House price inflation is still inflation

Polly Toynbee rightly warns about the danger of directing lending policy to ensure a housing market 'recovery' (i.e. rising house prices).

For most products, people say they want low inflation. People don't like it when the price of transport, food, fuel and so forth goes up. But, some people seem to think that the prices of their home should go up faster than the general price level. This does seem rather strange. Why is inflation of more than 2 or 3% considered bad for most things but not for houses? The fact is, logically, if prices are going up by 2% a year - then houses should go up no more or no less than them. If they do go up faster, it indicates a shortage of supply and that people are putting 'too much' money (or getting too much credit) to buy them.

Polly Toynbee suggests that capital gains tax should be levied on the profits made from selling houses. This is theoretically already the case for second homes and buy-to-let properties. It is primary residences that are exempt. This exemption does make some sense though - and is not just a subsidy to the middle-classes. After all, if someone sells their main home, they need to buy somewhere else. This thus means that they are not really taking their profits out of property. Their capital gain is not truly realised. It would only be realised in the event that they were to downsize to a notably cheaper property. As such, I can see why primary residences are exempt from capital gains tax.

It strikes me that governments should be logical and, if they want low inflation, should accept that this means low inflation in the price of houses as well. This will obviously be unpopular with many owner-occupiers (which is why neither Labour nor the Tories are keen on mentioning it) but perhaps it is time for people to stop thinking that they can make capital gains merely from buying and selling property. It is, after all, better that an economy makes goods or provides services that people need rather than that it focuses its attention on buying and selling and speculating in houses that have been already built.

If, in future, when house prices cease falling they then start rising again by more than the rate of inflation then this suggests that there are supply constraints in the system. This should spur on more house building to deal with these constraints. Additionally, if house prices are rising more than inflation, then a government committed to 'avoiding boom and bust' and to encourage responsible lending should also be thinking of imposing some degree of credit controls. This is because, in many cases, it is only the ready availability of credit that allows people to keep pushing house prices up - beyond a level that is affordable.

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