Some people say we could solve our economic problems if the authorities engineered a house price collapse. They argue that current house prices, especially in London and the South-east, are too high for many to afford a home of their own. Those that do afford the rents and mortgages are left with too little money to sustain demand elsewhere in the economy and to enjoy a decent lifestyle.
We have just lived through a period of falling house prices in most of the UK as a result of the Credit Crunch and mortgage famine. Far from stimulating demand on other things, this just added to the lack of confidence in the economy, and removed income from the system as the housing market contracted. Whilst high home prices undoubtedly make families struggle to afford a home of their own, they can also stimulate the income of others in the housing market. For every new buyer suffering from the high price, there is a seller who may be trading down, taking a profit or benefitting from an inheritance, who should have more money to spend. Most especially they swell the government coffers from higher tax revenue on the transactions that do take place.
We have very high home prices in parts of the UK thanks primarily to the very easy credit conditions of the Great bubble prior to 2007. Banks lent ever higher multiples of earnings to purchasers. Banks willingly extended credit to property developers and housing companies. We also have high home prices in the expanding parts of the country because demand from new migrants into these areas has outstripped the increase in supply of homes. This has been most pronounced in London, where the street pattern and dense existing development limits the scope for extra building. Some of the overseas demand in the centre has driven up prices to levels UK taxpayers are unable to afford, both thanks to the devaluation of sterling and to Non Dom tax status.
I agree there is a problem of affordability for potential new homeowners. The average age of buying a first home has risen a lot in the last decade. The government is responding by making more money available to banks to on lend as mortgages at low interest rates, and by launching its Help to Buy scheme. Critics say this is stoking the bubble. I do not think deliberately engineering a further crash in home prices would be helpful. It is not just the mortgage banks it would disrupt who have lent against higher values, but also the many individuals who have bought at high pirces in recent years. Their confidence and even their solvency could be undermined by such a move.