Blowing the Housing Hooter

Talk to spokesmen from Number 10 and they are unequivocal—there is no housing bubble. Not in London, not in the south east, not in Britain over all, none. All talk of a bubble overlooks the fact, they say, that houses are still below their long-term peak values. Furthermore, the Bank of England’s Financial Policy Committee is specifically instructed to look out for any signs of bubbles and as yet it has not blown a warning note on the housing hooter.

In this reading, there is no cause for concern—no cause, either, to question the government’s Help to Buy scheme, by which the Treasury will help first time buyers of properties below £600,000 with their deposits.

There is also a certain reticence on the part of Number 10 to give any sense of why they are so confident that there is no bubble. The recent Nobel Prize-winning economist Robert Shiller—the only living person to have a financial index named after himself—told Newsnight that the UK housing market: “looks somewhat like a bubble, prices are going up pretty fast. Whenever you have easy credit, that helps promote a bubble.”

This is a judgement that carries with it substantial economic heft—but the Government has yet to put forward research showing the opposite to be the case. Government sources tend to fall back on anecdotal evidence, such as that housing outside the capital is not rising at anything like London speeds, and that in Scotland, the value is declining.

It may well be the case that house prices are not rising at similar rates across the nation—but remember this. The US housing bust in 2007-8 was driven by a glut of credit which fuelled a boom. But the bust was especially severe because analysts had not grasped that the US market was so highly correlated. They assumed that regional housing markets in the US behaved independently of one another. This mistaken assumption encouraged investors to pile money into the housing market, assuming that because the regional markets had separate characteristics there was no reason to worry about a mass bust. They were wrong in that assumption.

That same assumption underpins the government view of the UK housing market—that London can spike a bit, but so long as it’s only London there is no cause for alarm. But this is wrong-headed. The London housing market is vast—combine London and the South East and the total housing market value in that region is close to £2 trillion, according to Savills. That’s more than the value of all housing in Northern Ireland, Wales, Scotland, the North West, North East, Yorkshire and the Humber, and the South West combined. To see London’s market as an isolated piece of a larger UK property market is simply to ignore its absurd size.

And that size is expanding very quickly. To give a sense of how rapidly, take the example of a street in south west London, in Zone 2, which is lined with a series of three bedroom, terraced mid-Victorian red brick houses. I know this street very well. Back in June last year, a house on the street could be had for the substantial sum of £499,000. Add stamp duty and that price rises to around £513,000. It’s an extraordinary sum for a smallish suburban house ten minutes by bus from the nearest tube station—half a million pounds is a price already well into bubble territory.

But then two months ago, an identical house on the next street was sold for £815,000. There is little to be said about this rise, other than that is it preposterous.

The Government chooses to play down the possibility of a housing bubble because if there were a bubble, then Help to Buy would begin to look dangerously pro-cyclical.

So it seems for now that nothing will be done. Two questions arise from this: how far can London house prices go—and what happens when they can’t go any higher?