UK Housing Policy - Instability of Prices

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• A Sterile Debate
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The Archive

• Significance
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• Unstable Prices
• Green Paper 2007

The Instability of the Housing Market

Housing is a fundamental need, but it presents special problems because of its high capital cost. This is the reason that government here and in Europe have encouraged the provision of housing in special ways. Since the 1960's until quite recently, the subsidy of tax rebate to house buyers was actually more per household than the subsidy to council houses.

Because housing is a fundamental need for the formation of new families, the initial high investment costs are required at exactly the time when those families can least afford it. With sufficient income, house purchase is a good investment, but the financial structures of housing policy must be used to make that advantage available to every family. An investment based rented sector is the most cost effective way of doing that. A consumer based rented system is too expensive to provide the needs of low income families or those who are trying to save for a deposit and it is too expensive to meet the needs of a healthy nation.

The long instability of the UK housing market is unique, but is it really such a mystery?

We can expect that 70% of the nation, who are existing homeowners, will have little affect on the house price market. Since a housing deal for an existing homeowner is usually to do with changing geography, it includes the simultaneous transactions of purchase and sale. So it makes little difference whether prices are high or low. Both sides of the deal will be affected in the same way.

It seems reasonable to expect that the demand side affecting house prices will be dominated by first time buyers. This group is a very small proportion of the population, who usually emerge from the rising generation. This is exactly the group who face the dilemma of the single option. Since their risk is so high, their sensitivity to supply and perceived changes in the market must also be high.

The dilemma of the single option is the creation of the unique financial and rented structures in the UK. It also provides a plausible explanation for the hypersensitivity of the UK Housing Market.

If this high-risk dilemma is at the heart of house price instability, then the adoption of a Complementary Housing Policy would solve it.