Friday, 11 January 2013

Would You Pay £47 For A Chicken?

According to Tory Housing Minister, Nick Boles , if the price of chickens had risen, in the last 30 years, by as much as house prices, you would today have to pay £47, as opposed to an average of about £5. He gives a range of other such comparisons of prices to show that its not just a quirk with chickens. For example, a jar of instant coffee would cost £20. It shows just how much of a bubble house prices are in. As I've said before, in order to correct this bubble, and for house prices to revert to the mean – as all prices eventually do – it means that house prices at some point will fall by around 80%!

Boles is in danger of stepping on some important toes for the Tory Party. He has been carrying through a campaign for some months now, of which this is just the latest example, to oppose NIMBYISM as far as house building is concerned, and to get more houses built, including on greenfield sites. I wrote some time ago that there was a conflict of interests that needed to be resolved.

On the one hand, house prices have been in this uber bubble territory for some time now. It was created during the 1980's, for reasons that suited the Tory Government of the time, and also met the needs of Capital. High and rising house prices to an extent compensated for stagnant or falling real wages. They provided a basis for an explosion of lending secured against these houses, which both made up for falling real wages, and also provided the gas for blowing the property, bond, and share price bubbles even higher. It was the basis, therefore, of the low wage, high debt economy that Thatcher created from the 1980's on.

But, that model stopped working with the Financial meltdown of 2008. Indeed, the basis of it ended in 1999, when the new Long Wave Boom started, and when Capital needed, once again to begin to accumulate as productive, industrial capital. The diversion of money capital into unproductive assets – property, shares, bonds, art collections and so on – is counter to the needs of productive capital, which has to compete for those funds.

But, the Thatcherite model is contrary to the needs of productive, industrial capital for other reasons too. Firstly, that capital needs to reduce the Value of Labour Power. That is the underlying determinant of wages. The more it falls, the greater part of the working day, and the value created it in it, is available for accumulation as Capital. In the 19th century, the industrial capitalists fought political battles with their class enemies, but fellow exploiters, the Landlords over this issue. The Landlords through their representation in Parliament had passed the Corn Laws. These were protectionist measures, which raised the price of imported corn. That meant British farmers could get higher prices on their own products, which in turn meant the Landlords could charge them higher rents. But, that raised the cost of the workers food, which in turn raised the Value of Labour Power.

The industrial capitalists eventually got the Corn Laws repealed in 1846, but it tore the Tories apart, and led to the creation of the Liberal Party, as the representative of industrial capital. We have a similar thing today. The huge bubble in house prices means that many workers, particularly in London and the South-East where the economy is strongest, and the demand for Labour is highest, cannot afford to buy a house. That is despite the higher than average wages in those areas, and despite interest rates being at record low levels, and with banks exercising forbearance on many mortgages in arrears. It is despite, a series of measures introduced by Governments over the last few years to create various scams such as shared equity schemes, to encourage people to continue buying massively overpriced property.

As Boles points out, home ownership in England fell for the first time in 60 years during 2011 from 68 per cent to 63 per cent. But, the massive bubble in property prices, and the fact that workers can no longer afford to buy, means that more people are forced to rent. With Public Sector housing having been sold off by Thatcher in the 1980's, and virtually no new building to replace it, that has forced rents every higher too. That is why we see Landlords in London benefiting massively from Housing Benefit, sometimes to the tune of £20,000.

Given the proportion of housing costs in workers spending, its clear that these massive costs have raised the Value of Labour Power considerably, and thereby undermine the Rate of Surplus Value, and Rate of profit, for British industry. According to Shelter, a typical London family spends more than half its income on rent!  than British industrial Capital has a direct interest in reducing the price of property, and thereby raising the rate of profit. That is contrary to the Thatcherite model which relied on continual increases in property prices. But, the corollary of that high debt model of Thatcherism was low wages. Thatcherism essentially sought to raise the rate of profit, not by reducing the Value of Labour Power, but by forcing wages down below the Value of Labour Power.

But, as Marx identified in Capital, although that can happen for a while – and getting workers to make up the shortfall in their wages via borrowing and to an extent Welfarism financed by better paid workers, extended the period – it is not a sustainable solution for Capital. Eventually, the demand for this cheap labour exceeds the supply; the workers are forced to work longer and more intensively to make up for the low price of labour, which causes them to degrade and wear out more quickly, leading to higher health costs and so on; the quality of the workers not only fails to rise (which is needed as production becomes more technical and skilled), but can fall back, as skills and education levels fall. In fact, all of these things can be seen in both the US and UK, where this model was adopted from the 1980's. Its one reason you see in the midst of high levels of unemployment, shortages of skilled workers, who then have to be imported.

