House prices rose by 10.5% in the 12 months to April. A typical home now costs £167,800, according to Nationwide – more than in August 2008, the month before Lehman Brothers collapsed, credit seized up and the economy fell off a cliff. It's as if the financial crisis and the worst recession since the 1930s had never happened.Lefties are hypersensitive to injustice, and Legrain quickly spots the genuine injustice in the current situation:
While home owners – especially those who had fallen into negative equity – will cheer the housing market's bounce, it is high time Britons were weaned off their addiction to property speculation. It is a dangerous delusion that we can all prosper by swapping more or less the same stock of houses with each other at ever more inflated prices.
Priced at more than five times average earnings, the typical house is more exorbitant than at the height of the 1989 property boom.The truth is that rising property prices only benefit those who are on their way down the ladder or exiting the market altogether. Everyone else would be better off if the rungs were closer together. Legrain goes on to demonstrate a commendable understanding of the implications for the wider economy:
Rising house prices force many families to squeeze into smaller homes, prevent many people from buying a place altogether, and inflict long commutes on people who cannot afford to live near their workplaces in city centres. They transfer wealth from poorer young people to richer older ones. And they fracture society between property haves and have-nots.
The belief that the "property ladder" is the road to riches does all manner of damage. It saps long-term growth by diverting funds – and talent – away from productive investment. Three-quarters of bank loans go to the property sector; many would-be entrepreneurs become property developers instead. It also promotes an unhealthy reliance on the financial sector and debt-fuelled consumption. And it destabilises the economy, as euphoric booms are inevitably followed by nasty busts.But having correctly diagnosed the problem, Legrain's socialist inclinations predictably compromise his prescription:
Legrain is right that planning restrictions have stopped the supply of houses from rising to meet demand, but more social housing is not the answer. A house of one's own is something to be earned. Houses are nobody's birthright, and should not be doled out by council bureaucrats as a reward for sloth or pregnancy.
What, then, should the government do? For a start, ease planning restrictions so it can build more social housing. That does not imply concreting over the countryside: 3 million new homes at the government's target density would take up a mere 0.3% of the UK's land area – even less if they were built on brownfield sites. Second, the authorities should restrict mortgage lending when the housing market is getting bubbly through targeted measures – such as requiring banks to hold more capital against property lending – that do not crimp desirable business investment.
Legrain is right that irresponsible lending by banks contributed to the property boom, but the banks were simply playing a game that the government established. It was the government that instructed the Bank of England to target CPI, rather than RPI, despite objections from Mervyn King:
For some time we've been hoping that housing costs will come into the CPI. I think the latest date for progress on this front has been pushed out until 2010, but frankly I don't think it will be in my lifetime. That's one of the downsides of CPI - it's very hard to see now when housing costs will come back into the index.The property boom was and continues to be supported by government intervention to artificially lower interest rates. Further government meddling in the lending decisions of banks is not the answer. Our banking system is broken, but it needs fundamental reform, not government bailouts and micromanagement.
Legrain concludes by suggesting increased taxes for landowners:
Last but not least, the government should introduce a tax on land values. Taxing wealthy landowners' windfall gains would help curb property speculation, fund new social housing and reduce the budget deficit. Over time, shifting the tax burden off labour and on to land would create jobs, reward hard work and promote more stable, sustainable and balanced growth. Fixing the housing market should be a priority for whichever parties form the new government.The key question here is context: would the move be revenue neutral, or part of a government plan to seize even more of our wealth. Personally, I could countenance increased property taxes if they came as part of a move to lower, simpler, less invasive, and less disruptive taxes overall, but one doubts that this is what Legrain has in mind.