By Mert Kul, Assistant Editor-In-Chief
- Published as part of our ‘Deep Dive’ Section, promoting in-depth pieces which analyse underrepresented issues and challenge conventional narratives.
The Cost-of-Living crisis has been the issue on the minds of many in the last few months as the effect of vast pandemic support and stretched global supply chains are coupled with destabilising regional events such as the War in Ukraine and repeated Covid lockdowns in China, exacerbating the mismatch between supply and demand in the global economy. In the 12 months to March, prices rose 6.2% and are expected to reach 10% within the current year. Needless to say, this has focused the inflation debate predominantly on the price of everyday goods and services, with comparatively less attention being given to the ever-increasing cost of housing and its impact on ever widening wealth disparities.
Whether you are renting in the private or social sector, or paying off your mortgage, it is the cost of housing that remains the single biggest item on the monthly bill for the average UK household. To better reflect this, the headline figure of inflation was amended in 2017 to include owner occupier costs, allowing for a more adequate measurement of the costs of owning or occupying a home, including rents, mortgage repayments or the cost equivalence of renting the home if owned by the occupier.
Yet this measure also has serious limitations. As with all averages, they are purposely designed to be broad and thus exclude impacts at the margins. Thus, while a household with a median income spends 23% of their earnings on the median private rent, renting the same property would cost 38% of income for the bottom 25% of earners. It also means that, in London, only the top 25% of earners could afford to rent at an affordable rate (defined as no more than 30% of gross income) before the pandemic.
The headline inflation figures also specifically exclude the endemic growth of house prices, which have far outstripped the traditional measure of inflation as well as wage growth for the past two decades. While average nominal wages increased 74% and average prices for goods and services have risen 50% cumulatively between 2000 and 2020, the average price of all residential properties has risen 174% in the same period. Home ownership nevertheless represents one of the central aspirations for most people.
Evidently, the passage of time and the continual worsening of the UK’s dire housing affordability crisis has not led to a significant change in either the prominence of housing as the dominant issue in the electoral space or to a greater understanding of why it has become so increasingly unaffordable, even before the pandemic.
In an effort to challenge this statis and provide alternative solutions to our cost-of-living crisis, Positive Money has released a new report, titled ‘Banking on Property’, examining the history of housing affordability through the holistic lens of tax and regulatory changes in housing policy, reforms in banking and financial markets and the UK’s overall monetary policy.
It first argues that a ‘structural bias’ was created in favour of home ownership as a deliberate policy of successive governments for much of the last 50 years, enacted through series of tax exemptions on housing assets and favourable rules for landlords continuing from the 1960s to the present day, the elimination of council housing stock under the Thatcher government’s trademark ‘right to buy’ policy, the later scrapping of rent controls and the shift of government subsidy from enabling homebuilding to subsidising rents.
The report then shines a light on the realities of our financial system and role of commercial banks as creators of the money supply, a fact which is largely ignored in mainstream political and media discussions. It argues that since the 1970s, there has been a significant de-regulation of the banking system to boost the UK financial sector’s international competitiveness and support government policy of creating a property-owning democracy. While these policies inevitably boosted home ownership for a short period, the report states that the effect of this rapid expansion in purchasing power in a market dominated by transactions for already existent properties have inflated prices so much that the policies have become counterproductive.
The report then looks at the post 2008 implementation of Quantitative Easing (QE), demonstrating that QE was designed according to a trickle-down logic and intended to create a ‘wealth effect,’ raising property prices to make asset-owning households and businesses feel richer and thus increase their spending.
We discussed the report’s findings and recommendations for fixing the current crisis with Danisha Kazi, Senior Economist at Positive Money and co-author of the report.
“The current cost of living crisis is probably as good a time as any to make the case for a new affordable housing strategy and a more equitable financial system, where policymakers and the public might be more receptive to new ideas. What has the reaction of both been to this report?”
“We’ve had a positive response from the public and from civil society organisations campaigning on housing – from renter unions to think tanks. We had a Labour and Conservative MP at our launch event, who agreed on a number of important areas, both arguing that house prices are out of control and that we need to see government action on this issue.”
“The report begins by demolishing the central obsession in housing policy across all major political parties in the UK, namely the battle to increase homebuilding. The left has constantly called for the restoration of the council housing stock destroyed under Thatcher while the right has largely pinned the blame on the planning system and sought to introduce market incentives to encourage commercial house-builders to build more. Why do you think these modes of thinking have become so dominant among the political establishment?”
“The rapid house price growth of recent decades has been driven by the transformation of homes into financial assets, through a loosening of financial regulation and monetary policy, as well as wider policy changes such as tax incentives, right to buy and the deregulation of the private rental market.
At the same time, the UK has come to be dominated by a small number of large shareholder-owned banks, caused in large part by the process of demutualisation and the ‘Big Bang’ deregulation in the 1980s.
Unfortunately, a powerful part of the political establishment still seems wedded to the laissez faire attitude to housing policy and financial regulation more broadly that was cemented during that period. What’s promising is that the British public appear to be seeing the merits of government action on this issue, as our polling shows.”
“The report cites the fact that the government’s own house price model suggests that even if the number of homes had grown by 300,000 every year since 1996, far outstripping the growth of households, the average house today would be only 7% cheaper than it is now. If the government itself is seemingly aware of this, what reasons could they have for continuing to expand supply as a means of increasing affordability?”
“Successive governments have essentially defended the interests of landlords and banks, rather than renters and those experiencing insecure living conditions. The myth that there is not enough housing to go round – as opposed to insufficient social and genuinely affordable housing, alongside too much speculative demand – is convenient for these groups because it lets governments off the hook for getting prices under control.”
