The recent Institute for Public Policy Research (IPPR) paper ‘On Borrowed Time’ suggests that property is one part of our financial system that is so out of control that it requires a reset to prevent a future crash.
While property values continue to grow across the UK, averaging 2% a year, areas such as Edinburgh and Manchester are soaring ahead of the UK, while London is showing a modest decline. In Edinburgh, properties are being for sold up to 17% over the asking price. The difficulties first-time buyers face show little, if any, sign of abating.
The IPPR paper recommends disincentivising property investment by freezing house prices for five years to (in their view) stabilise the housing market, devalue an over-inflated pound and increase exports. This would result in property values falling 10% by 2023. According to the paper, this would make it easier for first-time buyers to afford a home.
The Bank of England’s monetary policy committee would be tasked with freezing house prices for five years, then maintaining an annual increase in property values that matched inflation – effectively a zero gain.
The IPPR paper goes on to suggest that this freeze could be achieved through fiscal measures by increasing the controls on access to mortgages. The IPPR paper admits that this, in turn, would make it harder for first-time buyers to borrow. Although this would negate the premise of the price freeze, they offer no solution to their self-inflicted fiscal oxymoron, bar passing it to someone else to advise on and solve. The paper appears to want to have its cake and eat it.
Freezing property prices at a single moment in time implies that the price paid today is the right one. Potentially placing recent purchasers in areas where prices have since declined moderately into negative equity with no possible respite for at least five years.
Is that a solution to aid first-time buyers and exports?