The housing minister doesn’t get it – credit is what drives house prices

Listening to Grant Shapps, the housing minister, on the radio yesterday morning was deeply depressing. It would, he said, be “desirable” to have a “stable housing market”. One in which prices rose less than earnings over a long period of time, so that house prices fell in real terms and more people could enter the market.

We’d certainly agree with that bit – it would be desirable. And there are ways to make this happen. The first we have written about here many times before – introduce an inflation-linked capital gains charge on primary residential property.

But the government could also force through a firm loan-to-value ratio or income multiple for mortgages; or, as Ross Clark suggests in the Times, change the remit of the Bank of England (BoE) so that it was obliged to use interest rates to control the housing market as well as the Consumer Price Index.

Finally, the government could do something about the rental market. Many of us (and this includes me) are driven to buy, not for financial reasons, but in an effort to buy security. A few tweaks to the tenancy system in the UK – to make life more certain for those who rent – would make that unnecessary and remove some of the British urge to own that puts so much pressure on prices.
The problem is that Shapps isn’t going to do any of these things.

He has ruled out tenancy changes and there is no hint of a suggestion that he might be putting the case to George Osborne for capital gains or a shift in BoE priorities. Instead, he hopes to keep prices down by getting people to build more houses.

This is the depressing bit for me. It is final proof, were it needed, that he is not really on top of his brief. Building houses doesn’t stop bubbles. Why? Because prices are driven by the price of credit and the ease at which you can get that credit, something we thought the credit crunch had now made clear to just about everyone. Those in any doubt need only look to Ireland, Spain and the US. All built hundreds of thousands of houses. All saw a huge bubble. And all now have both a bust and hundreds of thousands of empty and unwanted houses.

Shapps is right to say that a house should not be considered a financial investment but be “primarily thought of as a place to be your home”. And he is right to want house price stability (stability is generally a good thing). But on current form he has no more hope of ending the UK cycle of bubble and bust in house prices than poor Gordon Brown did.