The housing get-rich-quick scheme is dead in the water. And not a moment too soon

Homes are even less affordable now than at the height of the 2007 housing bonanza

For an anxious owner of an enormous mortgage, I’m going to say something unexpected: the lack of meaningful growth in house prices over the past year is a wonderful thing.

The latest official data shows that the price of the average house in the UK inched up by a measly 0.7 per cent in July compared with July 2018. House price inflation has fizzled markedly since 2016 but, looking over a longer period, generally weaker price growth appears to be the new normal. 

In the decade since the end of the last recession, house prices have increased much more slowly than in the 10 years before the slump.

I do worry about house prices actually falling (as they have done in London already) – particularly if a sharp drop accompanies a no-deal Brexit and raises the spectre of negative equity. Wouldn’t it be nice if the housing market returned to those heady days before “subprime” became a household term? I’d be able to watch the value of our house tick up nicely in the happy knowledge that remortgaging will be a doddle and that one day, when my husband and I sell our home, we’ll make a pile of money.

But, of course, I know that the frenetic pre-crisis growth in prices put home ownership out of reach for too many people and we should not wish for its return. A decade on, its effects are still palpable: depending on the measure, housing affordability is at or near a historic low. 

For example, compared with average earnings, homes in England and Wales are now more expensive than at any point since official records began. That’s right – they are even less affordable than they were at the height of the housing bonanza in 2007. And it will take a long period of stagnation in prices to make a dent in that.

So, at least as a country rather than individually, why would anyone want house prices to rise strongly from their already high level, making a place of one’s own even more of a pipe dream for millions of renters? 

Some may say there is nothing wrong with renting but I disagree – in this country, there is. Renters in Britain enjoy far fewer protections than on the continent, something I can personally attest to having endured 10 years of shady agents, neglectful landlords and some difficult flatmates.

Buying a home when house prices are high, even if interest rates are low, means homeowners spend a larger share of their income on monthly mortgage payments. That has a direct impact on our living standards, as the Resolution Foundation demonstrated in a report released just after the EU referendum. 

If workers are not making the most of their skills, the whole economy loses out. Likewise, economic growth may suffer if house prices diverge widely between regions, as they do in the UK

Its analysis showed that if a two-income family with one child was paying the same proportion of their income in housing costs in 2016 as an equivalent family did in the early 1990s, they would be £1,400 a year better off. The loss is equivalent to a 9p rise in the basic rate of income tax over the period.

“If households are spending an increasing proportion of their income on housing in a period of earnings growth and record-low interest rates, something must be going very wrong indeed,” the report said. 

Besides squeezing monthly budgets, high mortgage costs lock homeowners into a minimum required income. That makes it harder, say, to take a paycut for a new job with better conditions, a less punishing commute, or that offers a better match for their skills. 

The costs are not just personal. If workers are not making the most of their skills, the whole economy loses out. Likewise, economic growth may suffer if house prices diverge widely between regions, as they do in the UK. 

The disparity discourages people from moving to a more expensive area for a job, and that means employers miss out on the productivity boost that could have followed from that worker’s particular skills and experience.

Fast-rising house prices also worsen inequality between generations and within generations, as a person’s wealth is increasingly determined by the arbitrary timing of their house purchase. Meanwhile, those who were well-off enough to get onto the housing ladder stand to make a lot of money simply from selling their home later on. 

But hang on, don’t rising house prices benefit the economy by making homeowners feel richer and encouraging them to spend more? 

It is not an uncommon argument. However, the Bank of England has looked into this so-called wealth effect and concluded it doesn’t really exist. Rather, the same factors drive both house prices and consumption, with one example being households’ uncertainty about the future.

In that sense, a phlegmatic housing market signals a looming slowdown in consumer spending – bad news for an economy as reliant on consumers as Britain.  

But over the longer term, the change of pace in house price growth should mean we’ll all treat our homes as just that – a secure and comfortable place to live – rather than a get-rich-quick scheme.