Industrial Capital, particularly the more efficient, Big Industrial Capital, recognised in the latter part of the 19th Century, that the most effective means of raising the Rate of Surplus Value, and Rate of Profit, was not by reducing wages, but reducing the Value of Labour-Power. That is reducing the costs of reproducing Labour Power, reducing the cost of food, clothing, shelter, healthcare, education and so on. In that way, real wages could rise – more of these things could be bought by workers for a given amount of money – but nominal wages could fall (adjusted for money inflation). As a consequence Relative Surplus Value would rise, as would the Rate of Surplus Value, and Rate of Profit.

So, it can be seen why the representatives of this industrial capital want to slash the price of houses. Boles intervention represents this section of capital. But, in doing so, he is coming up against the vested interests within the Tories base. Those sections of the Tory Party that were the backbone of Thatcherism have their own reasons for wanting to see a continuation of its model. Sections of the middle class, and small business class have always been happy to delude themselves into believing that if the price of their house rises, they are in some way better off. Of course, in 99% of cases they are not. Buying a house is not an investment like buying a share in a company.

When you buy a share, you do so for two reasons; firstly to receive an income in the form of a dividend, and secondly in the hope of making a capital gain if the price of the share rises. Unless you are buying a second house to rent out, that is not the case with houses. Instead of an income, owning a house usually involves you in expense for maintenance, insurance and so on. If its price rises, you can sell it, but you still have to live somewhere, and buying a similar house means paying a similarly increased price. Indeed, as most people tend to want to move to a better house, you will suffer a Capital Loss not a Capital Gain, because the more expensive house (if it rises by the same percentage) will have increased by a bigger absolute amount!

But, some of these layers do buy second homes, and some will be amongst those who have become Buy To Let Landlords. Moreover, some will have used the value of these properties to borrow money to finance their small businesses. And, these small businesses, unlike the more efficient big businesses, do continue to look to low wages as the means to extract profits. They seek to leach off the expenses laid out by others in order to benefit themselves. For example, they usually seek to minimise the amount paid out for training workers, and hope to just pick up skilled workers, who have been trained and educated elsewhere. They seek to utilise Welfarism in the form of Housing Benefit, Tax Credits and so on financed by other workers, in order to continue paying low wages, and providing poor conditions for their own workers.

Those layers within the Tory Party are also joined by the historic element of the Tory Party, the Landlords, and the Aristocrats of Finance. They seek to uphold the monopoly of landed property in the countryside, whilst the Money Capitalists, who make their profits by lending out their Capital, have a vested interest in maintaining any model that perpetuates large scale borrowing, especially one, which like now, is based on the provision to them of essentially free money from the State! It is against these sections of the exploiting classes, and, of the Tory Party, whose voice is to be heard in the pages of the Telegraph and Daily Express, that Boles will have to do battle.

Boles' attempt to encourage more house building is probably doomed to failure on the basis he is proceeding. The real reason for high house prices and rents is not actually a shortage of housing. There is 50% more housing per head of population today than there was in the 1970's. The real reason for high house prices, as was the case for high technology share prices, or at one time high prices for tulips is a bubble. In fact, part of the reason for that bubble is the Government's own policy of cheap credit, and massive money printing.

On Newsnight, earlier in the week, Boles argued that there was plenty of demand for housing as witnessed by the higher prices. That is to misunderstand the situation. In fact, the high prices have choked off demand, which is why home ownership has fallen, and why the number of first time buyers has dropped through the floor. The history of the property market is that without first time buyers the rest of the market is doomed, because it means people cannot sell cheaper houses to first time buyers so that they themselves can move up to more expensive houses. It is not excess demand for housing that is pushing up prices. Look down any street and you can see the significant excess of supply over demand, an excess that is reflected by the growing amount of property on Estate Agents books, and the lengthening period of time that each property remains on the market.

