Academic journal article National Institute Economic Review

Housing, Debt and the Economy: A Tale of Two Countries

Academic journal article National Institute Economic Review

Housing, Debt and the Economy: A Tale of Two Countries

Article excerpt

In housing affordability levels and volatility, there could hardly be a greater contrast than between the UK and Germany. Differences in history, institutions and policies are explored in this paper. Residential housing supply has been far more expansionary in Germany and mortgage credit more tightly regulated. A sensibly regulated rental market and stable German house prices have combined to leave the rental sector with over half of tenures. Policy failures in the UK have resulted in widening intergenerational inequality, increased social exclusion, adversely affected productivity and growth and raised the risk of financial instability. Policy lessons are drawn for the UK, which go far beyond the remit of the immediately responsible Ministry of Housing, Communities and Local Government.

Keywords: Housing markets in the UK and Germany, housing affordability, property taxation, land-use and rental regulations, mortgage markets, house prices and volatility, residential mobility.

JEL codes: R31, R21, H20, H24, G21, R38, R23.

I. Introduction

It is now official: "the UK housing market is broken". (1) Among the G7 countries, the UK has had the largest rise in house prices relative to average disposable income since 1970, and particularly pronounced since 1997. The consequent housing affordability problem is revealed by a rise in 'concealed households', or family units without their own home. It is estimated, based on the Labour Force Survey, that the number of concealed households in the UK rose by 50 per cent in the past decade, from 1.6 million in 1996, to 2.5 million households in 2016. In London, the number of concealed households rose by over 80 per cent in the same period, from 400,000 to 720,000 households. (2) Dramatic falls have occurred in the rates of owner-occupation, particularly for younger households. The IFS estimates that 65 per cent of those aged 25-34 years, and with incomes in the middle quintile for their age, owned their own homes in 1995-6; and that figure fell to just 27 per cent by 2015-16. The result is increased pressure in the rental sector. Indeed, the record low level in voids reported by the Association of Residential Letting Agents since 2010 suggests severe excess demand in the private rental sector. By contrast, comparable vacancy data for the rental market in the US suggest a 'normal' vacancy rate that is three times as large as in the UK. These housing pressures have had huge consequences for both tenants and the public purse. The Housing Benefit bill rose in real terms between 1997-8 and 2011-12 by 67 per cent in London, by 61 per cent in the rest of the South East, and by 51 per cent in Great Britain as a whole. Since then, severe cuts in the generosity of Housing Benefit (HB), as documented by the Resolution Foundation Intergenerational Commission (2018b), (3) have reduced the expense to the taxpayer but at the cost of increased financial stress for many tenants.

Structural failures of public policy towards housing have resulted in the above symptoms of the 'broken housing market'. One of the wider consequences is the rise in inequality between the different generations in the UK, described in the final report of the Resolution Foundation Intergenerational Commission (2018c). Local house prices now tend to reflect more heavily the access to public goods such as good transport, education and a healthy environment. Therefore, the more restricted access to housing has caused an increase in social exclusion for those without wealthy parents. There are consequences too for the macroeconomy, of lower productivity and growth, and the greater vulnerability of the UK's many debt-laden households and of the financial system as a whole.

Comparisons of the UK's housing market with those of other countries shows that the UK's experience is far from inevitable, but is the self-inflicted consequence of several policy failings. The Anglo-German comparison has been of long-standing interest, see Muellbauer (1992), and the contrast is a particularly stark one. …

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