"UK housing policy is crumbling" - Prof. Peter Ambrose (Brighton 2002)

http://staffcentral.brighton.ac.uk/channel/july_02/ambrose.shtm


In June, 2003 HMT's "Five Economic Tests" for whether the UK should adopt the Euro concluded: 'the incompatibility of the housing market is a high risk factor to the achievement of settled and sustained convergence'

http://www.hm-treasury.gov.uk/newsroom_and_speeches

The Significance of Housing Policy

The UK housing market has consistently featured in the headlines of UK newspapers. It has sparked interests from many different groups with varied objectives and has inspired endless analyses and research. On the 14th of January 2005, the Times newspaper commented

'the Governor of the Bank of England has stated that he cannot forecast house prices with any reliability, which does not stop the squabble of economists with genuine experts and motley soothsayers having a go.' 1

Andrew Farlow, a leading economist, (2004) acknowledges the general failure

'we still can't explain the pattern of behavior in the UK'. 2

The UK housing market is of concern to the Government for numerous reasons. At current house price levels, households of modest income, in crucial professions such as teachers and nurses are priced out of the housing market in many regions of the country. On the 12th of June 2005, Tiscali reported

'93% of towns now 'unaffordable' for nurses' 3

whilst the Guardian reported that

Teachers and nurses are so poorly paid they cannot afford to live in areas where they work'. 4

Another reason for Governments concern is the effect of an unstable housing market on interest rates and this is cited as a key reason for the UK not entering the Economic and Monetary Union. Geoffrey Meen (2003) states:

'In the decision, taken earlier this year, not to join the Economic and Monetary Union for the time being, the structure of the UK housing market was identified as a key difference from the rest of Euro area. Most of the remaining differences particularly in the corporate sector were found to be less severe and, indeed, in terms of labour market flexibility, the UK is probably more suited to monetary union than many of the countries that have already joined. However, housing market differences were the main reason why the convergence test was not met. The balance of the empirical evidence indicates that, as a result of housing, the UK economy is more sensitive to changes in interest rates than other major European economies.  It is, therefore, unsurprising that many of the policy recommendations accompanying the Treasury's analysis of the Five Tests refer to the housing market.' 5

The Chancellor of the Exchequer, Gordon Brown, commissioned Professor David Miles and Dr Kate Barker (2004) to investigate the current economic factors affecting the market. Both of these major reports quoted Geoffrey Meen as a key source of evidence. The Miles Report recommended more long-term fixed rate mortgages to allow the projection of reliable future mortgage costs, but it was a strategy rather than an explanation. In theory, it was aimed at reducing the sensitivity of the housing market to short term changes in interest rates. However, it will be argued here that unacceptable levels of risk at the margins of affordability are a root cause of house price instability. In which case, the higher cost of fixed term lending will exclude exactly those on the margins of affordability (The Dilemma of the Single Option). While it will aid those more removed from risk, it can provide little help to make housing more affordable for those at the threshold of affordability nor reduce the sensitivity of the market in the area of highest risk.