TheEconomistJuly 20th 2019 471J
ust over a decade ago, in an obscure cor-
ner of the economy, there was an early
warning sign that Britain was about to fall
into recession. Months before the down-
turn had been confirmed, the maker of Du-
lux paints reported that sales of its decora-
tive range were down. Faced with global
economic uncertainty and a weakening la-
bour market, Britons were cutting back on
refurbishment. At the same time, lower de-
mand for new houses meant that builders
needed fewer materials.
What was first seen in the market for
paints eventually spread to other parts of
the property sector—and from there to the
rest of the economy. Over a fifth of Britain’s
building firms ultimately went under. Sur-
veyors, estate agents and solicitors suf-
fered. In all, falling housing investment ac-
counted for a quarter of the drop in gdp in
2008-09. It played an even bigger role in
the recessions of 1975, 1980-81 and 1990-91.
So it is ominous that the housing mar-
ket is again looking weak. In the past two
years real house prices in London have fall-
en by a tenth (and by 5% in nominal terms).
The rest of the country is now following
suit; for the first time since 2013 real prices
are falling year-on-year (see chart). There is
growing evidence that, as in 2008, weak-
ness in the housing market is dragging
down overall economic growth.
A few factors explain the slowdown.
One is a tax reform in 2016 that subjected
buy-to-let investors to higher stamp duty, a
tax on property purchases. Another is the
fact that foreign buyers, who snap up Lon-
don flats as investments and status sym-
bols, are giving Brexit Britain a wider berth.
Tighter monetary policy is also playing arole. Since November 2017 the Bank of Eng-
land has raised interest rates from 0.25% to
0.75%. That has pushed up average mort-
gage rates, meaning Britons cannot borrow
as much. (It also means that, despite falling
prices, for most people housing is no more
affordable than it was before.)
As prices have dropped, so has the num-
ber of transactions. In May the number of
properties changing hands was 10% lower
than a year earlier. A measure of buyers’ in-
quiries fell for ten consecutive months to
May, before rallying slightly in June. Boris
Johnson, the probable next prime minister,
has floated the idea of reducing stamp duty,
which could gee up the market—but buyers
may be putting off their purchases until
such a cut happens.
The supply side of the market is also
taking a hit. In recent decades the housing
market has often seemed like a one-way
bet, with real house prices rising faster
than in any other g7 country. Now, con-
fronted by falling prices, sellers of land are
putting their plans on hold. A land-buyer
for one of the big housebuilding compa-
nies complains that finding plots for sale
has become more difficult.
Even when developers have land, they
seem increasingly reluctant to build on it.
Not long ago they were firing on all cylin-
ders, putting up 140,000 private homes in
Englandin2018,themostsincebeforetheThe economy
Weak foundations
The housing market is wobbling. It may be the start of something much worse
Where you lead, I will followSources: Land Registry; ONSBritain, house prices, September2007=100
2019 prices2007 09 11 13 15 17 19708090100110120130140LondonEU referendumBritainBritain
48 SecondhomesbytheseaAlso in this section49 Bagehot: The end of historyVacancy:The Economistis looking to hire a staff
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