The process by which house prices have been bid up is essentially this. Suppose you have two people with houses both with a price of £100 k. Suppose these houses are in different locations. A wants to move to work in town X, and comes to buy B's house there. Similarly, B wants to move to town Y and similarly to buy A's house there. Each believe that they can ask more than the £100 k. for their house. Each ask £120 k. If both own their houses outright they can essentially just swap houses, but it will appear that the price of each house has risen by 20%. The actual process can be hidden by the intervention of credit. For example, A might sell their house for £100 k. and buy B's house for £120 k. They might be encouraged to do this, borrowing the additional £20 k. because interest rates are low. But later, the process might be reversed. A & B (in reality other people, but in aggregate the same thing applies) might move back to their original houses. B might now sell their house for £100 k., and buy A's house for £120 k. They may have their original £20 k. gain to make up the difference (though in aggregate this would not be the case), but alternatively now they might borrow the £20 k. difference. In essence the same properties exist, and actual demand has not changed, the same two people are involved, but the nominal price of the two houses has risen by 20%.

Something like this explains what can be seen in the UK property market, and some others like Spain. Existing owners have become used to a prolonged period when prices only rise. Even when they come to buy themselves there is a disconnect in their view of things. They want to buy their next house at a lower price, but sell their own house at its previous high price. So, unless they have to sell they tend to hold on for long periods with unrealistically high asking prices, and remain thereby unable to sell.

Only when they are under pressure to sell, as happened in the US and Ireland, and as is beginning to happen in Spain, do they begin to ask more realistic prices in order to sell. If the government want to encourage more housebuilding they will first have to deal with this bubble in existing house prices. Their policies of propping up the bubble via money printing, low interest rates, and various scams to prop up demand are counter-productive. Builders are not building enough new homes for a number of simple reasons. Firstly, there is not sufficient demand for those houses at prices that would enable the builders to make the profits they require. Secondly, the cost of building new houses is such as to prevent those houses being built at low enough prices to stimulate demand.

The two things are connected. The bubble in house prices has caused development land prices to also bubble up. Just as Landlords introduced the Corn Laws to prop up food prices, so that more rent could be extracted, so high property prices allow Landlords to charge higher rents, and obtain higher prices for land. The higher the price of land, the higher the cost of building new homes – land is about a third of the cost, another third for construction, and the final third is profit. So, unlike many other commodities, where supply can increase, for property that is not the case, because of the monopoly of land ownership in a few hands. The more the owners of this land believe that sooner or later its price will rise, the less likely they are to release it.

One solution to this, in the past, has been for local authorities to take over land under compulsory purchase orders, and construct Public Housing. But, Thatcher put an end to that in the 1980's, and the current Government, is cutting Local Authority budgets not increasing them. If the Government wants to promote additional house building it has to start by bursting the current house price bubble. It comes back to Keynes' “animal spirits”. If the idea sets in that prices are likely to fall hard then people's mindset will change. That is going to happen sooner or later anyone whatever the Government does.

As I pointed out recently, the UK Ten Year Gilt Yield has risen by nearly 50% in recent weeks. As an average, during most of the post war period, going back to the 1950's, that Yield has averaged around 2.2% above RPI. That means today that the Yield should be about 5.5% or more than double its current level. Given that all other interest rates, including mortgage rates move in line with Bond Yields, that means that mortgage rates should be at least double current levels, and consequently monthly payments more than double what they are now. Given that already, many people cannot last to the end of the month on their income, and the number of people enjoying some form of forbearance on their mortgages is at the same level as during the 1990's house price crash, even a move in that direction is likely to cause a flood of repossessions, and a firesale of properties, crashing prices. It would actually be better for the Government to bring that about more gradually, by raising interest now.

Once that process begins it can set in motion a virtuous circle. In Japan, property prices have been falling for 20 years. In 1997, they fell by 90%. Once property prices begin to fall continuously – as they should because increases in productivity reduces the cost of production – that will become embedded in people's consciousness, and they will stop treating property as if it were an investment – which it isn't – and start treating it as the consumer durable it is. When that happens, the owners of land will have no reason to hoard it. Land prices will fall, thereby reducing building costs. With prices reduced to normal levels, demand will be restored, builders will be able to make normal profits at these lower prices, and levels of demand, and so supply will rise to meet demand. That in itself will help to create employment, and stimulate aggregate demand in the economy. But, in reducing the cost of housing it will also reduce the Value of Labour-Power, and increase the Rate of Profit.

It will be interesting to see, which wing of the Liberal-Tories wins out in this struggle.


George Carty said...

