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The following OECD assessment and recommendations summarise Chapter 2 of the Economic Survey of the United Kingdom 2005 published on 12 October 2005.
What is the risk from the housing market?
The marked slowdown in consumption suggests that the housing market continues to have a strong influence on aggregate consumption. The possibility of a much sharper retrenchment in consumption, brought about by a pronounced drop in house prices, remains a risk, although one that has diminished. If a relatively “soft landing” in the housing market has indeed been achieved it owes much to the strategy of gradual pre emptive monetary tightening, in marked contrast to previous episodes when an abrupt correction in house prices was triggered by sharp interest rate rises. Nevertheless, reforms are needed to make housing supply more elastic to damp future housing market cycles. As highlighted by the Barker review, relaxing planning restrictions to make housing supply more responsive is likely to help and the government is taking steps in this direction.
Monetary tightening usually precedes house price falls
1. Relative to consumers' expenditure deflator (index 1970 = 100).
Source: Office of the Deputy Prime Minister, Housing Statistics, September 2005 and OECD Economic Outlook 77 database.
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Following legislation which has recently been passed, it is important to monitor closely the speed and efficiency of the planning system and progress towards the government’s regional housing targets. In response to the recommendations of the Barker Review, the government should reform the planning system to increase its responsiveness to housing demand as well as providing greater incentives for local authorities to meet housing growth targets. Thee latter could be achieved, for example, by disregarding, for a period, council tax receipts generated by new housing from the calculation of the local authorities grant allocation from central government.
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A reform of the council tax, a tax levied on residential property, to make it more proportional to property values and based on more frequent and up to date valuations might also help to dampen future house price cycles.
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The extent of implicit subsidies provided in the government's new scheme to help first time buyers should be monitored, including any effect on house prices. However, given the scale of the scheme at present, the impact on house prices would be very marginal.
Projected growth in households and current housing completions
Thousands per annum
Source: Office of the Deputy Prime Minister, Housing Statistics, September 2005.
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Return to the Economic Survey of the United Kingdom 2005
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
To access the full version of the OECD Economic Survey of the United Kingdom:
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Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.
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Government officials can go to OLISnet's Publication Locator.
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For further information please contact the United Kingdom Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by David Turner and Jens Lundsgaard under the supervision of Peter Hoeller.
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