Housing Policy Is Damaging and Dangerous - Part 1

There has recently been a a series of mass divorces in China. The reason had nothing to do with people suddenly becoming disenchanted with their partners. It was all down to a change in the law, which meant that people no longer were able to sell second homes free of Capital Gains Tax. So, they divorced, and then divided the two houses between them! That is always the danger of unintended consequences resulting from State intervention, particularly arbitrary state intervention, of which most is.

The same can be seen as far as Housing Policy, in the UK too. Housing Policy should be designed to facilitate a number of things.

1. The supply of adequate housing to the population in the most efficient manner.
2. The creation of sustainable communities.
3. Protection of the environment.
4. To facilitate the mobility of labour.

Government policy under this government more than under the last not only fails to meet these requirements, but it is actually damaging and dangerous to the economy. The current and previous housing bubbles, and their effect on the wider economy are just one small aspect of that.

The supply of adequate housing to the population in the most efficient manner.

Government policy clearly fails to provide adequate housing to the population in the most efficient manner. It is neither adequate, nor efficiently supplied. It is clearly inadequate to meet need as opposed to demand. In fact, at the moment, because house prices are in a bubble, supply is considerably in excess of demand, outside possibly London, because few people can afford to buy, for the first time, whilst many more are unable to make up the difference in price, between their current house, and the more expensive house they would like to move to. Look down any street in the country, and you will see a forest of for sale signs that have been there for a year or more, even though the sellers have often reduced their initial asking prices by anything up to 30%. The only reason prices have not collapsed further is because, banks are following a policy of “extend and pretend” that allows borrowers to go into arrears, even with near zero interest rates, without being foreclosed upon.

Providing for need, however, is a different matter. There are lots of people who need housing in one form or another, but who are not being provided with it. The bubble in house prices is one reason for that, but even at much lower prices, there would be a considerable number of people for whom buying is not a viable or the right solution. The main reason, these people are not being provided for, is the lack of rental property. The extent of that lack is demonstrated by the attempt to fill the gap, by people renting out garages and garden sheds!

The main reason for the lack of rental property is the high price of land, which in turn is a result of two things, a) a monopoly of land ownership, b) astronomical house prices. In the past, during the 20^th Century this was resolved by state intervention. Large amounts of state owned housing was produced, and the land the houses were built on was compulsorily purchased by the State. From the 1980's onwards, virtually no state owned housing was produced, and the other forms of social housing, provided by Housing Associations, declined also. That policy was needed as part of the attempt to build a low-wage, high debt economy, because rapidly rising house prices, were the bedrock of the desire to stimulate borrowing. If sufficient low cost housing was available, house prices could not be inflated, and so borrowers could not be persuaded to go more into debt, borrowing against their homes. That was the main economic strategy of Thatcherism.

The monopoly of land arises from the fact that, unlike many other countries, Britain's bourgeois revolution was a fudge. Large amounts of land remain in the hands of the same feudal landlords that have owned it for centuries, having stolen it from the peasants. The Crown is one of the largest of these. They are not the only monopoly owners of this land. In the 18^th and 19^th Centuries, the rising Capitalist Class also bought large amounts of land, to turn into capitalist farms.

The extent of this monopoly can be judged by the fact that all of the residential property in the UK is squeezed on to just 10% of the land mass! When the racists oppose immigration, by saying that we are overcrowded already, they are, as usual talking through their arse. We are only overcrowded, because government policy has led to housing being squeezed into unnecessarily cramped areas. In Staffordshire, which has a large amount of industrial and commercial development, for example, 75% of the County is still designated rural. Britain has lots of available space to enable people to live in decent sized houses, in pleasant and sustainable communities, at a fraction of the current costs.

As with any other commodity if a monopoly prevents its supply being increased to meet higher monetary demand, its price will rise. The Thatcherite economic model of high debt and low wages, based on easy money, ensured that monetary demand must increase. Landowners believing that there is only one way for land prices to go, and that is up, will always have an incentive to hold on to their land, rather than make it available for development, as long as possible. There will always be a higher price to be had tomorrow.

