Magazine article The Spectator

Houses for Votes

Magazine article The Spectator

Houses for Votes

Article excerpt

It is little wonder that Gordon Brown last week hurried to the pastel sofas of the GMTV studio to reject the warning by the Governor of the Bank of England, Mervyn King, that people should think twice about buying a home at current prices. There is one figure which the government is going to be watching even more closely than the opinion polls in the year leading up to the next election - the Halifax house price index. Never mind Iraq, never mind foundation hospitals, never mind the European constitution; there is only one matter capable of causing the catastrophic collapse in electoral support needed for Labour to lose the next election: that is a large drop in house prices.

Whatever they think of Labour's other achievements or non-achievements in office, there is little question that the average household feels enriched by the Labour years, and enriched for one reason: the value of property has gone up, and gone up far faster than general prices. Averaged across the country, houses are now worth 2.4 times what they were when Labour came to power on 1 May 1997. For most households, the apparent rise in housing wealth has outstripped any losses on the stock market. It has encouraged homeowners to treat their homes as their pensions or to withdraw capital from their homes in order to spend it on other goodies. Many have been tempted to go further and make speculative investments in the property market: ordinary people who would never dare borrow money to invest in the stock market have been persuaded to gear themselves many times over in order to build themselves a portfolio of a dozen or more investment properties.

Few appear to have grasped that this massive creation of wealth is illusory. We are, by and large, still living in the same crummy old houses as we were in 1997. It is not so much that they have risen in value as that money has fallen in value. To put the rise in house prices in an alternative context, the pound in the homebuyer's pocket back in 1997 is now worth just 41 pence. Rising house prices are as much a kind of inflation as rises in baked bean prices. They do not amount to the creation of wealth, but to the redistribution of wealth to homeowners from non-homeowners. House price inflation distorts the economy, lowers the standard of living for those who failed to buy a home several years ago and, by trapping people with large mortgages, greatly harms the mobility of labour which is essential to a dynamic economy. Worse, there is always the danger that the speculative bubble could burst, leading to misery and ruin on a scale which contributed to the collapse in support for the Major government in the early 1990s.

During his first term as chancellor, Gordon Brown was prepared to tolerate house price inflation. Over the past couple of years, however, he has begun positively to encourage it. Most blatantly he has done this by dropping the Retail Prices Index (RPI) as the official measure of inflation and replacing it with the Index of Consumer Prices (ICP). The Chancellor excused the change on the grounds that he needed to bring Britain's inflation figures in line with those of the rest of the EU. Yet clearly this is far from the whole story. While the former contained a minimal element of house price inflation, the latter includes no housing costs whatsoever: thus the official 'cost of living' index now excludes the cost of putting a roof over our heads, as if we all slept over the hot air vents above King's Cross Underground station. …

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