I blogged recently in a post on the future of recruitment that the level of house prices to incomes in the UK’s south-east was becoming a limit on London’s ability to attract new workers. But an encounter with an economist this week reminded me of how deeply entrenched the received wisdom is on the causes of the UK’s high house prices: following the Barker Review, the official version is that the reason for high prices is that demand has outstripped supply, which is the fault of a too-rigid planning system. But there’s another explanation which is at least as plausible.
This is that the surge in house prices is largely the result of the deregulation of the financial system. When I entered the property market, twenty five years ago (and before the City’s deregulatory “Big Bang“) mortgage rules enforced lending ceilings of three times main salary plus half of secondary salary. House prices followed a long-term pattern of being about a three-to-three and a half times multiple of earnings (go figure!). With deregulation, these limits no longer exist; lenders offer what they think the borrower can support. House prices are now at multiples of five-six times earnings. (And mortgage payments for first time buyers are running at around 18% of income, up two percentage points on last year, according to a note this week from the UK’s Council of Mortgage Lenders).
The Big Bang had another effect as well. It opened up the City of London to become part of the international global financial market, which led to a much greater economic focus (in my view) on preserving the competitiveness of the City (at the expense of other sectors of the economy). It also led to global salaries and million pound bonuses, which has had its own effects on inflating the UK property market.
Obviously, one could re-regulate the market – there are several mechanisms which a central bank could use – which would have some short run costs for some buyers as the housing market unwound. This would need some sort of mitigation. But given the universal view that high house prices are bad for the UK economy, it should be a step worth taking.