Could a house price slump reshape the next election?

All the main parties talk about house-building but without a solid plan, says Sean O’Grady

It is probably bad news for the Conservatives to enter an election year with a weak or falling housing market (PA Archive)

Average UK house prices fell by 3.4 per cent in the year to May – the fastest annual fall since the 2009 financial crisis – according to the Nationwide building society. It warns that “headwinds to the housing market look set to strengthen in the near term”. House prices edged down by 0.1 per cent in the month of May itself, and the average property price now stands at £260,736 – about 4 per cent below the August 2022 peak.

What is causing the slowdown?

Obvious immediate factors include cost-of-living pressures, sharply rising interest rates, and relatively weak consumer confidence. Longer term, Britain’s housing has suffered from a lack of supply, caused by a mixture of restrictive planning rules, political resistance to building in rural and semi-rural areas, and the extreme personal tax breaks given to investment in residential housing (favouring buy-to-let landlords).

This has generally kept prices tight and rising, but also prone to periodic sharp corrections and periods of stagnation. So the net effect of British housing policy, under all parties, is to have turned the market for homes into something of an unstable speculative Ponzi scheme, with a pattern of boom and bust that greatly amplifies relatively modest changes in the underlying economy.

Is it the Bank of England’s fault?

Not exactly. It has a duty, given to it by parliament, to get general consumer price inflation down to 2 per cent in the medium term. That means higher interest rates, which is bad news for borrowers – and for property owners who’ve paid off their mortgage, whose main capital asset is (usually) their home.

But the interest rate rises are only needed because of the recent wave of inflation, caused in turn by energy and food price spikes due to the war in Ukraine, by labour shortages, and by problems with European and global supply chains. Covid, war and Brexit have variously exacerbated these unhelpful trends and pushed prices higher, while wages, though rising, are lagging badly behind.

You could say that the Bank should have raised rates earlier, or not cut them so much in the pandemic, but that’s unproven, and it’s academic right now.

Will there be a crash?

It can’t be ruled out, first because prices have been rising so much for so long, and second because the economic outlook is so uncertain. Much depends on geopolitical events (Ukraine, Taiwan), rapid technological change, and rising protectionism and deglobalisation. We also know that, whatever the immediate arguments about Britain’s rank in the G7 growth table and whether we will go into recession, Brexit is proving to be a powerful long-term brake on growth, which means sluggish wage rises.

Given the apparent stubbornness of inflation, interest rates may remain higher for longer. Last, if the economy slows much further, commercial banks may tighten their lending criteria, making things harder for first-time buyers with modest deposits.

What’s the political impact?

It is probably bad news for the Conservatives to enter an election year with a weak or falling housing market. Falling property values are a poor finale to 13 years in power for a party that prides itself on its ambition to build a “property-owning democracy”.

Those who are due to remortgage in the coming months will have the biggest shocks, because the initial rates they were on were so low. More than 1.4 million households face the prospect of interest rate rises when they renew their fixed-rate mortgages over the course of this year, according to the Office for National Statistics. Around six in 10 were fixed at interest rates below 2 per cent, compared to 4 or 6 per cent now – equivalent to hundreds of pounds more every month.

This was supposed to ease after Liz Truss and Kwasi Kwarteng left office, but the failure by the Sunak administration to get inflation down as fast as previously expected has meant that rates are again escalating.

A long-term and persistent housing crisis is the unwelcome backdrop to this unhappy news about falling values, with the only ray of hope being that first-time buyers may be better able to afford a cheaper starter home. On the other hand, those very same people may already be affected by the rise in rental costs, which in turn makes it harder for them to raise a deposit. The upshot is that first-time buyers and renters, who are usually in a younger age group, will be even less inclined to give the government a fifth term in office.

For a significant number of older voters approaching retirement age, their home is effectively their pension, and the less it is worth, the less income they can expect to receive (albeit annuity rates will be moving up) or leave to their children.

Areas where housing has boomed the most in recent times, with correspondingly inflated mortgage debt, will see the greatest backlash. Many more “blue wall” seats may fall to the opposition parties than would otherwise be the case.

A caveat would be if voters actually feared that Labour would make things even worse, as was the case in the 1992 general election. (That, too, was held in the shadow of recession and a housing slump, but Labour was less trusted than John Major’s government to restore prosperity.) Current polls suggest Labour has a lead on economic competence, but that might not survive a propaganda campaign by the Conservatives and their media allies.

What do the opposition parties say?

Were Labour to come to power immediately, it would be following broadly the same fiscal policy as the present government, and would also support the Bank of England in hiking of rates. Keir Starmer couldn’t correct a housing slump even if it were a good idea to do so. All the main parties talk about increasing the rate of house-building, but there’s no solid plan for that.

Conservatives are starting to strengthen tenants’ rights against landlords, notably by abolishing “no fault” evictions – and Labour would probably go further – but experience suggests that such moves only tend to constrict the supply of rented homes in the longer term, pushing up rents.

Whether either party can relax the planning rules in the face of militant Nimbyism has also to be in doubt. Labour has floated the idea of allowing local authorities in England the power to compulsorily purchase land at a fraction of its potential cost if they want to build on it; though few have much sympathy for landowners, it’s a policy that would be likely to provoke fierce resistance from anyone arbitrarily expropriated.