The pounds missing from your pocket

Posted by: Colin Wiles

11/10/2012 6:38 pm

Most people accept that our housing market is bust. House prices remain stubbornly high even though a whole generation can’t afford to buy. The planning system won’t deliver the homes we need, and builders won’t build them even if it did. The private rented sector is growing yet rents are still rising and in many parts of the country it costs more to rent than to buy. Bed and breakfast is booming. Every year, the government invests around £1 billion on new “affordable” housing, yet spends £23 billion on propping up high rents through the housing benefit system. It’s a crazy world.

But it’s important to remember that this dysfunctional housing market does not just create personal misery, it also has damaging economic consequences. 

A recent piece of research by Shelter shows that if private rents had risen only at the same rate as general inflation since 2001 private tenants would now have an additional £8 billion in their pockets, that’s an astonishing £2,000 per household each year. Imagine what an impact that extra income could have on the economy.

But it strikes me that the Shelter research could also be applied to the owner occupied sector. House prices have increased at roughly four times the rate of general inflation over the past thirty years. That means bigger mortgages, which means less disposable income for home-owners. As a result, our housing costs are the third highest in Europe. I haven’t been able to source any figures on how this impacts on household incomes, but my back of an envelope calculations go as follows: the LSE calculates that rents would have risen by only 22% if they had followed CPI since 2001 compared to an actual increase of 76%. If we apply the same ratios to the 11 million home-owners with mortgages, paying an average of £500 a month, (that’s £66 billion a year), then homeowners would have an extra £19.5 billion in their pockets every year if house prices had increased in line with CPI. That’s £1,770 for each household. (Of course interest rates are at an historically low level and a like-for- like comparison is difficult, but I think my figures are in the right ball-park, unless anyone out there is prepared to challenge them?)

So that means private renters and owners have effectively been robbed of a staggering £27.5 billion per annum as a result of inflation-busting house prices and rents. That’s roughly half of the entire annual spend on education. Imagine if that money was available for spending by households in the UK economy instead of being poured into the pockets of landlords and mortgage companies, and then swallowed up by the the sub-prime debt mountain. Is it any wonder that our economy is suffering from a lack of demand? And of course, high rents also add to the cost of goods in the shops, as they increase the overheads of all traders.

Compare and contrast this to Germany where house prices have fallen by ten percent in real terms over the past thirty years and where housing costs are significantly lower, due primarily to their willingness to release sufficient land to keep housing markets in balance, to restrict the amount of mortgage credit and to regulate the private rented sector making it an attractive alternative for potential home-owners. As a result, Germans enjoy stable housing rents and house prices and some of the highest standards of living in Europe. They can invest their surplus cash in savings, cars, holidays and other consumer products that benefit the economy.

The clear message from this is; yes housebuilding can provide a major economic stimulus, but it is low rents and low house prices relative to incomes that will create the greatest economic benefits in the long term. David Cameron’s attack on the NIMBYs this week was a welcome development but we still have miles to go before we reap the benefits of a balanced housing market and restore the pounds missing from our pockets.