The last two Januarys, I've published various versions of my book Broke, about the difficulties faced by the middle classes and why it matters.The coverage was prolific and almost identical both times. Luckily, a year is beyond the memory horizon for the media, so they just do it all again.
One of my contentions, which was more difficult to prove, was the reason why house prices have risen so disastrously over the past three decades.
Conventional wisdom - not a happy phrase - suggests that it is simply a matter of supply and demand, and clearly there is an element of this. I'm not sure why the political establishment clings to the idea that this is the whole reason, but I suppose it is because it gives them the illusion that they have some control over it (not that they exercise it).
But it doesn't really make sense. For one thing, demand from the Far East in particular may be infinite, at least we have to assume that, and there is no way we could build enough to satisfy the investors of Singapore.
For another thing, the great leaps in house price inflation - which have had such a devastating effect on the UK, narrowing the economy, tying up resources, and narrowing the life chances of our children - have all happened when the amount of money pouring into the housing market has soared.
The prices haven't risen during periods of unprecedented housing shortages, like the post-war period. No, the real reason house prices rise - at least as much as they have - is because too much money has gone into mortgage finance.
It is certainly about supply and demand, but about too much money chasing too few goods. There are also too few goods, it is true, which clearly doesn't help.
People involved in politics tend to look at me rather non-plussed when I say this, so I'm clearly not as convincing as I might like to think.
So I was fascinated to read in the Financial Times this week that a research project at LSE has confirmed what I'm saying - and which incidentally, Kate Barker also said: there is no close link between housing numbers and house prices.
It talks about a study of large developments and found that:
"Developments of the size and scale studied, even in areas where originally objections were significant, can lead to more rapid rises in local house prices."
So let's turn our attention on how to regulate the mortgage market to bring prices down relative to incomes, and give our children a chance to rent and own where they want to.
The time may have come to resurrect a new version of the famous Corset from the 1970s, which regulated the amount of money going into the market - in the days when politicians were more economically literate than they are now.
It can't be the same; there will need to be new safeguards to prevent foreign banks lending into the UK property market - perhaps by making those mortgage debts unenforceable in UK courts.
It won't be easy. But if we don't do something, the only people who will be able to afford to live in London and the south east will be people in financial services, and the poor and hopelessly dependent.
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7 comments:
Exactly. House prices bubbled up by banks who can create unlimited amounts of money.
So, please explain, David, how a politician can sell the policy of static (in real terms falling) house prices? "Just like your car, your house will be worth LESS in 20 years time".
Aye, there's the rub. But at the moment, people increasinly see that the housing market is constraining their children and squeezing them dry...
I can't agree that oldies like me would be happy to see our 'equity eroded' (welcome house price falls) for the benefit of our children -- yet.
Meantime, last year you moved out of Crystal Palace my son moved in. Both of you were hit by the nasty so-called Stamp Duty just when you are financially stretched on fees, repairs, as well as monster mortgages.
Abolishing Stamp Duty Land Tax (to give it its proper full title) would be crazy, but couldn't the blow be softened by converting it into an annual charge on the value of the LAND? ....linked to the fluctuations in land/house prices in the area?
Instead of £10,000+ going straight out when it should be paying for new boilers etc open an option to pay £250 now (2.5%) with the same amount but uprated by house price inflation in the area every year thereafter.
It's an idea to get LVT in the back-door in a popular politically saleable form.
Are you prepared to push this idea? I believe that only LVT will halt the crazy house-price bubble. Got to start somewhere!
So, all of this external demand is for houses, but houses as investment instruments, not as housing? Strictly, it's probably land as an investment instrument. The house is simply proof that the land is usable as housing land.
I'd like to think that LVT would fix it. But I'm not sure how. Perhaps it results in a reduction in return on investment, thus discouraging external investors. Perhaps, if UK citizens (or tax paying residents, or some similar group) had an annual per capita exemption, it would help them to compete in the market.
I'm a house owner. I have a fixed value mortgage to repay, but am close to repaying it. Once I've done that, I'm not bothered about house price fluctuations:up or down. I know I'll have to sell if I want to move, and that I'll be able to buy a similar value property. However, negative equity would be a serious problem. So, sharp reductions in house prices would be unwelcome to house owners. But, lack of inflation would be good for all of us. And a slow reduction (say 1% annually) would probably be generally tolerable.
Very interesting comments. Isn't this really a problem, though, of those with capital being able to invest in more capital; those who don't can't? As society has become more unequal, the situation has become more exaggerated. As regards to equity erosion: as housing in most places has tended to hold its value over time, wouldn't a more generally equitable market tend to create a situation not so much of your house reducing in value than of 'merely' retaining it, rather than appreciating well beyond general inflation levels as has been so happening so much in recent years. Very difficult to believe, though, that this isn't all underpinned to a very large degree by lack of supply, which almost all the 'experts' I've listened to recently seem to agree upon.
I have been saying the same thing for several years, the rot began when the banks entered the house finance market and changed the rules for lending. Where it had been accepted practice to base a couples mortgage affordability on one income, both incomes were included. Then they began stretching the multiplier beyond two and a half times income. Furthermore the restrictions on the use of mortgage money were lifted, people could use a mortgage extension to buy other things - cars, furniture etc.
The result? People took the opportunity to move up the ladder, trapping themselves in a situation whereby both husband and wife had to work to pay the mortgage. Family life was disrupted, children missed the parental guidance key to properly disciplined behaviour. Money which might otherwise have been used to finance job creation projects was diverted into bricks and mortar where it lies idle. Altogether a disaster which appears to have no quick fix. Building more houses won't solve it. In my village of about 2000 houses, a new estate of 275 houses has elevated the prices by around £20,000 over comparable recently built ones.
Who benefits? Well, since building costs cannot have risen beyond inflation, the main cost component is the land and the main beneficiary is the landowner. Some form of taxation on land sold for development is called for.
A fully updated Land Registry might help, too, to stop wealthy landowners avoiding paying rates whilst getting public subsidies at the same time.
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