The government-engineered housing boom will hold back the recovery

July 21, 2021 

The UK housing market has become detached from the real economy. Far from ‘levelling up’, measures by the Treasury and the Bank of England have propelled a housing market boom for the wealthy, rather than support renters who are facing mounting arrears and debt through no fault of their own. Ultimately, this will widen inequality between the young and the old and the housing haves and have-nots.  

Over the past year the UK housing market has been on fire, stoked and fueled by the Treasury’s generous tax breaks to homeowners and landlords. The Bank of England’s policies are also lubricating a property boom, despite a global pandemic which has seen repeated lockdowns and the deepest recession in 300 years. 

The result is house prices are becoming even more disconnected from economic reality. The latest figures from the Office of National Statistics (ONS) show that average UK house prices increased by 10% in the year to May 2021 to a record £254,624, reaching levels last seen in 2007 just before the financial crash. This is at a time when many, including the young and lower paid have disportionately suffered from unemployment or been furloughed and many people are still at risk of losing their jobs. And if you are young and from a Black and Ethinic Minority background, you are twice as likely to have been made unemployed during the pandemic. 

From the perspective of renters, surging house prices means greater precarity in living conditions. Home ownership is pushed further out of reach, and renters typically spend a larger share of their income on rents than homeowners on mortgage payments. According to the ONS, UK private rental prices increased by 10.6% from June 2015 to June 2021. Private renters spend an average of 40% of their household income on rent, which is the very top of the upper limit that the OECD recommends before households are considered ‘overburdened’ by housing costs. London is over that upper limit at a staggering 47%. 

Pandemic measures supporting the rich 

Throughout the pandemic, the Treasury and the Bank of England’s various policies have been benefiting the asset rich and property owners. Back in July 2020, the Chancellor announced a holiday on stamp duty (a tax on the purchase of a new home) for all properties up to the value of £500,000. This was extended to the end of June 2021, with gradual return to previous rates pushed back until October 2021. 

Adding more fuel to the property boom fire, the Chancellor delivered a 95% mortgage guarantee scheme, available to all home movers and effectively removing targeted support to first-time buyers. The move is designed to get banks lending high loan-to-value (LTV) mortgages, which are loans to buyers that can only afford to pay a 5% deposit (compared to a minimum 10% previously).  Those at renting at the lower end of income distribution will still struggle to raise large enough deposits as house prices continue to rise. The average asking price in July 2021 was £338,447, which would require raising close to £17,000 for a 5% deposit. This is out of reach for most renters — almost two-thirds of private renters have no savings at all. To make matters worse, many frontline workers are unable to save for a deposit to buy an average price home in the UK, due to pay freezes and rising rental prices. The scheme won’t ‘turn generation rent into generation buy’ as the government claims, but it will support existing homeowners, landlords and those on higher incomes.

The Bank of England and Quantitative Easing

The Bank of England has also played its role in stoking the house price fire. Quantitative Easing (QE), since March 2020, involved the creation of £450 billion of new central bank money to buy government bonds from financial markets. While this has helped to keep interest rates low on government debt, there are well known negative side effects. When the Bank of England buys government bonds from financial institutions, this money is then reinvested into existing assets and property, pushing up their prices. 

A recent inquiry into QE by the House of Lords Economic Affairs Committee highlighted that QE has resulted in artificially inflating property and asset prices which in turn exacerbates wealth inequality. The Bank’s own analysis of the first round of QE in 2009, showed that real house prices and share prices in 2014 would have been 25% and 22% lower, respectively, in the absence of QE. 

Lack of support for renters 

While homeowners, landlords and the asset rich reap the benefits of rising house prices, support for renters and the financially vulnerable has been lacking.  Unlike the staggered reduction in the stamp duty holiday, renters faced a sudden cliff edge when the eviction ban was lifted at the end of May.  One estimate suggests that 1.7 million renting households are concerned about paying rent in the coming months and 1 million households, half of them with children, are worried about eviction. The risk is heightened for tenants from Black and Ethnic Minority communities, who were twice as likely to be worried about evictions than those from white backgrounds.  

What needs to happen?

There has been a lot of rhetoric from the government about ‘levelling up’ and the need to ‘build back better’ but this rings hollow against policies that have artificially boosted the housing market.  This will create a two tier recovery, by boosting the wealth of the already wealthy while those hit hardest fall further behind. This is the wrong kind of model for a recovery, which relies on trickle down economics.  It also forces people into taking on more debt to be able to afford a home or meet their housing costs in the private rental sector.  House prices can’t go up indefinitely, which will leave many households vulnerable facing higher levels of debt. 

The Treasury and the Bank of England should take stock of the unfair distributional impact of their policies. Engineering a property boom with generous tax breaks and cheap credit is a fragile and unsustainable model for recovery. The Bank of England must be more transparent about the unequal effects of QE and consider other policy alternatives that have more equal benefits across society. Better coordination between our two most powerful economic institutions – the Bank of England and the Treasury – could ensure public money is directed towards investment in housing infrastructure, and increasing the supply of affordable and social housing rather than propping up financial markets and manufactured housing booms. Failure to tackle rapid house price growth and widening inequalities will result in a highly uneven recovery, leaving those hit hardest by the pandemic falling further behind.