On Thursday, Britain woke up to two bits of inextricably linked news: our GDP had fallen by two per cent (the biggest drop since 2008) and the housing market in England (though not in Scotland, Wales or Northern Ireland) was reopening, brought out of the deep freeze that the Government put it into back in March when all transactions were suspended due to lockdown.
As the thaw began, with estate agents returning to work, the Office for National Statistics confirmed what we already knew – the United Kingdom is on course for the deepest recession in modern history because of the coronavirus pandemic and we’re only just beginning to get a glimpse of how bad its economic aftermath will be.
Unlike 2008, the recession on our horizon isn’t anything to do with the housing market (see the bit in The Big Short where Margot Robbie explains mortgage bonds from a bubble bath). But, nonetheless, unleashing the animal spirits of our housing market is a well-rehearsed Conservative response to economic downturn.
Remember Help to Buy? Lest we forget. The building, buying and selling of homes on the private market is lighter fuel for our economy in which, let’s face it, we don’t really produce much these days. Construction makes up a huge proportion of our GDP which is why the Government was so reluctant to close building sites and quick to reopen them.
As former Number 10 advisor Toby Lloyd and his co-authors pointed out in Rethinking The Economics of Land and Housing, property is now the single largest source of wealth in the UK, making up to half of all total household assets and net wealth. Mortgage debt comprises the majority of bank lending as well as the majority of household liabilities.
So, it’s no surprise that both ensuring the ongoing exchange of houses and maintaining their value is an overriding macroeconomic concern at the best of times. The last financial crisis exposed the limits of this thinking, of course, but little changed and growing wealth inequality continued to be driven by the financialisation of housing which, in turn, pushed more and more people into relative poverty or to the verge of it.
That was laid bare by this pandemic when it emerged that people on low and middle incomes who were stretched by private rents were in hot water because of job losses and furloughing. This sent the landlord lobby into a frenzy of action and forced the Government to restore Local Housing Allowance to cover the lowest third of market rents.
Housebuilders and estate agents will welcome the reopening of the housing market with open arms. As will anyone who was stuck and trying to move during lockdown. But we are still in the midst of a pandemic, still buffering as we wait for the biggest economic shock in recent history to come into focus.
Neal Hudson is a leading UK housing market analyst. He warns that the consequences of the coronavirus crisis and lockdown will leave a lasting impression on the housing market.
“Some people’s financial situations are unchanged but there are many others who have lost income, savings, jobs, and even loved ones,” he told i. “Therefore it seems likely that while some people will be able to afford the same house price as before the lockdown (dependent on a full recovery in the mortgage market), many others will be in a far worse position.”
So what will all of this mean for the housing market? Neal says that house prices could fall, but inequality could grow. “In the absence of a significant price correction, it’s likely that this period will further reinforce pre-existing inequalities. Those lucky enough to have the savings and income to benefit from secure and affordable home-ownership will continue to do so, while the number of those that don’t will grow. They will be stuck in the insecure, unaffordable, often poor quality and over-crowded private rented sector or in homes they own but are too small or inappropriate for their changing needs.”
It’s too soon to tell just how bad this will be. The Bank of England has forecast the worst recession since 1706, with a 25 per cent fall of GDP in the second quarter of this year. That’s so serious that the Government, according to a briefing leaked to The Telegraph, is reportedly thinking about freezing public sector pay and hiking taxes to pay off the national debt of the extended Job Retention Scheme.
If our economy doesn’t bounce back there will be widespread joblessness. According to Neal, “[this] raises the prospect of forced sales and the risk of a significant house price drop. In the absence of these forced sales, we will probably see prices falling slightly though potentially further in more at risk markets like city centre apartments where loan to value ratios are high on new builds, Airbnb was a big market and where there may now be fewer international students.”
If austerity V.2 were to be the chosen response to the incoming recession it would compound all of this. If house prices remain high but wages fall, the stalemate that has characterised recent years will continue and only new Help to Buy style schemes will bring the market back to life. We’ve been here before.
Of course, there is another way out of this. Economic stimulus, a programme of public spending that would mitigate the deepening inequality caused housing wealth inequality: we could just build social housing. It was desperately needed before and now it could be both a key to economic recovery and solving the housing crisis.
Right now the Government faces tough questions about how they will support renters, homeowners and landlords alike. A further increase to the benefits available to renters would effectively be a huge public bailout for private landlords when the benefits bill payable to them is already shamefully high.
Borrowing to build a new generation of truly affordable social housing (not just using the money generated from Right to Buy sales) would stem the continuing crisis in the private rented sector. It would turn homes into a national asset once again, which would indemnify us against future catastrophes like coronavirus which, inevitably, will come. It would keep the economy moving because there would still be construction. A radical intervention or a joined-up, common-sense approach?