Can anything stop the government-created housing bubble?

Booming prices and slow wage growth should eventually make property progressively less affordable, yet James Moore isn’t so sure

Out of reach? The government has been stimulating demand for new houses without doing anything to encourage supply (Getty/iStock)

You’ll probably be aware that the housing market in large parts of Britain has gone, and I’m going to use a technical term here, bonkers.

Prices have been rising like global sea levels and, troublingly, the latest report by Zoopla, the property website, suggests that they’re poised to go on rising for some time to come (like the sea levels).

The company says this year is on course to be the busiest since 2007, just before the financial crisis emerged to pop the bubble, with 1.52m sales expected and £461bn set to change hands, £145bn more than last year.

But red hot demand, following the market’s inactivity in 2020, is still not being matched by supply – and there are scant signs of that changing.

In fact, when Zoopla compared the number of homes available during the year to mid May with the average across 2020, it was 20.8 per cent down. And remember, in much of 2020 the market was in a Covid-created funk.

Kate Eales, head of regional residential agency at estate agent Strutt & Parker, says their available stock is down by a staggering 36 per cent year on year.

These conditions would be a recipe for the booming prices we’ve been seeing had the government not intervened to stoke demand. But it has, with a series of measures designed to grab headlines while ignoring the realities of the free market capitalism it says it understands.

Here’s Caroline Pattinson, managing director of Pattinson, an independent estate agent operating in the North East, on one of them: “It’s our view that the stamp duty holiday was an unnecessary lever for the chancellor to pull because the market was already booming.”

That’s not normally what one would expect to hear from an estate agent, but as Pattinson goes on to say: “It’s created a false market now and is exacerbating the hold-ups in the sales process.”

Anyone who’s been through the buying and/or selling of a home in Britain knows that it’s a horrible, deeply stressful experience, about on a level with having an unpleasant dental procedure without the benefit of anaesthetic.

Logjams and bottlenecks muck things up for everyone, and Pattinson’s people are left stuck in the middle, taking heat from both sides. Never in my wildest dreams did I think I’d ever find myself sympathising with an estate agent but I can see where she’s coming from.

There’s also the reheated help-to-buy scheme, which I’ve written about before. It uses state funds to guarantee 95 per cent mortgages, the inevitable consequence of which is still more buyers being brought into a market suffering from a chronic lack of supply, with nothing other than the silly price you might be able to get through selling up to stimulate the other side of the equation.

In theory, the market will eventually find some sort of ceiling, especially given the fact that wages are plodding along like a half-lame cart horse, while firing and rehiring workers on worse terms has become depressingly popular among certain employers.

Booming prices and slow wage growth should make property progressively less affordable. Banks are required by their regulators to make sure borrowers can pass fairly strict affordability tests before advancing loans. Yet I’m not so sure. The Bank of Mum and Dad has become an increasingly important part of the housing market in recent years.

It’s already one the biggest lenders currently operating, and even when its loans have to be repaid they are advanced on very favourable terms.

Through the course of the pandemic, people with disposable incomes have been saving their money. Companies in the consumer economy are hoping they’ll spend it to fuel economic recovery.

However, at least some of it may serve to further fuel a housing market that’s already frothier than a supersized Starbucks cappuccino by giving the privileged kids in generation rent a leg up into a market that’s out of the reach of the rest.

Good thing rental yields have, as I wrote last week, fallen, at least in big cities. But how long will that last?