Good inflation, bad inflation

House price growth is inflation with a better publicist

Houses beside the Kennet, Reading Houses on Elgar Road viewed from the western bank of the river (Credit: Andrew Smith)

That’s one of those irregular verbs, isn’t it? I give confidential security briefings. You leak. He has been charged under section 2a of the Official Secrets Act.

— Bernard Woolley, Yes Minister.

Yesterday, the Financial Times reported on new figures from the Nationwide Building Society,¹ which found that UK house price growth had risen to 2.2% in June, up from 1.7% in the previous month. This took the average property price — a largely meaningless figure — to £277,484.

The reason? Something to do with the ceasefire between the US and Iran, mortgage rates and seasonal variations in the data. To be honest, I didn’t finish the article. Instead, I was distracted by the headline:

House price inflation is simply another way of describing the same phenomenon as growth. But it hits rather differently. Inflation, at least above a certain threshold,² is bad. It conjures up images of things getting more expensive, such as food, electricity and clothing. If wages fail to keep up, people’s purchasing power falls.

Of course, housing is treated differently, in part because it is different. A home is both a consumption good, i.e. somewhere to live and an asset class. When ordinary inflation rises, most consumers lose and businesses often face higher costs. When house price inflation rises, existing homeowners see their wealth increase on paper and can, if they so wish, borrow more heavily against their home.

This is why governments of almost every description are so loath to oversee a house price correction. First, because homeowners constitute a large voting bloc. Second, they benefit from higher property tax revenues or transaction taxes such as stamp duty³. And third, rising prices can help to boost consumer spending (as people feel richer) and stimulate the construction of new homes.

Still, the losers are many. First-time buyers, forced to pay higher deposits and take on larger mortgages. Renters, who may face higher rents over time as landlords seek returns on increasingly expensive buy-to-let mortgages of their own. While we all lose in a sense, as capital is directed away from potentially more productive parts of the economy towards housing.