The Nationwide Building Society has just reported that house prices in the UK rose by 10.5% over the last year – the first double-digit increase since June 2007.
Although at a personal level this will be a great relief for those households that found themselves in negative equity as a result of the fall in prices between October 2007 and February 2009, it is not a cause for national celebration. House prices in the UK are still at high levels, relative to incomes, and it is again becoming harder for young people to take their first step on the property ladder.
The manifestos of the three main parties have little to say on the housing market – though Labour and the Liberal Democrats want an increase in the number of affordable homes and Labour repeat the Budget pledge to exempt house purchases below £250,000 from stamp duty for the next two years – and nothing to say on the need to prevent a resumption of rapid house price inflation.
The Bank of England’s Monetary Policy Committee has done an excellent job since 1997 in keeping consumer price inflation close to its target rate, but ensuring greater stability in the UK economy in future requires control of consumer and house price inflation. It is a fact that house prices boomed in the period leading up to each of the last four recessions in the UK (in the early and late 1970s, the late 1980s and most of the 2000s). If nothing is done now, there will eventually be another house price boom, to be followed inevitably by recession.
Building more affordable homes will help at the margin but would only prevent future house price inflation if it was done on a major scale, something that no one is proposing. Interest rates cannot help, because they are set to control consumer price inflation. What is needed is an overhaul of the regulation of the UK mortgage market, to include limits on loan-to-value and loan-to-income ratios, restrictions on buy-to-let and self-certified mortgages and changes to remuneration practices at mortgage lenders to ensure bonus payments reflect performance over several years.
None of the main political parties was brave enough to challenge our love affair with our homes by making such proposals ahead of the election. It is to be hoped that the next government will be brave enough to implement measures along these lines after it.