From 1982, two trends were set in place. Firstly, a secular down trend in interest rates, and secondly a secular rise in asset prices. The two things are not unrelated. They are both a function of increased money printing. There was a short blip in the mid 80's, when that policy was reversed. It caused the Stock Market Crash of 1987, and the house price crash of 1990. Between 1982 and 2000, the Dow Jones Index rose from 1,000 to over 10,000. Partly, that was due to the fact that the Rate of Profit rose during this period, but mostly it was simply money fuelled asset price inflation. After 1987, every time the Stock Market sneezed, Alan Greenspan reduced interest rates, and another upward twist in the spiral was brought about.

That “Greenspan Put” gave speculators the idea that there was only one way for share prices to go, and that was up. That then tends to be a self-fulfilling prophecy until such time as it isn't, and then the consequence is a massive stock, bond and property market crash. Each time the state has intervened to blow up those bubbles again, they have had to print ever larger amounts of money in order to do so. There comes a point, as happened with Keynesian intervention in the 1970's, when that no longer works. We seem to be at that point now. Astronomical amounts of money have been printed, but struggle to get into circulation, because no one wants to borrow, other than those who will not pay it back, and despite all of the liquidity, Stock Markets are flat, Bond prices cannot go any higher, and property markets outside a few exceptional places have either already crashed or are, as in Britain and Spain, on the Liverpool Pathway themselves.

The same trend has meant that landowners, and property owners have come to the same false conclusion that the only way for prices to go is up. Alongside the monopoly ownership of land, and other restrictions on supply such as legislation on the Green Belt, etc. that means that increased supplies of land do not match demand. Artificially high house prices mean that landowners are encouraged to continue in that view. High house prices then feed into higher than necessary costs of building new houses, which means that house builders tend to be only interested in building very expensive houses, where those costs form a smaller proportion, and where their profits are then bigger. Moreover, there is no point house builders producing cheaper houses, because the majority of potential buyers cannot afford to buy them at these inflated prices. The result is that house building continues to fall, reducing the supply of houses.

The solution to this problem is fairly straight forward. As Fathom Consulting have pointed out for several years, and repeated on TV again yesterday, the price of houses is too high given the state of supply and demand. That is why houses are staying unsold on the market for more than a year, and why there is about a 30% difference between asking prices and final selling prices. Instead of trying to keep house prices inflated to satisfy the Daily Express and its readers who reflect the core membership and support for the Tory Party, the Government needs to facilitate a crash in house prices, as happened in the US and Ireland. It is unlikely to do so, because of the above, and because it would mean the banks would collapse, because they only survive on the basis of the fiction of their balance sheet valuations. If anyone wants to know what is damaging and dangerous about such a policy, however, just look at what happened with the US Sub-Prime crisis, or what is happening today in Cyprus. Sooner or later, you cannot hide the grim reality, however much money you print, however much you encourage people to pauperise themselves with debt.

According to the IMF and OECD, house prices in the UK are 40% overvalued. Valuation indices produced by the Nationwide, based on inflation adjusted prices, show a similar bubble. In the past, whenever such bubbles have burst, the correction is, and mathematically has to be, double the over-valuation. That means that prices need to fall by around 80%, before they can begin to recover sustainably. Such a fall in prices, would immediately mean that millions of first time buyers would be able to easily provide a 25% deposit on a house without any Government subsidy. They would be able to meet their monthly mortgage payments without impoverishing themselves, and without mortgages on huge multiples of their income. It would mean that existing home-owners, with equity in their homes, or only a small amount of debt, would be able to buy a more expensive house, unblocking the log-jam in sales.

But, that fall in house prices, if it was accompanied by measures to end the monopoly of land ownership, and with getting rid of the restrictions of the Green Belt, would also bring about a similar reduction in land prices, thereby reducing massively the cost of building new homes. That in turn would mean that increased supply would prevent prices rising again sharply. The increased supply of houses, and much lower prices would mean that rents would also have to fall, because large numbers of people currently forced into renting, could instead choose to buy.

The economic consequences of this are fairly obvious. Housing comprises a major component of workers expenditure. High house prices and rents, thereby increase the Value of Labour Power, and so wages. That means that British industry has a competitive disadvantage against other economies where housing costs are lower. Reducing the price of houses, and level of rents dramatically would increase British economic competitiveness.

