Fourth attempt

Dear Mr. Shapps,

I would like to thank you for your communication of 21 April 2011. This was a much more thorough response to my initial e-mail on the subject of the coherence of housing market policy, and this fact is much appreciated.

I respect the position you are in is an awkward one, and the wishes expressed in your communication clearly allude to the impossible problems with which you are faced: prices must become more affordable for the benefit of all, but prices cannot be allowed to fall significantly, again for the benefit of all. This is encapsulated in your wish that “[i]n the long run we want houses to become more affordable whilst avoiding price falls which have many damaging impacts”. This wish is self-contradictory (unless ‘which’ is replaced by ‘that’, of course, in which case you would be stressing that it is damaging price falls that you wish to avoid rather than simply any fall in price).

However, one inevitable and incontrovertible fact remains. By definition, the price-to-earnings ratio can only be reduced if prices rise at a rate that is slower than average earnings growth. The difference between your statements (2 March 2011 versus 21 April 2011) is revealing. The shift from “would be beneficial [...] if prices were to rise, on average, no faster than earnings” (2 March 2011) to “if prices [...] don’t rise at a rate exceeding average earnings growth, then this in itself would be helpful over the long term by reducing the price to earnings ratio” introduces a new element to your response – that of actually reducing the price-to-earnings ratio, the word ‘reducing’ not having featured in your original e-mail of 2 March.  This new addition can mean only one of two things: either 1) reduction of price-to-earnings ratio is one of your aims – in which case prices will have to rise at a rate that is slower than average earnings growth for this aim to be fulfilled; or 2) reduction of price-to-earnings ratio is not one of your aims, and you are merely appending these words to your original sentiment in order to appease those who would welcome such a reduction. So for the sake of clarity I would like to ask two questions explicitly:

1)        Is reducing the price-to-earnings ratio unequivocally your aim?

2)        If yes, to what extent (e.g. back to 3½ times average annual salary)?

You state that “prices diving” might well constitute “an ‘instant fix’ in terms of affordability for some”, but that it would have “many negative consequences for the wider market and economy” (your communication 21 April 2011). This statement is well-founded in terms of evidence, but it omits to consider that many prospective first-time buyers are aware of the potential negative consequences for the market and the wider economy, and are looking for a correction rather than ‘prices diving’. Furthermore, I should point out that we are not talking about ‘some’ (your word) being benefited by such a correction but hundreds of thousands (at a conservative estimate) of people spanning a whole generation (aged roughly 18-40). You say that you “want to avoid soaring prices which freeze out first time buyers”, but from interviews you have given in the media I know you are fully aware that these people are already frozen out by exorbitant prices, and this freezing-out will continue until the average price-to-earnings ratio returns to a level roughly in line with 3½ times average annual earnings (the only alternative being a return to irresponsible lending). Lastly, I would point out that there are many serious consequences for the wider economy by not allowing prices to correct, with two very obvious ones being continuing weakness of sterling (if the number on the price tag won’t come down, the value of that number has to be eroded) and high levels of indebtedness impacting on such things as the amount people can or will put into private pensions (with the state having to pick up the tab).

I would like to take this opportunity to thank you for your willingness to clarify a policy that is perhaps necessarily incoherent due to circumstances inherited from the previous government, and I look forward to receiving a response at your earliest convenience.

Yours sincerely,

XXXX.

Third response

Letter from Grant Shapps 21st April 2011:

Dear XXXX,

Thank you for your e-mail of March 30 in which you expressed your concerns about the Government's approach to supporting the housing market.

You make a number of important points in your emails about the challenges the market faces, in particular about house prices. As you might have read, what I've previously said is that if prices are relatively stable and don't rise at a rate exceeding average earnings growth, then this in itself would be helpful over the long term by reducing the price to earnings ratio. We want to avoid soaring prices which freeze out first time buyers.

In the long run we want houses to become more affordable whilst avoiding price falls which have many damaging impacts. Falling house prices are bad for homeowners and builders alike, increasing the number of repossessions and households unable to move due to negative equity. Falling prices also slow the building of new homes which will be needed for future generations. We don't want prices diving because whilst this might be an 'instant fix' in terms of affordability for some in the housing market, this would have many negative consequences for the wider market and economy.

Now, I don't think that Government can command all this to happen and this isn't going to change things overnight. This is a long term solution to a problem which previous administrations have tried to address with quick fixes like top-down housing targets.

To achieve a stable housing market, we need to build more homes and entrench sensible lending practices that strike a balance between allowing access to the mortgage market for creditworthy borrowers and yet prevent repossessions. In the long run, houses will become more affordable. That's our aim: a stable housing market that gives both home buyers and builders a solid base to invest for the future.

I appreciate the time you have taken to raise your concerns with the Department, and I hope that this responds to the points that you raised in your earlier e-mails.

Yours,

Grant Shapps.