are enough distortions already. And secondly, being born somewhere does not give you a right to live there forever. It’s a free country. If a legal immigrant wants to buy a house in Cornwall why should they be prevented?
Joseph,
If by opening up 4% of the greenbelt land you actually mean the greenbelt around London and other cities rather than National Park land, the problem is still one of density because we don’t have good enough infrastructure (roads, railways reservoirs) now let alone for millions more. If however you want to see a wider distribution of people across the country rather than concentration in the cities there would need to be incentives to employers to disperse employment more widely too.
One way to help down that path might be to site the next London airport on Salisbury Plain and build Japanese style high speed train links to it from London, Birmingham and Cardiff.
In years gone by to run a business you needed natural resources and people. That usually dictated where you set up business ir where businesses thrived.
Now in this country ot seems all you need is a power supply socket and a computer, no wonder everything gravitates to a few high density areas.
It might be a good move to limit the density of businesses in any area and make them pay the travel expenses of all workers to get into work or pay relocation costs.
Then it would be in business interests to look carefully at where they start-up.
When we build houses, we have to also build infrastructure. That is a given. It seems to me that we live in an age where every proposal is accompanied by a ‘but it’s not that easy’. When did we become so negative? The Victorians built a lot of houses and they built sewers, roads, railways, schools, hospitals and factories to go along with their new houses. In fact, they built them so well that we still use then today. Yes we need infrastructure to accompany our new houses but it’s so obvious that it’s not worth talking about. It’s akin to arguing that athletic activity needs a sharp intake of oxygen but its not that easy because you also have to exhale. If the Victorians could build infrastructure with pick axes and shovels then we can do it with our cranes and 100 million pound boring machines.
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