Real Estate

Britain’s house price boom is not too big to fail


Britain’s housing market appears to have defied gravity throughout the coronavirus pandemic. While unemployment has risen and many have struggled, higher household savings among those who have kept their jobs and an extended period stuck at home has left quite a few rethinking their living arrangements. More concerning is the role that government policy has played in pumping up the market — running the risk that when gravity returns, a hard landing will follow. 

Though the stamp duty “holiday” that provided a tax break to purchasers was originally planned to end this month, that prospect appears to have dulled buyers’ appetites only slightly. The rollout of vaccinations and a potential return to the office has not stopped Britons from questioning whether they want a new house further from the city centre and with more open space. Property portal Rightmove reported house hunting volumes hit a record in January. Prices rose in February, according to the Nationwide Building Society, though economists expected a slight dip as buyers anticipated the end of the tax holiday.

This has left the housing market “too big to fail”, says the boss of one of the UK’s largest housebuilders, who fears government policy to encourage buyers is feeding an unsustainable bubble. There are concerns that, along with the stamp duty break, the decision to keep estate agents open through the lockdown has kept prices rising. That might lead to the government having to keep intervening to prevent consumer confidence and spending from collapsing along with property values. 

Housing can be both a casualty and a cause of recessions. In Britain, consumer confidence closely follows the housing market, but when workers lose their jobs forced sales can help pull house prices down — depressing consumption further and increasing job losses. This time, however, the furlough scheme — in which the government pays 80 per cent of workers’ wages — has kept a lid on unemployment. The Office for Budget Responsibility, the fiscal watchdog, expects unemployment to peak at 6.5 per cent later this year, compared with 8 per cent after the 2008 financial crisis. 

Worryingly, government policy has helped to provide subsidies for demand rather than increasing supply. In last week’s Budget, chancellor Rishi Sunak extended the stamp duty holiday until June, then at a lower level until September. This is not entirely unreasonable: stamp duty is not a well-designed tax and in the long term should be rethought. But it will help to keep house prices high; market watchers think the tax cut contributed to the 7.5 per cent rise in values in 2020.

Sunak’s promise of state guarantees of mortgages worth 95 per cent of a property on homes worth up to £600,000 is a bigger mistake. If banks are unwilling to finance buyers on those terms that should be a warning for the government to stay away. There is no evidence of market failure. If anything, the state’s role should be to discourage banks from lending to borrowers without sufficient buffers, given the potential damage to the wider system from defaults. 

The furlough scheme and stamp duty holiday cannot last for ever. An apparent exodus of foreign residents thanks to Brexit and the pandemic could also depress medium-term housing demand. Sunak is betting on higher household savings producing a consumption-led recovery once lockdown ends. Some of that cash may instead feed a house price boom that swiftly turns to a bust. Instead of adding fuel to the fire, the chancellor should prepare for that possibility.



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