We face dangers because the UK economy depends on house prices. Here are three ways to fix that | Fran Boait

HHouse prices are expected to fall next year on a mix of financial instability caused by the misjudged mini-budget and the Bank of England’s acceleration of rate hikes. This will be disastrous for many households who are struggling to afford higher mortgage payments.

At the same time, many are struggling to buy their first home. In 2021, UK house prices rose at their fastest pace in over a decade, even as the economy is still recovering from one of its worst contractions in 300 years. This disconnect between the housing market and the rest of the economy only benefits those who use housing as an asset to accumulate wealth.

The gains from this wealth are unequally distributed across society. The average white family has added £115,000 in property wealth over the last decade, while the average black household has accumulated nothing and almost half of the property wealth in the UK belongs to the over 65s. Many people struggle to raise the large deposits required, and those working in the rental sector or in social housing face higher housing costs and greater tenancy uncertainty compared to those with mortgages.

The dominant narrative has been that prices have hit all-time highs this year due to supply constraints, but as many economists have argued since the crash, bank lending, not housing supply, is a key reason behind house price increases. And high land prices mean that even less social housing is being built.

Lending to real estate creates a self-sustaining cycle of credit supply, credit demand, and rapid house price increases. And when fewer people can afford to pay off their mortgages, credit dries up, confidence falls, and the cycle works in the opposite direction, causing prices to suddenly fall.

Overnight, people can find themselves in negative equity and evicted from their homes, with banks and real estate investors collapsing. While these dynamics were understood in great detail after the last crash, the memories are brief and the post-crash powers to reduce finance Instability in the housing market has done little to dampen the inflationary impact of mortgage lending or the attractiveness of home ownership as a financial asset to reduce. Government policies, from stamp duty holidays to the revival of the ‘right to buy’, have only exacerbated this problem. This destructive boom and bust pattern must end.

As we see with the departure of Liz Truss, governments in the UK have been made and broken on the back of rising mortgage rates and mortgage payments are already rising and likely to rise no matter how big the property downturn, it’s very likely that the public will support the Conservatives will be ousted from office at the first opportunity. Stabilizing house prices will always be a difficult political sale as 65% of households in England are homeowners, or more specifically large debt/mortgage owners, and their family wealth is inextricably linked to house prices.

Even Labor refuses to change course by targeting 70% home ownership through mortgage guarantees. However, public opinion may have reached a tipping point: in March, when prices rose at their fastest pace since 2004, more than half of UK homeowners said they would be happy if their home didn’t appreciate in value over the next 10 years meant houses were more affordable for those who did not own property.

The current economic turmoil is revealing just how fundamentally fragile the UK economy is. Escaping our structural dependence on house price increases, fueled by an oversized financial sector, will not be easy. However, there are some important starting points. We need to prioritize measures that protect tenants and social housing, rather than treating them as an afterthought. This will require a significant expansion of social housing and the introduction of rent controls and tenant protection measures to ensure quality housing with long-term security.

Banks must also be contained. Having a concentrated banking sector with 50% of its assets backed by UK ownership is not a healthy position. We need a diverse ecosystem of banks lending for more productive and socially useful activities. Fairer taxation of property and land would dampen speculation and also release much-needed funds for social housing.

Finally, our regulators must take the task of stabilizing house prices seriously and ideally include it as a secondary objective in Bank of England policymaking.

The dysfunctional nature of our housing market cannot be fixed quickly or overnight, it is deeply entwined with our politics and culture. But since the last crash, we’ve missed opportunities when it comes to affordable housing for more than a decade, and it’s time for a change.