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As the impact of the credit crunch began to be felt, it became painfully clear that the previous government’s promise to cure the perceived ills of boom and bust was misguided and unrealisable. The clichéd prophesy – what goes up must come down – was proved belatedly and savagely true, as inherent cyclicality of the economy revealed itself again.
But was that such a bad thing? The debate about the inevitability if cyclical economies goes on, of course, but one of the main arguments put forward is that the boom times are necessary for fostering the kinds of technological innovations that drive growth. When the correction comes, the regime changes so that the economy is best placed to capitalise on those innovations. We pay for the good times eventually, but those boom periods are necessary features of the market economy. Yet, regardless of whether we accept such a simplistic analysis, there remains the difficult question about who should share in the fortunes of the good times, and who should bear the burden when the credit card bill arrives. And nowhere is this question more pertinent that in the housing market.
The most recent housing market cycle in Britain – the one whose end we have just witnessed – started in the early 1990’s. The subsequent period of housing market growth eventually became one of the longest housing market cycles in living memory: approximately 18 years trough-to-trough. Most of this period was one significant economic growth. Material conditions, especially since the turn of the century, improved for many throughout the country.
Yet, as was the case in many other areas of society, this rise in material wealth was accompanied by the emergence of significant inequalities. The gaps between the “haves” and the “have-mores” became wider than ever – in terms of social and economic deprivation, health inequalities, life expectancy, and so on. This corollary of “New Labour-style” economic growth has also been apparent in the housing market.
The specific impact of the long cycle has been to enable a benign environment for the emergence of multi-speed housing market across the different regions of Britain. The ripple of housing market growth, seeded first in London and the south-east, has been permitted to emanate throughout the country, much further than previously, before being stopped short by crash and correction. Like real ripples in a pond, the strength of the effect tends to peter out.
The growth in house prices, by the time the ripples hit places like Yorkshire, Tyneside and South Wales, was much weaker and comparatively short-lived. In the mid-1990’s, when the housing market was really taking off in the south-east, many parts of the ex-industrial north were still experiencing price falls and there was much consternation about the spectre of a “low demand” housing market. When the good times hit – in the mid-2000s – prices were still rising in the south, albeit in a more muted way.
Economists have been quite concerned about the volatility in the housing market, but their focus has normally been on house-price changes over time, and with macroeconomic policy, the implication being that volatility affects prices in concert throughout the whole market.
The experience of different regions in the UK in the latest cycle has been quite different from previous ones. In the 1970’s housing market cycles (peaking in 1973 and 1979), rates of regional house-price growth rose and fell more or less in line with the national average. No region differed from the countrywide average by more than roughly 10 percentage points.
The story since the late 1980s, including that of the most recent cycle, could not have been more different. In the inflationary spurt of the late 1980s, rates of house-price growth in London and the south-east were more than double those in Scotland and Northern Ireland. Rates of growth in Wales and parts of northern England have consistently been below the UK average.
Why does this matter? There are two very good reasons. The first is that the absolute gaps in prices between different parts of the country have a different parts of the country have a direct impact on people’s lives, through their housing equity, and – in macroeconomic sense – on mobility in the labour market. As the gaps grow, so the purchasing power of families in lower-priced area falls. Economists are also concerned about the unearned gains that result from the lottery of where in the country you live. As Mark Stephens of Glasgow University remarked recently, the housing market is quite possibly the engine of inequality in modern Britain.
The second reason relates to the solution. To put it simply, our diagnosis of the type of volatility that exists in the market tells us a lot about what we might do about it. A concern with volatility through time gives rise to the countercyclical macroeconomic and fiscal measures that are designed to smooth out the ride.
Many of these measures are national in their scope and by definition – like interest rates, the apply equally to the housing markets in Surbiton in Salford. Many such measures are on the supply side of the market: acute difficulties with the affordability of housing for first-time buyers led to a great deal of policy attention being paid to the role of new house-building, for instance.
The planning system was vilified for standing in its way, even when economic modelling suggested that, all told, the potential for new houses to bring down prices was pretty marginal. New labour really would have had to give the Campaign to Protect Rural England something to chew over if it was going to solve the affordability problem solely by building new houses.
An understanding of regional volatility – between different parts of the country – will put a rather different perspective on matters. Instead of simply thinking about the national supply-side framework, our attention shifts to the unequal distribution of demand-side fundamentals. Employment, earnings, the pressures brought about by population movements, economic growth and demographics, all vary considerably from region to region – and they all govern how many people might be on the doorstep looking for housing.
That is why we also need a range of demand-side policy instruments, unfashionable though these may be, for all their flaws, that is why regional development agencies, were a step in the right direction. We cannot solve the structural problems of the housing market simply by tinkering with the supply side in a countercyclical fashion. To bring about sustainable change will demand a long, hard look at what drives the differences between separate parts of the country in the first place.
Ed Ferrari
The New Statesman
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