House Price stability: Why Grant Shapps is right

A few days ago an interview appeared in the Observer in which Housing Minister Grant Shapps, said that the era of roller coaster house prices was over and that the market needed to return to stability and level house prices. There were few levers government could pull he pointed out, but they’d like to try.

Never mind that he was restating something he’s said before, the Daily Mail and the right wing Twiterrati went ballistic. He’s anti capitalist they screamed, he wants to play with the market, how can he call himself a Tory?

But let’s face it house prices are over-inflated, you only have to look at the gradient of the house price graph to see that over the past decade they’ve had an unsustainable rise.

Ultimately though house prices are a bubble that government and the Bank of England can’t let burst. Why? Because the owners of the assets in that bubble are so heavily leveraged. Other assets are rarely purchased by such a high percentage of borrowing, so property as an asset is far removed from equities, and isn’t a traditional investment. Ultimately if the bubble bursts then too many loans (read as bank balance sheets) are in negative equity causing significant problems to capital ratios.

They’re also different to equities in other ways too, in that their price is not related to any underlying economic value being created. Although equity values are related to confidence and supply and demand they’re also linked to the success of the company, i.e. the value it added to and created in the economy. If a company generates a large amount of economic activity (turnover) and is efficient and therefore creates a large amount of profit (and hence tax revenues) then its share price goes up and owners of the equities see their initial investment increase in value. Therefore an increase in asset value relates to some underlying economic activity.

However in the housing market this isn’t the case, house prices have just gone up, and up and up, unrelated to any underlying work. Last week I watched a decade of Location, Location, Location with Phil Spencer and Kirstie Allsopp, who gleefully told us that at the height of the boom many people made more money just by owning a house than they did going out to work. What did this mean? It meant that people, got lazy and subsidised their incomes with borrowing from their home which then created an artificial bubble of consumer spending and economic growth that was again unrelated to any real work done in the economy.

So roller coaster house prices are not only pricing an entire generation out of the market they’re economically dangerous. What Grant Shapps is suggesting is right, that house prices shouldn’t really be increasing at a rate greater than inflation or salary inflation, so in real terms they are steady, or perhaps even dropping slowly.

He’s also right to say that government has little control over this market, as it has little control over any market. There’s no chance that it is going to implement a house price regulator (OffHouse anyone?), all it can do is hope that the changes its making to planning rules will increase supply and try to nudge people into using other vehicles for investment purposes. It doesn’t even have control of interest rates to try to stem prices, that’s the job of the Bank of England (who are currently too busy focusing on using them to keep growth going to worry about house prices, and hardly have a great record in the past anyway).

The challenge with this policy though is the same as with nearly any radical policy, communications. Middle England and the Daily Mail will respond to any suggestion that house prices shouldn’t continue to sky rocket with horror and outrage, “it’s our right to make money from our homes, they’re our biggest and best investment, Phil and Kirstie told us so” they say.

The challenge is therefore immense, how do you change an entire section of society’s mindset to the idea that a home is just a place to live not an investment?

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