“In 2017, Positive Money commissioned a survey which found that 85% of MPs did not know that commercial banks create new money when extending a loan. To what extent do you think this has been a factor in the inability of successive governments to fix the affordability crisis and is there any reason to believe that the scale of this ignorance is shifting?”
“Misconceptions about the money system do contribute to the housing crisis. The power of credit creation means that households are able to purchase property even as house prices increase significantly faster than their incomes. But most people – including most politicians – don’t understand that when a bank makes a loan, it creates new money, and new purchasing power in the economy. To democratise our money system and have more oversight of credit creation, we need a better understanding of these issues.”
“The last two years in particular have seen the beginning of a real societal conversation about institutional racism. Your report highlights some stark figures when it comes to assessing the demographic impact of ever-growing house prices. It suggests that within the current system, there is little opportunity for ethnic minorities to build generational wealth in comparison to their white British counterparts and presents them as trapped in a self-reinforcing cycle of poor, expensive and insecure housing which damages their life chances. To what extent if at all would you say the UK’s ‘structural bias’ towards treating housing as a financial asset is a significant example of institutional racism?”
“The transformation of housing into financial assets has turbocharged inequality in London, putting decent and genuinely affordable homes further and further out of reach for so many, especially young people, ethnic minority households, and others on low incomes. The report illustrates how rapid house price growth in London has particularly locked ethnic minority households out of homeownership, making them less likely to benefit from rising property wealth while trapping them in the more expensive and highly insecure private rented sector – a clear example of institutional racism. Strikingly, the median household wealth of a Black and ethnic minority household in London today is 6 times less than the median wealth of a White British household.”
“The first policy recommendation in the report is for the government to introduce a mandate on the Bank of England (BOE) to limit house prices to defined levels of affordability. As your report cites, such a mandate was implemented last year in relation to supporting the transition to Net-Zero emissions. However, the BOE has repeatedly failed on existing mandates in the recent past, namely to promote financial stability while encouraging rampant credit expansion in the mortgage market – widely acknowledged to have created an asset bubble which led to the 2008 Financial Crisis. As cited in the report, the Bank has since failed to use its new powers to limit the growth in high loan-to-value mortgages or to suppress Buy-to-Let mortgage lending which further exacerbates the housing bubble. What makes you think that the institution in its current form is equipped to the important task of regulating house prices?”
“The Bank of England is the public institution with oversight of the financial system, and has an important role to play. As we saw in the 2008 crisis, central banks failing to identify systemic risks can have catastrophic results in the financial sector that can spill over into the rest of the economy. The Bank of England has tools currently available to it that it isn’t making use of. It could require Buy To Let borrowers to show that their income can cover monthly mortgage payments rather than rely on expected rental income, for example. But we also need some more structural changes, like better coordination between monetary and fiscal policy. We need to hold the Bank of England to account on their track record and make sure they offer up alternatives that could bring about real systemic change.”
“What do you think is the strongest policy tool at the BOE’s disposal with regard to achieving affordability in the housing market?”
“A highly effective strategy would be for the Bank of England to make better use of its existing macroprudential as well as monetary policy powers through ‘credit guidance’, using credit ceilings or quotas for mortgage lending, or increasing capital risk weights on property lending to make other forms of lending relatively more attractive.”
“Your report commissioned polling from YouGov which demonstrated broad support among British homeowners to limit house price growth and view houses as homes, not primarily financial assets. Did this surprise you at all and do you think this will change the electoral calculations of political parties when it comes to determining housing policy?”
“A majority (54%) of British homeowners would be happy if their own home did not rise in value in the next ten years if it meant houses were more affordable for those who don’t own property. This contradicts the widely held belief that homeowners would like to see house price growth at all costs. Housing inequality has been made more visible by the gas crisis, cost of living scandal, and also through the pandemic, when people were spending much more time at home. At the same time, booming house prices during a deep recession has shown just how disconnected the housing market is from the rest of the economy.”
“Is the continued support of homeowners one of the main reasons it is important to see a gradual slowdown in property values as opposed to a faster correction?”
“There are many vested interests that want to keep the housing market booming and would resist any measures to tackle the root causes of rapid house price inflation. These include property developers, financial investors, landowners and of course homeowners. While homeownership rates have been declining for the past 20 years it remains the dominant form of tenure with 65% of households as homeowners. For many this is a primary source of wealth and even a retirement safety net.
The report addresses the need to break these difficult vested interests and structural conditions by including policies that reshape the market through a fair and more progressive taxation system that taxes unearned income from owning property. We also include policies that shift the balance of power away from landlords and to protect renters because this directly tackles the treatment of housing as a financial asset by landlords and property investors.”
“Given that house prices have risen so far beyond their intrinsic value in relation to real earnings, are you concerned that even a mild shift in monetary and fiscal policy to curb support for house prices will burst this bubble?”
“The report highlights the need for the UK government to adopt a strategic long-term approach to gradually stabilise house prices and bring the house price to income ratio down to affordable levels over time. This is precisely because the housing market is intimately linked to the macroeconomy. For example, households spend more when house prices rise and spend less when house prices fall – this impacts the wider economy. As we know, recessions are triggered by the housing market. Banks’ balance sheets are largely secured against the housing market. So volatility in the housing market can be transmitted into the wider economy.
The report also specifically outlines greater coordination between monetary and fiscal policy to ensure a coordinated approach to stabilise house prices over time. Additionally, this would help to prevent government policy fuelling a housing boom and cancelling out any measures to contain house price inflation. (See section 6.2.2, p. 65 of the report).”
If the current government were to take one policy or message from this report, what would you want it to be and why?
“The government needs a bold new strategy to slowly let the air out of the housing bubble and tackle this huge part of the cost-of-living crisis.”
Are there any further projects Positive Money plans to embark on in the near future?
“We hope so… watch this space.”
