What's the issue?

Rising house prices and rent prices systematically undermine the progressive vision of a society with equal opportunities for all. But falling house prices threaten negative equity, bank insolvencies and economic contraction. Fear of a house price crash stands in the way of bold action to tackle our housing crisis. The Common Ground Trust proposal, as published in its Land for the Many report to the Labour Party (Monbiot et al, 2019), offers a route out of this fix, and a mechanism for socialising the unearned land rents that are currently captured by landlords and mortgage lenders.

Analysis

House price inflation over the past two decades has been driven more by expansions in effective demand than by shortages in overall supply. First, seismic changes in the UK mortgage market – including the lifting of various restrictions on banks and building societies, the growth of securitisation and the lowering of the Bank of England base rate – have dramatically increased the supply of cheap, easy credit, and thereby boosted purchasing power available to all buyers. Second, the increasing treatment of homes as financial assets, by global and domestic elites, as well as ordinary households seeking security in retirement, has put enormous upward pressure on prices. Most significantly, buy-to-let landlords have benefited from a highly advantageous fiscal and regulatory environment in their bidding war with first-time buyers.

Fortunately, it is perfectly possible to bring these inflationary forces under control through the reforms summarised in Figure 8. Perhaps the most urgent are reforms to the private rented sector. These make sense on their own terms – since the constant threat of rent hikes and evictions is having a detrimental effect on the health and life chances of millions – but they have the added benefit of dampening demand from buy-to-let investors, and therefore removing one of the key drivers of house price inflation.

The problem is that, once house prices begin to falter, the feedbacks between mortgage lending, house prices and investor behaviour that push prices up during a boom can quickly slip into reverse. Banks become more cautious about extending mortgages, and households more cautious about taking out large mortgages.