A New Year a welter of New Challenges for Mr Shapps

A New Year a welter of New Challenges for Mr Shapps

Happy New Year and here is wishing fervently that it progresses far better than those reading the runes might suggest.

For me the year has started encouragingly and for that I must congratulate Grant Shapps, our housing minister.

In May when Shapps took the ministerial reins attached to the wild stallion that is housing I argued that the first big question he had to face down was whether he believes house prices at current levels are sustainable or not.

In the run up to the General Election he had – along with his political rivals – obfuscated. And with most of the industry seemingly content to ignore the link between affordability and the actual price of housing and focus on short-term affordability related to mortgage rates, the chances of him continuing to toe this line were high.

So, I am delighted to say well done Mr Shapps. Though I will be heartily disappointed if, without pointing to specific actions, he seeks to claim credit for stable or falling house prices over the next few years. The chances of that happening without any intervention by Government I would suggest are greater than evens.

But it was nice to see him earn pats on the back from many quarters including the Labour supporting Red Brick blog, Lib-Dem leaning blog from Alex Marsh and Jules Birch’s quizzical and critical blog Inside Edge hosted on the Inside Housing website. Even Neil O’Brien, director of the right wing think tank Policy Exchange, backed him in a Telegraph news blog that argued “we don’t want ever-higher house prices”.

It is a shame that there was so little clamour for containing house prices when containment would have been more useful.

That is history. However, from where we are now, addressing the issue of house price inflation and actual house prices must be central to the Government’s policies. And, even without action, simply the rhetoric of ministers can be a powerful tool.

But sadly good sense is not necessarily good politics. We live in a perverse world.

For example, rising fuel prices are attacked with vigour, even though they have the huge benefit of encouraging low energy technology.

Meanwhile rampant house price rises are widely applauded despite the extremely nasty effects of redistributing wealth from poor to rich, cutting off potential first-time buyers from access to homeownership, in the long run reducing housing transactions and house building, reducing labour mobility, and more often than not prompting painful corrections.

On the other hand, in the short term rising fuel prices are painful and provide an economic drag, while rising house prices in the short term boost confidence and, the suggestion is, consumer spending and investment in the housing stock.

Here’s a question: how many politicians have been brave enough to argue that energy prices are too cheap?

So it’s good to see Shapps nail his colours to the mast on house prices, having been edging in this direction for some months. I hope, however, that when he was banging in the nails he was aware that with this action comes an array of new and very awkward challenges.

The political and economic Pandora’s box he has opened releases problems that run far deeper than simply confronting the thorny issue that the desire to see house prices rise appears hard wired into the minds of the middle classes.

I have outlined below just a few of the new challenges he faces having aligned himself to the view that house prices have to fall in relation to earnings.

One: Shapps argues the case for a gradual realignment of house prices. Well, depending on the rate of general and wage inflation this could take a decade.

Certainly this approach would be less traumatic in the short term. But it may well condemn the nation to lower levels of private sector house building than would follow a short-sharp-shock drop in prices.

If you track house price inflation since the 1970s against residential transactions there is an unsettling correlation between the two. Rising prices go with increasing house building, falling prices with fewer new homes built.

A short sharp correction – as might be favoured with a leaning towards the “creative destruction” views of Schumpeter – might be more painful, but it would provide space for new growth. The question is from what level.

Fortunately for Shapps he does have one lever at his disposal to ease the plight of house builders who potentially face years of negative real growth in house prices – reducing the cost of house building. Ironically this was gifted to him by his predecessors.

The reduction of the regulatory burden would provide more space for house builders to take on projects they might not otherwise have progressed.

But private sector housing transactions in the much larger second-hand market would be untouched by this measure. And there appears to be a strong link (coincidental or causal I don’t know) between overall house price transactions and new homes built.

Two: Shapps is keen to get people on the housing ladder, in particular first-time buyers. But any actions to encourage more first-time buyers into the market potentially assists in propping up prices by promoting more demand in the market than would otherwise be the case.

The balance is tricky here. For instance, Shapps is keen to press regulators at the FSA over their Mortgage Market Review which suggests need for tightening up rules for mortgage lending.

The first question this raises is ethical and political: how far should the lot of first-time buyers be eased if we are also to promote real-term house prices falls over the next decade? Falling house prices will weigh heavily against their ability to trade up into a second home and may condemn them to unsuitable housing for many more years than is desirable.

The second question is economic: if we encourage more first-time buyers into the market, surely we risk pushing up prices?

Further, every time Shapps supports products such as HomeBuy he is promoting demand and so promoting house price inflation above what it would otherwise have been.

Three: If house prices begin to take off, what can and will he be prepared to do? Whatever he does to curb house price inflation is highly likely to play hideously with his core voters and will most probably unsettle plenty of his colleagues. It will be interesting to see how consistent with his current position he is prepared to remain.

That’s just three possible challenges associated with seeking to maintain house prices on a path between zero growth and wage inflation. There are many others and I could go on, but the danger of spiralling into a sequence of ever more hypothetical situations is too great.

What is important now though is to say well done to Mr Shapps and to wish him all the best with the welter of challenges he has thrust upon himself by being willing to state the blindingly obvious – that the reason houses are not affordable is because they cost so much.

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