Despite favourable conditions, the housing market is still stuck in the doldrums. David Smith, who hardly ever says never, predicts that we will never see '80s-style escalations in house prices again.
The most foolhardy word to use in economics, particularly with reference to the future, is never. Like miniskirts or flared trousers, economic events have a habit of coming around again, usually just after you have cleared out your mental wardrobe and forgotten all about them.
But, and I hope I do not come to regret it, I am going to say that there will never again be a housing boom such as the one we experienced in the late 1980s. Not such a bold forecast, you might think, but remember that people writing in the mid-1970s said the same thing and were proved wrong, on two occasions, before the end of the l980s.
Certainly, the conditions seem to be in place for a substantial housing recovery. Mortgage rates have been generally low for longer than at any time since the l960s. There is no shortage of available mortgage finance: the only queues at present are those of lenders lining up to press cash into the hands of a relatively small number of willing borrowers.
Consumers are happy to spend on cars and other big-ticket items. Unemployment, a vital ingredient in the consumer-confidence equation, is falling. Houses, particularly those for first-time buyers, are more affordable than for at least a decade.
Housing, however, has remained determinedly in the doldrums, through no fault of the vast industry that surrounds it. The housebuilders have behaved as if good times cannot be far away, bidding against each other for any building land that comes on the market, and driving the price up in the process. The January-March period, for at least the past four years, has brought out a regular clutch of house-price forecasts from estate agents and building societies, each predicting this, finally, is it, and that we can look forward to annual price rises of 10% or so within months.
Each time, an embryonic recovery has petered out. And each time, special factors have been cited. This year certainly looked as if it was going to be the real McCoy. In January and February the builders and estate agents reported a sharp rise in buyer interest; by March this was being translated into hard sales. But then, just as the market appeared really ready to start motoring, it pulled into the pits and stayed there for the summer. For the industry, paradise was once again postponed.
The two main special factors were tax and higher interest rates on fixed-rate mortgage offers. Of course, tax increases are an important factor. Indeed, they might have been expected to have a bigger impact on the economy as a whole than has so far been the case. It should not be forgotten either that successive Chancellors have acted to reduce the tax advantages of housing.
In 1987, a top-rate taxpayer could get mortgage tax relief on the first £30,000 of his mortgage at a 60% rate. By April next year, thanks to the combined efforts of Norman Lamont and Kenneth Clarke, mortgage interest relief will only be available at a l5% rate, for all taxpayers. This is a substantial change. Indeed, Lamont has since made clear that he would have liked to complete the picture by imposing capital gains tax on housing, although Clarke is said by the Treasury to be unenthusiastic about grasping that nettle.
It is also the case that one of the effects of the worldwide bond market fall-out of the first half of this year was to push up long-term interest rates sharply. This meant that, just as buyers were ready to dip a toe into the water, higher interest rates re-emerged as the shark waiting to bite it off. Add in the fact that about a million households continue to be affected by negative equity, where their outstanding mortgage is greater than the value of their property, and the explanation for the housing non-recovery appears complete.
These are all good reasons but we could, I think, go further. The combination of factors that produced the housing boom in the late 1980s was unique. There was a genuine increase in housing demand as the baby-boomers born in the l960s set up home. The number of households increased by around 2.5 million, an increase of roughly 12%. There was the massive change in tenure brought on by council house sales under the right-to-buy legislation. There was the financial liberalisation which initially allowed the banks to enter the mortgage market and eventually produced a free-for-all in the supply of housing finance. Borrowers did not restrain themselves. There were the big income-tax cuts and the low interest rates of 1987-88 and, most of all, there was the belief that housing, and house prices, were a one-way bet that even the most inept investor could not fail to make money on.
That explosive combination of circumstances will not be repeated. It is just possible that a different set of events will conspire to produce some future housing boom, although I find it difficult to see what that could be. There was a supply-demand imbalance then, exacerbated by readily available finance and overblown expectations. That situation will not easily return.
Looking to the future
Should we worry about housing's stop-start performance?
There will be demand for new housing, as population shifts and as the existing housing stock requires replacing. There will be demand for housing-related consumer purchases, both from people who do not move property and from those who do, but for non-investment reasons. House prices will rise in line with average earnings over the medium-term, gradually lifting negative equity victims out of the difficulties in which the housing boom-bust placed them.
What will be missing is housing's most damaging role in the 1980s, which was to serve as the vehicle for directing large quantities of credit, much of it on tax-subsidised rates, into the economy, with inflationary consequences. And that, I would say, is a very good thing.