For all their claims to economic competence, George Osborne and David Cameron’s economic policy since 2010 has mainly been to try to recreate the conditions that existed in 2007. Falling for the alchemy of mainstream classical economists, they diagnosed the key problem facing Britain to be not enough debt. Through schemes like “Help to Buy”, and even obliquely through raising university tuition fees, the government set out to get Britain borrowing again in the somewhat arcane belief that this would magically produce economic growth.
They succeeded too. According to Lianna Brinded at Business Insider UK:
“The average price to buy a house in Britain now stands at £291,504, according to the Office for National Statistics. Meanwhile, the average London property price is at a huge £551,000.”
So why does the economy seem so anaemic? The British people have done what they were told. Private borrowing is nearly back to the level seen in 2008. House prices are booming to the point that our houses are earning more than we do.
As Brinded notes, the problem is that while house prices have spiralled upward, income has stagnated:
“To put this into perspective, Resolution Foundation estimated that median income, at £24,300, is only around 3% higher than it was when the credit crunch hit in 2007/2008.”
For the moment, low interest rates are making up for stagnating earnings. However, behind this, the number of people able to get on the housing ladder is shrinking because at low interests it is impossible to save the necessary deposit. So the whole market depends upon a shrinking section of the population spending an increasing proportion of their income on housing costs. With the housing market slowing markedly – particularly in London – a housing crash similar to 2008 may be on the cards:
“So the market is poised on a knife edge between interest rates and wages. If interest rates were to rise — and they will eventually — it could prove a major problem for the Britons who already spend 25-28% of their salaries on housing. Similarly, if another downturn depresses wages, mortgage payments will become an increasing portion of their income even without an interest rate increase.”
Whatever else we face, we are a long way away from Margaret Thatcher’s idea of a booming “property-owning democracy” that current government policy was supposed to re-establish.