A few years ago, I went into an estate agency in south London to inquire about renting a flat. The agent, a friendly bloke whom I knew quite well, was incredulous. “Are you sure you want to rent? You should buy something,” he said, thrusting a sheaf of property details towards me. “Look, prices are going crazy in the area!”
It only dawned on me afterwards how odd this was. Here was someone trying to sell me something by telling me the price was so high it was “crazy”. The housing market in Britain is now so dysfunctional, we take absurdities like this for granted.
Take the report from the Halifax last month, which found that it costs a family £1,300 a year more to rent an average three-bedroom house than to buy one. What’s more, the gap is getting bigger – rents are rising even faster than house prices.
It probably doesn’t surprise you that renting is more expensive than buying – but it should. After all, renting is supposed to be what you do until you can “afford” to buy.
High rents and unaffordable house prices are a vicious circle from which the market offers no means of escape. High rents drain people’s income making it harder and harder to save a deposit to buy. This keeps demand for rented houses and flats high and keeps rents rising, making saving harder still.
If the market worked properly, house prices would eventually begin to fall as fewer and fewer people could afford them, but this never seems to happen. Whatever the reasons – the overall shortage of housing, the role of houses as investments, the vicissitudes of mortgage finance, sharp practice by estate agents – it’s a truly spectacular market failure.
People within the property “industry” – who usually have a vested interest in sky-high prices – will tell you it’s all very complicated, but in this case the economics really are very simple. There aren’t enough houses, to rent or to buy, in the places where people need or want them. If you’ve read a single convincing argument why this isn’t so, please let me know.
As Paul Krugman points out in a recent blog, sometimes clever people just don’t want to see the simple answer to a problem, especially if it raises awkward questions about what they believe. Mainstream economists and conservative politicians, usually so keen on simple market explanantions for everything, are also quick to hide behind complications when it comes to housing. This is probably so they can avoid having to explain why the market has failed to provide the housing we need.
As this chart shows, neither the private sector nor housing associations have come anywhere near making up the housing shortfall since Mrs Thatcher pulled the plug on council housing more than thirty years ago. Demand for housing has gone through the roof and the response from the private sector has been: bugger all.
But people like George Osborne can’t admit that, so they come up with fiddly, half-baked financial schemes like Help to Buy. Because what we really need is more housing demand, higher prices and more debt underwritten by the taxpayer. That really is crazy.