Construction itself, comprises a large part of the UK economy, but because no one can buy houses at these astronomical prices, there is no demand for new houses, and so construction has all but stopped. A huge fall in house prices, that made them affordable, together with the freeing up of building land, would facilitate a major house building programme that would create large numbers of high value, skilled jobs, and a consequent amount of tax revenue, both increasing growth, and reducing the Government deficit.

Lower rents would mean that the current distortions caused by the need to pay out Housing Benefit would be removed. Massively lower rents, and house prices would mean that no such subsidies would be required. That means that the current transfers from better off workers wages to cover these subsidies would no longer be required, again reducing the value of labour power, and increasing efficiency.

Instead, Government policy does the exact opposite. The policy of money printing helps prevent the property bubble bursting, for now. Instead it feeds through into inflation, as the value of the pound falls, thereby raising the value of labour power, putting pressure on for higher wages, and thereby reducing competitiveness.

The “New Buy” programme can never work under current conditions, precisely because it does nothing substantial to reduce the price of houses. By the Government providing a further loan to buyers, it merely encourages people who cannot afford to buy a house at current prices to recklessly go into excess amounts of debt in order to do so. That is precisely what happened with the sub-prime crisis in the US, and the Government is simply following the same mistakes that were made by Fannie May and Freddie Mac, the privately run, but state guaranteed mortgage firms, there. The reality is that if someone cannot save for themselves, more than 5% of the price of a house as deposit, they cannot afford, and should not be buying that house.

It is not a matter of whether such a person can meet the current monthly mortgage payments. It is a matter of whether they have sufficient equity in the house to cover changed circumstances, and whether their income is able to cover such changed circumstances. If someone can only just cover their mortgage payments today, when interest rates are at unsustainably low levels, how will they manage when those interest rates rise? Its possible to take out a fixed rate mortgage, but they usually only last for up to five years, and can cause problems when they come to an end, particularly if the value of the house has fallen, and if interest rates have risen.

Its possible to insure against the possibility of being unable to pay your mortgage due to illness or unemployment, by taking out payment protection insurance. That has become unpopular as a result of PPI mis-selling, but it is the mis-selling that was the problem not the principle. At the moment, however, it is the Government, that is taking on the role of providing the insurance, through things like the “New Buy” Scheme, because it is providing 20% of the equity in the house, so that if the buyer defaults on the mortgage, it is the taxpayer who will pick up the bill, so as to bail-out the bank that made the loan.

That is rather like the way the State intervenes to bail-out the builders and insurance companies, who build houses in flood plains, and provide insurance for them. If people knew that the State would not bail them out when such houses were flooded, they would either not buy such houses, meaning builders wouldn't build them; only be prepared to pay a substantially lower price for them to cover such eventualities; have to be prepared to pay huge insurance premiums to cover such eventualities.

But, its precisely because the “New Buy” scheme does nothing to bring down house prices that means that few people are able to take it up, and few banks are prepared to lend under it, other than to people they would have lent to without it. It was intended, when it was introduced last year, to help 150,000 people buy houses. In fact, only 1% of that number, just 1,500 people have taken it up!

The second part of the Government's new housing policy, to guarantee 20% of the loan made by banks for the purchase of any house is much worse. It is a direct copy of the experience of Freddie and Fannie in the US, that led up to the sub-prime crisis. As I pointed out recently - Osborne's Big Budget Boo-boo – its immediate effect might be the opposite to that intended, because no one in their right mind would buy a house now, when they can get this guarantee in a year's time, and no bank would lend now for the same reason. Its immediate effect is then to reduce even further the level of current demand for houses, which is already at rock bottom levels.

But, as Labour have pointed out the other side to that is that, as with the New Buy Scheme, the people who will likely benefit, are the people who do not need it. The banks will still gear their lending to the people who are most likely to pay them back. With this government guarantee, it means that multi-millionaires will be able to follow the example of the Chinese referred to at the beginning. They will be able to divide up their household, so as to justify buying several state subsidised houses. In doing so, if house prices have not crashed by then, it will give a further twist to their inflationary spiral, leaving them even more overvalued, even more exposed, even more likely to come crashing down with more devastating effect.

This kind of volatility and uncertainty is very damaging for the economy, and can as has been seen in 2008, and more recently in Greece and Cyprus have dangerous consequences. Government policy exacerbates it.

In Part 2, I will look at how Government Policy is damaging and dangerous for the development of sustainable communities.