Watch out, folks, we are about to be hit by a snowstorm of economic data. So put on your goggles and look out for the one big hurtling fact that really matters. The key point you need to remember during this week’s spending announcements is that the population of the UK is set to rise by an incredible 10 million over the next 20 years. That is more than the population of Greater London crash-landing on a land mass half the size of France.
Not since industrialisation, not since medieval England recovered from the Black Death, has there been anything like it. Thanks very largely to Labour’s deliberate failure to control immigration, and to higher birth rates, the Big Society is about to get very big indeed.
What jobs will we all do? Where will we all live? And what effect will that extra demand have on the cost of housing?
We already have huge waiting lists for social housing. On the private market the average age of a first-time buyer has now soared to 37 (at the height of the 1980s boom it was down to about 23) and we have desperate problems of overcrowding.
In 1998, about the time Labour let the brakes off immigration, the annual growth in population exceeded new housing supply for the first time, and since then the problem has been getting worse. One answer, I suppose, is to try to create cheaper housing by encouraging existing homes to become more affordable.
Recent pronouncements from the Coalition Government have suggested a new doctrine: that house prices should be flat, or flattish, while earnings rise to meet them. In other words, the British middle classes are being asked to wean themselves off house price inflation, and become more continental, with a higher proportion of rentals.
And a lot of people will say amen to that. Why do we pump all this money into unresponsive bricks and mortar, when we could be investing our capital in stocks and shares and thereby in the flesh-and-blood businesses that add to the GNP of Britain? They will point out – entirely correctly, that this national addiction to house price inflation has bred a kind of financial illiteracy, an apathy about any other investment except the roof over our heads.
And they will point out that it was the house price bubble – the demented practice of giving vast mortgages to people with no incomes and no assets – that led to the crash. Better a stagnant housing market, they will say, than another great boom and another great bust. Which is all very well, in theory.
In practice, it looks as if flattening off the housing market is both risky in the short term, and unachievable in the long term. The sad truth is that it is still psychologically essential to the British middle classes to have a sense that our principal asset is gently appreciating in value, or at least that it will over the long term.
For months now we as a nation have talked about cuts and nothing but cuts, with the morbid fascination of an Oprah Winfrey discussion of self-harm. We know we have to go through with the operation. But we don’t know quite how extensive the slicing is going to be, and we have been kept so long in the waiting room while the surgeon counts his scalpels that the foreboding has been allowed to grow.
That is why it is so vital – as soon as the Comprehensive Spending Review is announced – that we stop droning on about cuts, and start talking about the reasons for these cuts. They are not about shrinking the state. They are about growth, growth, growth – creating the conditions for a sustained economic recovery, and an economic recovery is a function above all of confidence.
People will accept that higher-rate taxpayers should not receive child benefit – a point this column has been making for years. They can see that it is necessary to reform university finance. But if you tell them it is a matter of government policy that their house should effectively fall in value, then you will punch that confidence in the solar plexus – and you will make them less likely to invest, to take on new ventures and new staff.
We are already seeing renewed falls in property values in areas outside London, and the real wobbliness of the market may be concealed by the comparative lack of activity. There are normally about 1 million housing transactions a year in this country. That is now down to 600,000, and if the market falls much further there could be big knock-on effects for the whole system.
The notional assets of banks still depend on housing stocks whose value has yet to be tested, and if the housing market tanks, then the financial system tanks, too. People will be unable to get the mortgages to buy new homes, and developers will be unable to get the finance to build them, and the problem of supply will get even worse.
The last year of the Labour government was the worst for building new housing for 40 years. And when the economy takes off again, as it undoubtedly will, that shortage of new homes will combine with a growing population to produce the most almighty spike in prices – and young people will be less able than ever to buy a home. Which is why the best way to help those millions in search of an affordable home is not to try vainly to ensure that the present stock of housing becomes more affordable – ie falls in value – but to increase the supply of affordable homes.
That is what we have done in London, and that is why housing minister Grant Shapps is right to bring forward his new homes bonus, to give communities an incentive to champion new housing.
The Coalition has done well to get to grips with immigration. But we need to cope with the demographic changes that are now inevitable, and that means investing in houses and other vital infrastructure. Otherwise house prices may continue to slide in the recession, but spike more viciously than ever in the recovery.