Learning from our mistakes

It is a sad fact that in the last 40 years, Britain has suffered from four separate housing bubbles.

The first occurred in the early 1970s when Ted Heath was Prime Minister. He liberalized the banking sector, reduced interest rates, and tried to keep the economy afloat with a huge fiscal deficit. He also antagonised the unions and drove the UK to the edge of hyperinflation. House prices rose and fell in parallel with Ted Heath’s opinion poll ratings.

In the late 1970s, Jim Callaghan tried the same trick. He had less success than Ted. House prices didn't skyrocket in quite the same dramatic way. Nevertheless, his departure from office coincided with a house price crash.

Mrs Thatcher was a little slow in playing the housing bubble game. It was well into her second term as prime minister before she engineered the conditions for a hyperventilating property market. Nevertheless, it was a spectacular one. And when it crashed the whole economy sank with it.

John Major never got the chance to inflate the housing market. He spent most of his wretched time in office cleaning up the mess that Mrs Thatcher made. By the time he was shown the door, house prices had stabilized. This was good news for the next occupants of 10 and 11 Downing Street. The UK economy was ripe for another bubble.

Tony Blair and Gordon Brown produced perhaps the greatest bubble of them. When it finally burst in 2007, it did more than just send the economy into the longest recession since the war. It nearly destroyed the UK financial system. The UK economy came within a centimeter of Armageddon.

Have we learnt anything from these experiences? I am afraid not. As soon as this bubble has finally unwound, and the banks have recovered, the British people will be ready for another round of property market monopoly.

Deep down inside, we love it too much. We would miss those greedy conversations about how much price appreciation is now embedded in our homes. The illusion of wealth, it might be an imperfect substitute for being truly rich, but it will do for most of us.

However, there are others who look upon our experiences with unbridled horror. Having seen the harm that speculative bubble can inflict on an economy, the Singapore government introduced a series of measures designed to cool down their housing market.

The government announced its intention with extraordinary clarity: “The government’s objective is to ensure a stable and sustainable property market where prices move in line with economic fundamentals.”. Could you imagine a British government ever committing itself to that kind of sanity?

• It raised down payment requirements for second mortgages. Individuals with more than one mortgage can only borrow up to 60 percent of a property’s value, down from 70 percent.
• It extended the period homeowners must hold properties to avoid a sales tax. Sellers will now have to pay a stamp duty for all homes and land sold within four years of purchase.
• Singapore’s homeowners who sell a property within a year of purchase will have to pay a tax of 16 percent.

Earlier, the government barred interest-only loans for some housing projects. It also barred developers from covering interest payments for apartments still being built.

House prices in Singapore are rising rapidly. The risks to the financial system and economy are serious. Nevertheless, in contrast to our sorry history, the Singaporean government understands the dangers of permitting unbridled property speculation. Although, we cannot learn from our own history, there is some comfort in the fact that others can see the dangers that we cannot.