A House of Cards

Chris Waller – September 2015
Mensa emblem

It is now clear that there is a major crisis in housing. Britain needs a quarter of a million new houses each year and, from current figures, we are building little more than half that number. Young people now have more or less abandoned the idea of ever buying a house, as prices rise to over five times average earnings, up from the four-to-one ratio of more recent years. To buy an average house in London now requires an income of around £100,000 per annum. While one might argue that London is almost an island within Great Britain, economically speaking, in the rest of the UK one would still need to earn around £60,000 per annum to have a chance of buying a house – that is if one can raise the deposit.

Like so many economic problems, it did not arise over the weekend. Its causes are many, but certain decisions made 35 years ago have contributed to this current situation. First was the Right To Buy programme initiated by the Thatcher government, ostensibly to create ‘a property-owning democracy’. Since 1980, a total of 1.5 million council houses have been sold off, but the rate of replacement has been lamentably low, leaving a dearth of affordable housing. Even now, council houses are being sold off at the rate of 10,000 – 15,000 per year with only about 1,200 being built last year to replace them.

As a consequence of these two factors, young people increasingly have no option but to rent and this is driving up rents in the private sector. The average monthly rent in Britain is now £900. Add to this a deposit equivalent to six weeks’ rent and agents’ fees and it can cost £2,000 to get the keys to the door of a flat.

There are several factors driving up the cost of housing, but the biggest is the rate of lending by banks. Across the developed economies, banks are committing a greater and greater proportion of their lending to property, which is now reaching an average 60%. In Britain in 1960, private debt – comprising mainly mortgages – was running at 50% of GDP. Private sector debt has now reached 170% of GDP, an alarming figure and one to which the government, ostensibly committed to reducing debt, seems oblivious – indeed it seems to be adding fuel to the fire. George Osborne, faced with the problem of rising house prices fuelled by increased lending, inaugurated his Help To Buy scheme. This is surely the most economically inept response conceivable, which serves only to exacerbate the problem, pushing up prices by anything from £8,000 to £20,000 depending on the area of the country.

The situation is further aggravated by the paying of housing benefit. Paul Johnson, director of the Institute for Fiscal Studies, speaking on BBC Radio 4’s Analysis the other evening, quoted a figure of £25 billion per annum – £500 million per week – more than Britain spends on the police, roads and military procurement combined. And that expenditure is rising. The idea of a housing benefit was mooted in William Beveridge’s famous report and it was a laudable aim, but over the last 30 years it has expanded relentlessly, as the number of renters and the cost of rents have increased. Like Topsy, housing benefit has ‘jest growed and growed’ until it has become a monster.

David Willetts, a former minister and a member of Margaret Thatcher’s advisory panel, also spoke in the same edition of Analysis and said that it was that government’s policy to ‘subsidise people rather than things’, hence the move away from subsidised council housing in the 1980s towards home ownership and private sector renting. It is ironic, therefore, that these very policies have resulted in exactly the opposite of what was intended – home-ownership is now all but a dream for most first-time buyers and taxpayers’ money is being poured into the pockets of private landlords.

The problem can only get worse, as the government now proposes to force local councils to sell off more council houses – an estimated 113,000 (a figure calculated by Shelter). It further seeks to enact legislation requiring housing associations to sell their housing stock at a discount to their tenants, albeit with compensation, this latter coming from the taxpayer. And, of course, this will further increase private sector debt, as more mortgages will be needed.

The banks are caught up in a madness of their own making. The banks create money ex nihilo and lend it against property, historically a safe bet and more so in Britain, given our obsession with asset values, particularly those vested in bricks and mortar. In order to secure that lending, it is in the banks’ interest to ensure that house prices continue to rise and they can only do so while a steady stream of lending can be guaranteed. Currently, British banks are directing 85% of their lending into property. Given that the banking collapse of 2007/08 was precipitated by reckless lending – the sub-prime mortgages fiasco which destroyed Lehman Brothers – one would have thought that the banks should be more circumspect. The British banks are ignoring the lessons of Northern Rock et al, and perhaps wantonly so, since they believe that the government – actually the taxpayer – will have to bail them out once again.

These are not the only clouds on the horizon. Of all mortgages taken out, about one-third – roughly one million – were interest-only mortgages. It is estimated that over 900,000 of the mortgagees have no plan in place to pay off the capital when the mortgage matures and thus they will have to sell their homes. Any large-scale forced sale of houses will necessarily depress property values and thus leave people with a remaining debt and no means with which to repay it. This could well leave home-owners in negative equity and the banks holding assets worth less than their loan books. Once again, the banks failed to consider the Law of Unintended Consequences in their rush to seek profits.

The government has said that 200,000 homes will be built each year until 2020. This is a very ambitious target given that the private sector has, over the last 50 years, only managed to build, on average, 170,000 houses per annum. The Federation of Master Builders has said that even if loans for property purchase are available, the shortage of bricks and bricklayers will scupper any attempt to construct the required number of houses. When the recession hit in 2008 a large number of brickworks were closed down and mothballed as demand plummeted. It takes a long time, plus a lot of confidence in the future market, to recommission a brickworks.

Property construction companies have blamed British planning regulations as one of the causes of the housing shortage. The Local Government Association has calculated that there are 400,000 building plots available with planning permission and have redirected the blame to the builders, whom they say are now taking over two years to complete a build after receiving planning permission, up from 20 months in 2007-08. Some builders are cited as having held land with planning permission for nine years before building on it. Meanwhile, the government is talking of reducing the protection of green-belt land to bring it into the market, but this clearly is not necessary. The LGA has said that there is currently enough land with planning permission to allow over three years building without any further applications. One might also ask why there are over 900,000 properties standing empty when millions need homes.

If anything, we need to rethink the way we build houses. We are still committed to ‘bricks and mortar’ as the only true expression of a home, yet if the population is to be more mobile, do we not need to rethink housing completely and revisit the pre-fab, albeit in modern form? Sadly, as a result of the experience immediately post-war, the idea of pre-fabricated houses still carries a stigma as being a cheap, and slightly nasty, answer to the problem of accommodation. That said, many pre-fabs are still standing and many of the residents are happy to live in them. The Swedes build excellent pre-fabricated houses, so why can’t we? Would it not be easier, and more cost-effective, to build houses which can be moved?

The British obsession with property values is nothing new. Indeed, the British obsession with property in the form of land goes back centuries. In more recent times, it has become an addiction, with the banks in the role of dealers who are only too happy to feed the addiction of their clients. The property market is grotesquely distorted and corrupts the economy as a whole, sucking investment away from productive capacity into static assets.

The government needs to act to correct this unhealthy bias in the British economy, but which party would dare to risk the wrath of the residents of Acacia Avenue? It is clear that action is needed on many fronts to clear the backlog of demand for houses, but parties of government tend on the whole to ignore the bigger picture and concentrate on a quick fix which will garner votes at the next election. One policy that would galvanise the property market into action is that of land value taxation, but this would take years to design and implement and the political horizon for any party of government is only five years away.

I sense it will be business as usual until the next banking crisis, when there will be weeping, wailing and gnashing of teeth by all and sundry and the usual chorus of ‘why did nobody warn us?’


  • Brickonomics, Brian Green.
  • The Observer, Will Hutton.
  • The Telegraph, Christopher Hope.
  • BBC Radio 4, Analysis.
  • The Independent, Kevin Rawlinson.


Chris Waller – Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

Members can discuss this and other articles on the economics forum at International Mensa.

About Us

Economania is the website of Mensa's internationally recognised Special Interest Group dedicated to economics, trade and finance.