Civitas has a new paper (pdf, reports in The Observer) on housing out today by sociologist Peter Saunders, with some surprising conclusions. Saunders argues that demand stimulus—open credit markets, foreign investment, immigration and increased housing wealth itself—has driven house prices up, breaking their historic link with prevailing wages.
He argues that the solution to this problem is rolling back Help to Buy and other demand-side subsidies, as well as a change to monetary policy requiring the Bank of England to target house prices, and a new round of Right To Buy, but this time applying to private properties as well as council houses. Help to Buy is a bad policy, and demand for housing has risen, but outside of these, Saunders is deeply wrong about practically every claim in his monograph, and his proposed policies would be disastrous, a bizarre proposal to centrally control the pricing mechanism in a key industry, coupled with legalised theft.
Here's why Saunders is wrong:
- Throughout, Saunders compares house prices to wages. But house prices are more like human capital—an asset that produces a steady stream of some desirable output; shelter or labour. Since it's hard to put a number on the value of someone's human capital, he'd be better off comparing the cost of servicing a typical mortgage to wages, since this is what you actually need to afford with your wages. By this measure, things look very different; mortgage payments are where they typically have been, at around 20% of income.
- Saunders thinks that these homeowners will get a big shock when interest rates rise and their mortgage payments jerk up. For one thing, many mortgagors have fixed rate mortgages, which will stay stuck. But for another, expectations of low future interest rates are precisely why house prices have risen so much—markets and home buyers are pricing in a (reasonable) guess that market interest rates are not just low now, but will be for a long time. Indeed, this is why the situation for those on tracker mortgages (those linked to the Bank's base rate) is not as different as many people think. The payment rates are tied to the BoE rate because lenders and borrowers both (reasonably) believe that market rates and the Bank rate are driven by the same factors. Both the Bank and market lenders push their rates up when prospects improve, and down when they worsen, more or less.
- Saunders claims that wide homeownership is a particularly good way to encourage wealth-accumulation across society. But there is good evidence that homes are no better than any other assets—holding shares in a FTSE100 tracker, for example, is just as good.
- Giving the Bank of England a secondary goal, targeting the ratio of house prices to wages would be utterly bonkers, requiring them to crash the rest of the economy to meet an arbitrary aim they have very little direct control of. As we saw at the beginning of the crisis, the prevalence of tracker mortgages is contingent on Bank of England rates being set for other reasons. If the Bank tried to target the price of housing through the link between many market interest rates and its own base rate the link would be severed—a classic example of Goodhart's Law. But even if it could have a major influence on either side of the equation, it would be crazy to set interest rates and QE too high or too low for the rest of the economy, and risk a dangerous boom or costly bust overall, to try and centrally plan the prices in one particular market.
- Saunders is wrong that supply is irrelevant to high rents, mortgage repayment costs, and the related high house prices. Usually high prices drive firms to open up shop, increase supply, and drive down prices through competition to gobble up the profits. This is why we have pricing! Markets are about demand and supply. But in the housing market incredibly strict regulations stop this. And we have high quality econometric evidence backing this up: house prices would be 35% lower if there had been no regulatory constraints on housebuilding 1974-2008.
- A right to buy council housing and right to buy private rental housing are completely different things. One is a privatisation scheme, very generous to its beneficiaries. One is legalised theft. I have a house, you rent it and want to buy it for a price a bureaucrat deems appropriate; I value it more than that price and would not like to sell it. On Saunders scheme I have no say over my own property. Yes, this would drive down the price of housing—by trampling over hundreds of years of established property law—but it would only drive it down because it makes housing genuinely less good of a thing. Not everyone wants to own right now. Moving house when you own is vastly more costly and not everyone wants to stay where they are now forever. Landlords provide a valuable service, and smashing that market to bits would drastically worsen the UK housing situation.