The pace of house price rises in the UK does not indicate a bubble. But prices never reverted to the mean

THE most lively controversy in the British economy at the moment is whether the country is slipping back into its old habits; in particular, dependency on a debt-fuelled property boom.

In a splendid piece of research last week, Fathom Consulting pointed out that

The real estate sector accounts for almost of quarter of all the jobs created in the UK over the year to June. The rise in real estate employment in the latest quarter is the strongest on record. Over the past year the number of real estate jobs has risen by 77,000, the number of construction jobs is 1,000 higher, manufacturing is 14,000 lower. The number of real estate jobs is now at a record high – 100,000 more than at the peak of the boom in the summer of 2008. The number of construction jobs is more than 300,000 lower than its peak.

Anyone who wanders down a British high street will agree with Fathom's contention that instead of being a nation of shopkeepers, Britain has become a nation of estate agents.

Whose fault is this? Some, including Albert Edwards of SocGen blame the government for its "help to buy" scheme. In a polemical piece, Mr Edwards issues

a word of warning to George Osborne. If he presses on with phase II of "help to buy" and the UK does suffer its inevitable bust, history may judge him even more harshly than Alan Greenspan

The outright pace of house price rises is not that rapid. Figures from the ONS show average prices up 3.3% over the 12 months to July, and that was largely driven by London, where prices were up 9.7%. Prices fell in both Scotland and Wales. However, given the importance of the capital (which comprises well over 10% of the country's population), dismissing London as a "one-off" is not sufficient. Yes, prices in the centre of London have been driven up by wealthy foreigners but this has a knock-on effect in the rest of the capital; it cannot be efficient for an economy if ordinary workers struggle to afford decent housing in the biggest city.

And Mr Edwards is right to point out that the striking thing about UK house prices is that the pre-2007 bubble never fully popped. Take a look at the graph.

In relation to earnings, London house prices are almost as expensive for first-time buyers as at the peak. And the post-2008 decline looks very mild by previous standards.

Why didn't the bubble burst? Look at the numbers on housebuilding. Forty years ago, the country was regularly building more than 300,000 new dwellings a year. Even in 2007-2008, nearly 220,000 homes were constructed. But the 2011 number was just under 146,000.

Compare that with the change in population. The table below compares the two for the last four census periods

Rise in population Homes built

1971-1981 500,000 2,922,850

1981-1991 1,000,000 2,128,960

1991-2001 1,700,000 1,864,380

2001-2011 3,500,000 1,875,350

Broadly speaking, in the 1970s, housebuilding outpaced population growth sixfold; over the last decade, only half as many homes were built as people added. With demand outstripping supply by such a large amount, the priority seems clear. Build more houses; build more flats.

To be fair, that would seem to be the aim of the government's help-to-buy scheme which has two phases, one which encourages first-time buyers by lending them a large part of their deposit; and the second, which will guarantee loans. It is the second part that gets the likes of Mr Edwards worked up, on the understandable grounds that it looks like a British version of Fannie Mae and Freddie Mac. Our leader described it as a "daft new government subsidy scheme". As Fathom points out above, so far the main effect has been to create jobs in estate agency, not construction.

Rather than help first-time-buyers to afford inflated prices, the best approach would be to drive prices down by a housebuilding programme. The government did talk about loosening planning laws when it first came to office but ran into opposition from the NIMBYs among its backbenchers. But it would also be worth, in this blogger's view, initiating a government housebuilding plan; just the kind of infrastructure spending that will have the best chance of stimulating the economy.

UPDATE: Sorry to add to an already long post, but two other factors need mentioning. Since a collapse in house prices is generally seen as an economic catastrophe, monetary policy tends to be geared to the condition of the housing market. Record low interest rates have played a big part in keeping house prices from falling further, and ther potential impact on the housing market may affect the timetable for returning policy to normal. But which part of the population is best served by high house prices? Not the young who are condemed to living with their parents into their 30s or cramming themselves into shared accommodation. The middle-aged and the old benefit, and they have already landed the young with the bill for their pensions.