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Opinion: Could an affordable housing market solve the cost of living crisis?

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Opinion: Could an affordable housing market solve the cost of living crisis?

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Published by Max Salsbury for 24dash.com in Housing and also in Central Government, Development

Opinion: Could an affordable housing market solve the cost of living crisis? Opinion: Could an affordable housing market solve the cost of living crisis?

By Sarah Willis

The average cost of buying a house rose 94% against a wage rise of 29% between 2001 and 2011. From 1997 to 2012, the ratio of house prices to earnings shifted from less than 6:1 across most of the UK to at least 6:1 across most of the country, rising to 8:1 across the south and more than 10:1 in London and the home counties.

At the same time, the financial crisis triggered the longest period of falling wages for 50 years, exacerbated by a period of high inflation. Whilst wages are beginning to recover, they still fall below the RPI measure of inflation (which includes housing) and are still far below house price growth in the long term.

Until housing becomes more affordable, the cost of living will remain a problem. Could a programme of Macmillan style mass building solve the cost of living crisis? 

Housing and the cost of living crisis 

Housing and the cost of living tend to be spoken about as separate things, not helped by the widespread use of the CPI (Consumer Price Index) measure of inflation – which doesn't include the cost of housing – as the measure against which to compare wage growth. But the two are inextricably linked. 

Higher house prices mean higher rents. This means rent takes up a greater proportion of a stagnating income. When prices are rising (particularly when rising higher than earnings) this makes the effective price of things higher than they appear – with less disposable income left after rent, a loaf of bread becomes proportionally more expensive. 

Additionally, this makes it harder to save for a deposit – which is bigger than if prices were lower - meaning more years paying rent, so more money is spent on housing during a lifetime.

One cannot meaningfully talk about the cost of living without including housing.

Subsidising the problem 

The government recognises the importance of housing, and that prices are putting ownership out of reach for many people – certainly without parental help. But their current solutions subsidise the problem rather than solve it. 

Help to Buy does help first-time buyers onto the ladder. But it does nothing to address the ladder rising as a whole. If the scheme continues into the future, its cost will just continue to rise in tandem with prices. If anything, it fuels price rises by stimulating a demand that already outstrips supply – particularly now the scheme has been extended to existing property owners. 

Housing Benefit, rather than a benefit for the poor, is in reality a transfer of wealth from the public purse to private landlords i.e. those who already have wealth. It is a subsidy for a booming market. As Ed Balls put it “thirty years ago, around 80 per cent of public spending on housing was spent on building houses for people. Today, 95 per cent of total housing spend goes on housing benefit to subsidise high and unaffordable rents.”

The Macmillan solution

As has been suggested elsewhere, the real solution to the housing problem is to reduce the price at source: build more houses. It worked for Macmillan, and formed the foundation for Britain's economic recovery following World War II.

The reason prices are so high is because demand has been outstripping supply for decades. There are 100,000 fewer homes built per year than we need. So it's not even just about prices. It's as much about providing the level of housing required by the population.

Further, a Macmillan style programme of mass housebuilding would stimulate the real economy: an estimated £350 is generated for every £100 spent. This is far more meaningful than relying on the financial sector and inflated property prices for a somewhat 'artificial' GDP increase. 

What about negative equity?

If the solution is so simple, why is the government not pursuing it? Aside from Keynesian economics being out of fashion, the problem is negative equity.

The 'British dream', if there is one, is of home owning; where buying a house is as much about investing for retirement as it is providing a home. When the majority of the population's wealth is locked into their house, to reduce the price is to reduce their savings. And when the cost of retirement keeps going up, it may solve the housing crisis but exacerbate an already looming retirement poverty crisis. 

Further, selling the family home is the principle means for transferring wealth between generations. When the amount inherited is already squeezed by the cost of retirement and care in old age, negative equity would inflate the income and wealth disparity already being felt between generations

Which begs the question: if mass house building is necessary to solve the cost of living crisis and meet demand for homes, what can be done to compensate for negative equity? Is it possible that directly compensating existing homeowners for the price difference would be cheaper than continuing to subsidise an inflated market with Help to Buy and Housing Benefit?

These are sums for the Treasury. But they are surely sums worth doing.

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