Young people will pay the penalty for an ever-expanding house price bubble

Alongside England meeting Germany at the knockout stage of a football tournament, the rise of house prices in the UK seems to be one of those eternal features of post-war Britain. Last week’s news that the Nationwide building society had reported the strongest rise in residential property values for 17 years in June was a reminder that house prices are an ever-present and dominant factor in the country’s economic outlook.

Indeed, regional data for the three months to June indicated that all parts of the UK saw an acceleration in annual house-price growth. No wonder that Andy Haldane, the Bank of England’s outgoing chief economist, said recently that the housing market was “on fire”.

Part of the reason for the froth in the market is the decision by chancellor Rishi Sunak to extend a cut in stamp duty to the end of June, which could save buyers up to £12,500, and to unveil a new mortgage guarantee scheme for first-time buyers who cannot afford large deposits.

We’ve seen it all before. An economic upturn pushes up prices, which the government not only fails to deflate but adds extra oxygen to with a botched tax cut. Think of the creation of double mortgage interest relief at source (Miras) and the decision in 1988 to give buyers four months’ notice of its withdrawal, fuelling a price bubble that ended in a crash.

It is very risky to fall back on the phrase “this time is different”, but clearly there are some unique features in the current housing market. Chief among them, of course, is the impact of the coronavirus pandemic.

As hordes of office workers have had to learn to work from home, those in more cramped conditions have seized the opportunity to find a larger place further from the town or city that no longer requires their physical presence in an office.

There has been a clear shift in attitudes towards remote working – both by employees and employers – as a result of the pandemic, according to Jon Cunliffe, the Bank’s deputy director.

Remote working considerations point to a shift away from urban areas like London and towards suburban areas and further out – borne out by Nationwide’s data showing the fastest-rising regions were Northern Ireland, Wales, Yorkshire and the Humber, and the Midlands.

While this might lead to some “levelling up”, the fact that prices are rising across the country shows that it is more “up” than “levelling”. Home ownership will simply become yet more unaffordable for young people, and for key workers who were already priced out of many areas before Covid-19. This will exacerbate the intergenerational wealth gap and favour those who rely on the “bank of Mum and Dad”.

Whether or not there is a crash will have no impact on the real problem – a long-term lack of supply of new homes. But more than that, it is the inability of developers to be able to respond to rising prices by building more homes. Economists call this “inelasticity of supply”, and according to the IMF, the elasticity of housing supply in the UK is among the lowest compared with other wealthy members of the OECD (Organisation for Economic Cooperation and Development).

The government has responded by proposing a reform of the planning system, whose current structure of case-by-case local decisions acts as a bottleneck, and had a target of 300,000 homes to be built a year. However, one impact of the Tories’ defeat in the Chesham and Amersham by-election may be to put some of those plans on hold.

Even if some progress is made in opening up cities’ green belts to development, there is no reason to think that new homes will be built to meet the shortages. Remember that over the last five years, social housebuilding has averaged fewer than 6,500 homes a year – compared with 1.1 million people on council waiting lists. This is outstripped by the number of social home sales to tenants. According to the charity Shelter, £12.8bn a year over 10 years would deliver 90,000 social rented homes annually.

But housing supply is not just a numbers game. It is critical to get the size and tenure right – a block of bedsits or five-bed luxury condos may make a nice packet for a developer, but will do little for young families desperate for space.

Getting the tenure mix to match what people can afford is critical. It is high time for the government to ensure young people and key workers do not pay the penalty.