How would you respond to this article from today (other than to note the suspicious fact that Metro is owned by the same firm as the Daily Mail, one of the biggest cheerleaders of house price inflation)?

House prices will reach pre-crash levels by next year

Boffy said...

The same people have been saying that house prices were going to soar again for the last 3 years. Okay I've been saying they are going to crash for the last couple of years, so neither of us have been right so far.

Other than, if you look at selling prices rather than asking prices they have actually fallen quite significantly - by around 30%, in fact. But, given that selling prices are always below asking prices the actual fall is probably a bit less than that.

All of the sources quoted in the article are people with a vested interest in boosting house prices. But, the only basis they can give for why house prices MIGHT rise would be additional lending. That rests on the Funding For Lending Scheme. But, so far it seems that it has been used by banks to obtain cheap money to lend to people they would have lent to anyway!

In the meantime, first time buyers still cannot save enough money for a minimal deposit, and still cannot afford the monthly repayments even though they are at the lowest in 15 years! With wages being cut further in real terms, with Tax Credits for hundreds of thousands being cut, and other in work benefits being cut by around 2-3% in real terms, with unemployment set to rise as more and more zombie companies like Comet, HMV, Jessops and so on go bust, where exactly do these people see the additional disposable income coming from that will make this additional demand possible?

Its simply not a credible scenario.

George Carty said...

Could the houses be bought up by foreign investors benefiting from the weakening pound?

Boffy said...

They could, but why would you buy over priced UK houses, at the top of the market, if you were a foreign investor?

Wilbur Ross, a US billionaire investor, has been buying up cheap houses in the US for the last year, he has also been buying up cheap houses in Ireland for several months, and he has said that when house prices in Spain fall by another 50%, he will start to buy properties there.

But, these are places where prices have already fallen by around 60%, or will have fallen by around 60% plus in Spain. There is no shortage of cheap property to buy around the globe, so I don't see why a rational investor would buy over priced property. The general rule to make money is buy low, sell high, though most ordinary people always get suckered into the exact opposite, whether its houses, or shares.

I see today, that Irish Banks have again started foreclosing on Irish properties, as their balance sheets have been rebuilt, and as Irish property prices have recovered slightly. That will push prices down again. In Spain, there are now regular banks sales of large numbers of properties every couple of months at knock-down prices.

As soon as UK banks start to feel they have recapitalised enough, and especially if there is a fear of contagion or bank runs after Cyrpus, they will start to foreclose on loans here too, both property and business loans.

But, there is another point about the UK. I don't know about London, but elsewhere, many properties have now been up for sale on average for about a year, and many people have resorted to letting their property, if they are not prepared to take such a big hit on the selling price. The consequence is an increase in rental supply pushing down rents. That comes at a time, when rents will be under pressure because of the bedroom tax, and the other cuts to Housing and other benefits. Being a speculative investor in property at a time when prices are in a huge bubble, rents are falling,and interest rates can only move sharply higher seems to me like a quick route to the bankruptcy court.

George Carty said...

Is it significant that the foreigners buying up London property are mostly from non-Western countries? Russian oligarchs and Arab oil millionaires are major examples.

Could they be motivated not by a desire to make money, but by a desire to weaken the British economy -- propping up British house prices in order to ensure Britain remains uncompetitive?

Boffy said...

I don't think so. There is a huge difference between billionaires buying multi-million dollar properties, and house prices in general. These are essentially two completely different markets, and to a certain extent a bit like the price of Rolls Royces and Mondeos. The demand for Rolls Royces can fall if the price drops, because they lose some of their appeal as a status symbol, whereas the demand for Mondeos would generally rise with a lower price.

Chinese, and Russian billionaires are buying up all sorts of things across Europe. Rich Chinese are investing in Spain to create Golf courses, and associated complexes, for example. With that much money you need to diversify, especially in current conditions. In fact, I was thinking only today, given the risks now prevalent with banks and other assets, what I would do if I won the £80 million in the Euro millions on Friday. Not that its likely to be a problem.

Some of that money, though I think its problem overstated, is money that has to be laundered. Buying very expensive property is one way to achieve it.

When the Euro was launched, there were a lot of people in Northern Europe who had Deutschmarks etc. that were under their mattresses, so to speak, not decalred for tax purposes and so on, who needed to convert them to Euros. It was one reason that property prices in Spain spiked, because they used the cash to buy Spanish villas no questions asked, in the knowledge they could sell them again later legitimately.