Are rising house prices good or bad for Britain? The Government needs to make its mind up

Well into its eighth year in power and with an election on the horizon, the Government is once again working itself up into a lather about housing. And it is right to be concerned. With a survey showing that nine in 10 areas of Britain are now effectively no-go zones for first-time buyers and with social - or any sort of "affordable" - housing in short supply in the very areas where it is most needed, any Labour government would have a case to answer. For Tony Blair's government the case is especially pressing, because the special difficulties of first-time buyers threatens the premise behind so much of what New Labour has argued: that the free market works in the interests of all.

Well into its eighth year in power and with an election on the horizon, the Government is once again working itself up into a lather about housing. And it is right to be concerned. With a survey showing that nine in 10 areas of Britain are now effectively no-go zones for first-time buyers and with social - or any sort of "affordable" - housing in short supply in the very areas where it is most needed, any Labour government would have a case to answer. For Tony Blair's government the case is especially pressing, because the special difficulties of first-time buyers threatens the premise behind so much of what New Labour has argued: that the free market works in the interests of all.

The initiatives presented yesterday by the Deputy Prime Minister, John Prescott, however, only seemed to make the existing confusion in the Government's thinking worse confounded. Rather than commit outright to giving housing association tenants the right to buy their homes at a discount or ruling out such a scheme, Mr Prescott offered complicated half-measures that would give housing association tenants a discounted share in the equity which they could progressively increase. Mr Prescott also proposed the construction of as many as 60,000 "affordable" homes on government land which would be available for sale leasehold, but not freehold - a limitation expected to reduce the selling price by up to half.

There is no harm, of course, in governments casting around for new ideas - and some good may yet come of it. But it does seem that, so far as housing is concerned, this government is spending a lot of energy finding motes in other people's eyes without seeing the great beams in its own. The truth is that for its two terms in office, the signals it has been sending about housing have been contradictory.

On the one hand, ministers have treated rising house prices as a good thing: they give younger people an incentive to "get on the ladder", they allow existing owners to build up equity in their purchase, they generate a feel-good factor among those whose assets are increasing and encourage further spending based on the increasing equity. Some of that spending then goes back into the housing stock in the form of buy-to-let purchases, loans for which attract tax relief. Rising prices please home-owners and they please the government, too, because they bring in large sums in the form of stamp duty, inheritance tax and capital gains tax.

On the other hand however, prices that rise out of all proportion to earnings shut out of the market the low-paid and many first-time buyers with little or nothing in the way of a down-payment. One way of addressing this is to encourage prices to fall - and prices have started to stagnate or fall in many areas as interest rates have risen. But the Government has no interest at all in precipitating a sharp fall in prices, and the fall so far has been nothing like enough to enable more people to buy. Hence the quest for a magic formula that will allow low-paid "key" workers and others to buy, even if what they are buying is only a minority stake in a house.

But this government should know full well that there is no bucking the market. Prices have been pushed up by many factors. But they include distortions that the Government has itself introduced. Having removed mortgage tax relief for most buyers, it gives tax incentives to those who buy properties to let out - thus raising the prices of the very flats and houses that first-time buyers might have afforded. More money will be released into this sector when pension savings can be invested in buy-to-let next year.

Those on low pay, not only "key" workers, face a particular problem: but it is less a problem of prices than of pay kept unduly low by national wage agreements in places where housing is in great demand. There are only two ways to remedy this: build more houses and/or pay "key" workers more. This government, of all governments, must surely realise that if no one were buying houses at current levels, the prices would quickly fall. That is how markets work.