Whether you own investment properties as a landlord or your own home, the traditional UK homeowner’s psychology is to rejoice in property price growth. And they generally aren’t disappointed. Despite the cyclical boom and correction character of the UK’s housing market, over the longer term prices have risen steadily over the course of modern history.
Throughout the 1990s, average UK house prices were below 3 times average earnings. Even in London prices were between just below 3 and 4 times average earnings. Immediately prior to the financial crisis average prices had risen beyond 5 times average earnings and have recently returned to roughly the same level. In London they’ve soared far beyond the pre-crisis multiple of just over 7 times earnings to over 10 times (14 times in London ‘proper’) but in the north of the country they are still below the pre-crisis multiple of over 4 times earnings at just higher than a multiple of three. Figures are those provided by the Nationwide Building Society.
While home owners are generally for rising property prices the other side of the argument is that we are reaching a point at which some analysts believe their price as a multiple of average wages may harm the economy and, perhaps more importantly, the UK’s social fabric. The Institute for Public Policy Research (IPPR), a left wing think tank, has this week suggested that handing the Bank of England powers to control house price inflation is as important to maintaining a healthily balanced economy as the central bank’s role in managing consumer prices inflation. It argues that inflated property prices drain away capital that would otherwise be invested in the ‘real economy’.
This could be in the form of increased consumer spending or individuals investing in businesses.
The proposal put forward by the think tank is that the Bank of England should have targets for house price inflation as it does for consumer prices inflation and adjust its monetary policy in ways that would help keep it to within an acceptable margin of that target. It was further suggested that within the current context that target should be a house price growth freeze for at least five years to help real wage growth catch up with recent inflation.
IPPR researcher Grace Blakely explained what the think tank considers to be the inherent danger in unchecked house price growth:
“The model of our collective and individual wealth is still being based on assumed continued rising asset prices, such as house prices, and that is totally unsustainable. If we don’t break it, the financial crisis will happen again and all that wealth will get destroyed.”
Landlords who own investment properties are unlikely to agree with the proposal given that their business model, to a large extent, relies on strong capital growth, especially if they hold an interest only mortgage. However, first time buyers and even existing home owners who can find themselves priced out of an upgrade, may well wholeheartedly agree with the proposal.