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House prices in London are falling. Estate agent Savills this week announced that it expects house prices to rise by just 1% in 2018, which means a reduction in real terms (once inflation is taken into account).
Prime central London – including areas such as Chelsea, Kensington and Notting Hill – saw average prices end 2017 4% down. The fall was even greater in south and west London, for example in Fulham where prices fell by 4.7% and are now down 14% relative to their peak in 2014.
What economists call a ‘market correction’ (and normal people call ‘house prices falling from their insane peak’) is not unexpected in the capital: in 2017, the average home (£496,000) hit an historic high of 14.5 times the average Londoner’s salary (£34,200). A shortage of supply and increasing demand has meant rocketing values for eight years. Last year, prices in the capital fell for the first time since 2009, due to a combination of a natural slowdown, Brexit nerves and regulations that limit how generous mortgages can be in giving out debt.
For many, this is bad news. Those who recently purchased, need to sell quickly, or struggle to keep up with mortgage payments will all be worse off. At the same time, private developers are likely to slow down their house-building.
However, it might also be good news, and not just by helping first-time buyers onto the housing ladder. If the government and housing associations (non-profit providers of social housing) are smart, they will see the market slowdown as an opportunity.
Sadiq Kahn, London’s Mayor, wants to build 66,000 new homes a year, up from the current number of 29,000. To do this, local authorities and housing associations need land; the houses have to physically go somewhere. So far, this has proven difficult: there isn’t a lot of spare land, and, even when there is, it is expensive. But if the housing market cools, this is the perfect time to purchase empty sites or buy out low-quality housing and then build significant new social housing developments.
Private sector ‘vulture funds’ have been doing this for years. Sensing an opportunity to make profit, they buy mortgages, wait until homeowners default and then sell the houses back when the market picks up again in a few years. The government should do exactly this, except instead of taking advantage of people to ride the housing market, they should take advantage of the housing market to benefit people.
This would have two big benefits. First, it would prop up the housing market to stop a vicious cycle of falling prices (exactly what the government did for the banks in 2008) and, second, it would provide a new generation of much-needed, high-quality social housing.
This is partly already happening in Ireland. The Irish Bank Resolution Corporation is a state-owned organisation that the government set up to take over mortgages when home-owners struggle to keep up. And, in 2016, the Master of the Irish High Court suggested that the government should buy back homes from private vulture funds and turn them into social housing, a move which was publicly popular (40% approved, 33% opposed).
The time to set up our own British Housing Bank is now. It could be 50% owned by the state and 50% owned by housing associations; both would eventually make money from the venture. Traditionally, this is the type of bold, brave idea that the British government is afraid of. If they manage to pluck up the courage, it would go some way to solving the housing crisis.
Benjamin Clayton is a Fellow at Harvard’s Kennedy School of Government. He was previously Chief of Staff at the British Government’s National Infrastructure Commission.