Bubble burst is for the best

Market cheerleaders claimed this reflected ‘fundamentals’ of migration, household formation or house building. But this ignores the role of credit markets in driving prices. Few people can buy without hefty mortgages – and few will take on such enormous debts unless they expect capital growth. Like all financial bubbles, the housing market was always vulnerable to banking shocks, regardless of the ‘fundamentals’, and this bubble is finally bursting.

A decline in house prices is generally about as popular as an outbreak of bubonic plague. But although there are dangers in any sharp market correction – mainly rising repossessions and the impact on the delivery chain – in many ways a house price crash would be a thoroughly good thing.

First, it would solve the affordability crisis in the simplest way possible – by making houses more affordable. That this even needs stating shows how surreal our attitude to house prices is – and how urgently it needs to change. Now the bust is upon us, perhaps we can finally have a grown-up conversation about housing wealth. House price booms are economically regressive and socially divisive. They do not create growth, they merely redistribute wealth from poor to rich, young to old, and north to south.

A bust could also create the space to ask whether it is the state’s job to make homeowners richer. Ending the subsidy for the rich by levying capital gains tax on homes would help prevent bubbles – but this is political suicide at the height of a boom.

Most of all, a crash would enable us to change the house builders’ business model and put public interest back in the driving seat. Throughout the boom, developers insisted the Stalinist planning system was the only barrier to supply. Now they are left with thousands of unwanted ‘executive living apartments,’ and are begging the state to bail them out. Paying associations to buy up unwanted flats might get you units, but why should the social sector be lumbered with small, poor quality homes to save the builders? Buying sites cheap as cash-strapped developers release their hoarded land banks would be a more efficient use of our money than propping up their share prices. Public land buying would support the new wave of local housing companies set to replace the short-term speculative house builder model responsible for the mess with long-term investment.

Investing at the bottom of the market makes good business sense; making the market work for, not against, the public good. A crash may make radical reform thinkable again – and would anyone really mourn the loss of those gloating property millionaires from the TV schedules?

Toby Lloyd is managing consultant at Navigant Consulting