Party Vibe

I’m sightly surprsied that there haven’t been any topics on here about the state of the british economy, given that we are closer than any other country in the world to going bankrupt… escentially following Iceland

i don’t normally agree with much Polly Tonybee has to say but with this article she is absolutely bang on

Owners must be weaned off the house-price drug

Now is the time to be honest about what is needed to avoid another wild boom: taxes geared to discourage inflation

Kick-starting the housing market is the urgent priority, isn’t it? The engine is dead, not even a splutter. Brown and Darling keep stamping and jump-starting, but house prices keep falling by £140 a day. Rising repossessions will feed back into the loop, accelerating the price fall. New home building is down by some two thirds, and 450,000 construction jobs may be gone by next year.

So the government put money into preventing repossessions, and yesterday Northern Rock was reborn as a lender able to offer mortgages of up to 90%. HomeBuy Direct will soon offer mortgages to some 15,000 first-timers. It’s a start, yet only a fraction of what used to be lent. But what, exactly, is the aim? House prices are still far too high – they are only back to about 2006 levels, still crazy money. Prices need to fall further to regain any reasonable multiple of people’s incomes.

But every time prices fall, another round of bad debts hurt the banks’ balance sheets and the taxpayer has to pump in more. The nation is still deeply dependent on house prices rising for ever. We still live in a bubble economy, with no way to live except by reinflating it. The state itself has been mainlining on the house-price drug, as addicted as the happy home-owners.

With five million on the housing waiting lists, the state acquired much social housing by demanding that property developers add in a quota for free. Through section 106 planning agreements, developers had to build schools, GP clinics, playgrounds and roads to pay back some of the value bestowed with planning permission.

All this, however, depended on ever-soaring house prices. If profits now return to earth, who will pay for all that infrastructure? Housing associations, councils and government depended on price inflation as much as property developers did.

When Gordon Brown moved into No 10 promising 3m new homes to make up for Labour’s failure to build, that too depended on permanently rising prices. That explains the ambivalence about what housing policy should be now. So desperate is everyone to get the market moving that first-time buyers are rashly wooed with grants to buy homes that may ruin them if prices keep dropping.

Please can we have our bubble back, clamours just about everyone. The 70% who own homes and those who dashed into buy-to-let property yearn for the magical unearned wealth that came from nowhere. Most people will only judge that the slump is over on the day they see prices rise again in their local estate agent’s windows. Normality returns at last! Everyone knows this fairy money caused the crisis, but since about 2003 real incomes have hardly risen, except among the top 10% of earners. House prices sustained the feelgood spending. Where, many economists ask nervously, is our growth to come from now if not in fantasy finance or property boom?

Sober observers watching the government trying to start the dead motor of the housing market warn that once the engine catches, an uncontrollable, rocket-fuelled turbo take-off will leave them standing. Pent-up demand is high: plenty of people have money to invest if they see a chance. Property speculation is hardwired in the British brain after decades of a one-way bet – with only a few small blips. Bricks and mortar are our pensions, piggybanks, casinos, our children’s university and their first flat deposit. How do we return to regarding a home as just another commodity like saucepans?

Revive the private rented sector, the experts say. Be like France and Germany, where most people rent for life and young families aren’t crippled with mortgage debt. But ask these same experts if they own their homes: they do. Ask if they help their children to buy and they do – with good reason. The British tax system urges us to use property as a bank, because it is barely taxed. In countries with a balanced choice between buying and renting, property is taxed the same as other investments. But not here.

Now is the time to tell people that house prices will not be allowed to go mad again. Announce a tax to be imposed on future gains (not retrospectively). There are plenty of ways to do it. Some administrations impose an annual tax, including many US states. Some urge a land value tax system. It would be easy to impose capital gains tax on all future rises: that 18% on any inflation in value, only to be paid on selling it, could stop another bubble. The money raised could be earmarked for building social and private rented homes, or helping others to buy.

But suggest that to politicians and they blanche at the very idea, even while agreeing that it should be done – in theory. Parties that dare not revalue the banding system for council tax – which has unchanged since 1991, letting enormous wealth escape even that modest rise – are certainly not in a mood to challenge the Englishman’s right to inflate his bouncy castle. Current pressure is all for even less tax. Property developers want to escape their section 106 planning gain obligations. Progress suggests a stamp duty holiday. Inheritance tax cuts will ensure virtually no family homes are ever taxed.

The colossal housing shortage helps fuel BNP support. The government is trying to build, allowing councils to borrow and build again, a bit. Land is being acquired cheaply from bankrupt developers. The new Homes and Communities Agency is putting together a commercial consortium to build £1bn worth of private rented property. Northern Rock could become the national good lender bank. But none of this is enough to hold back the mighty thrust of the property market once it sets off again.

Light the blue touch paper and this small island with huge housing need and tight planning controls will see another unsustainable boom, South Sea and tulips all over again. Almost alone in the world, our tax regime is purpose-built to inflate property. Shares, savings and pensions have taken a hard knock: bricks and mortar will still be a better bet while they are untaxed. Most people will stay both seduced and enslaved by property, while 30% have no chance of joining in, apart for ever in social housing ghettos. Ignore any politicians talking about rebalancing the housing mix between ownership and renting, unless they are willing to use tax to dampen the incentive to buy.

polly.toynbee@guardian.co.uk