Ronald Reagan famously stated the perfect response that government should make to any crisis: “Don’t just do something, stand there!” This, it seems to me, is still the best response that government can make to the current problems in the housing market.
Interestingly, the nearest example of this was the last 4 years of John Major’s government. Prior to 1993 the Major government had sought to deal with a recession through intervening: by buying up empty housing and instituting mortgage rescue schemes. Kenneth Clarke, when he took over as Chancellor in 1993, stated that this intervention had been a “bloody waste of money” and instead put greater store on creating economic stability.
What Clarke seemed to realise was that housing markets depended on low inflation, high employment and some degree of predictability. As a result the Major government was able to phase out Mortgage Interest Tax Relief. They were also able to increase the output of new social housing whilst reducing the amount of public subsidy to the sector.
The Blair government maintained a similar policy to that of its predecessor for the first 3 years in office. However, it changed tack after 2000 and began to intervene in housing markets to try to ensure “affordability” and to encourage more households – particularly those on low incomes – into owner occupation. This may have contributed to rapid house price inflation and the consequent bust.
The key lesson we can learn from this is that there is much to be said for a policy of benign neglect, where households are left to manage their own housing decisions and take personal responsibility for their choices. Government, therefore, should do a bit more standing and a lot less doing.