Opinion: The housing market economy

House prices fell at the fastest rate since the nadir of the last recession in May. Richard Dawson goes back to the 1980 Housing Act to find the roots of the complicated and co-dependent relationship between the housing market and the wider economy

The latest index by Nationwide shows that house prices dropped at the fastest rate since the financial crisis last month.

The average cost of buying a home in Britain fell by 1.7 per cent month-on-month – the fastest such decline since February 2009.

In cash terms, average prices fell from £222,915 in April to £218,902 in May.

The news confirms that the housing market is not immune to the omnipresent coronavirus crisis, even though it had been shrugging this off and gaining momentum in the early months of the year, with 0.9 per cent growth in April alone.

May marks the first time the pandemic has been reflected in the mutual’s index, with Nationwide research indicating that 12 per cent of the population have been put off moving due to the lockdown.

Data from HMRC also suggests that residential property transactions are down 53 per cent compared with 2019.

Nationwide’s chief economist Robert Gardner says the outlook for the housing market remains “highly uncertain” and will depend to a large degree on the performance of the wider economy.

He says: “We have already seen a sharp economic contraction as a result of the necessary measures adopted to suppress the spread of the virus.

“Indeed, the 5.9 per cent decline in UK economic activity in March was only a little less than the contraction recorded over the entire financial crisis.

“However, the raft of policies adopted to protect businesses and jobs, to support people’s incomes and keep borrowing costs down, should set the stage for a rebound once the shock passes.

“These same measures should also help ensure the impact on the housing market will ultimately be less than would normally be associated with an economic shock of this magnitude.”

The co-dependent relationship between the housing market and the economy is one that should be fresh in the mind of anyone who endured the last recession.

Where a public health crisis has triggered this recession, the last was caused by a housing crisis.

But the relationship goes back further than the global financial crash of 2008/9 and to understand how embedded the housing market is in the economy, we have to go back to 1980.

The 1980 Housing Act was one of the most important pieces of legislation to be passed in the last 40 years because it was the law that brought in the Right to Buy scheme for the first time.

Giving tenants of council houses the legal right to buy the homes they were living in gave millions of households a tangible asset to secure their finances and supported the public finances by releasing cash to pay local authority debt.

It was a controversial and far-reaching policy that raised aspirations and helped families improve their livelihoods, but also initiated a national house price bubble, which ultimately burst in 2008.

In the North East, where inflation has been typically slower than elsewhere in the country, house prices grew by 178 per cent in the 1980s, nine per cent in the 1990s, 127 per cent in 2000s and 11 per cent in the 2010s, according to Nationwide.

The dramatic rise in the 2000s was due, at least in part, to the relaxation of conditions around getting approved for a mortgage.

It might seem strange to us now, but 100 per cent mortgages, where you do not have to put down any deposit to secure a loan from the bank, were commonplace in the early 2000s. This helped inflate prices because it made homes easier to buy.

In the space of a few short decades, we went from a place where a house cost around £20,000 to more than £200,000.

This bubble finally burst in 2008, causing a collapse in the housing market and a banking crisis that touched every part of the world.

Many of the mortgages that banks had been issuing and trading with each other in complex financial instruments called derivatives, weren’t worth the paper they were written on.

This created a ‘credit crunch’ wherein banks essentially ran out of money to lend. Thankfully, we have learned some lessons over the last decade and banks have plenty more resilience and liquidity today.

Where the housing market is concerned, the key difference between this recession and 2008 is that this time around falling house prices are the effect and last time they were the cause.

It should therefore reassure us, when thinking about how bad the coronavirus downturn is going to be, that the financial system is much better prepared to tackle it.