As the above blog post argued, after WWII, as workers living standards rose as part of the long wave boom, they began to accumulate wealth in the form of property. Where they had been overwhelmingly renters, they became owners, and for those who bought in the 1950's, through to the 1970's, they really were owners, and not just people who rented their house off a bank or building society via a large mortgage. Rather for many they owned the house outright, and for many more, the mortgage represented a small and rapidly shrinking proportion of the price of the house.
The advantage of that I have discussed many times in the past. It can be seen by comparing with the position of someone today. A recent report said that for many in private rented accommodation, today, their rent accounts for half of their income. The average for all renters is around 25% of income, whereas for those with mortgages it is 19%. This latter figure is undoubtedly misleading, however, because it will include people who took out mortgages 20-25 years ago, when house prices and mortgages were a small fraction of what they are today.
By contrast, if you own your home outright you face none of those costs. The reason that the Pharaoh and others wanted people to be in debt, was precisely because it made them dependent, and subjugated. If you at least own your home, you have some basic security, and it means this elimination of a major cost of living gives you a flexibility you otherwise would not have, if every week, you are wondering where the rent or mortgage payment is to come from. That gives workers a certain amount of independence and leverage in their negotiations with capital.
Marx relates that even into the 19th century, there was a law that stated that any new house built had to have a garden of a quarter of an acre. It was scrapped, precisely because even with this small amount of land, workers were able to grow enough food, keep a few chickens etc. to be reasonably provided for. That is a situation that capital cannot tolerate, given that it needs workers to be in a position where they must sell their labour-power to live. Something similar has been seen in Spain, over the last few years, where workers migrated back from the towns to their families in the countryside, where at least they could produce some food for themselves.
In France, as Marx describes in The Eighteenth Brumaire, peasants were encouraged to invest in their land, and to borrow to do so. They were then pauperised, as food prices dropped sharply as supply increased, whilst the interest rate, on the mortgages that had been taken out, rose and taxes increased. The peasants ended up in a worse condition than they had been in as serfs, paying rents to the landlords. We've seen something similar happen in Greece, and across the European periphery over the last few years. But, we also saw the beginnings of it with the collapse in house prices and other fictitious capital in 2008. Given that that bubble was simply reflated on a larger scale, its clear that this process is far from over. A much bigger crash must happen.
Moneyweek recently carried an article about the prediction of Martin Armstrong that house prices are set to fall for the next 18 years, having already peaked. As they say, Armstrong's record of economic predictions is pretty impressive. Looking at the charts they provide it appears that a fall of house prices in real terms to those that applied when the current long cycle of rises began in 1955, is on the cards. That would be just a confirmation of the principle of mean reversion.
In fact, although that may be the case, and would fit the suggestion I have made myself that prices are likely to drop by around 80% when the property bubble bursts, I think the suggestion of this 18 year decline to that level is unlikely. That is because bubbles take a long time to blow up, and in reality, although as I've suggested before, you could argue that the start of the property bubble blowing process began with Reggie Maudling in 1960, or Barber in 1970, the real bubble was only inflated in the 1980's, with subsequent puffs into it in the late 90's, and after. But, bubbles never deflate slowly, they burst. Their is a Minsky Moment, and particularly in property that results in exaggerated price drops, precisely because property is an illiquid asset.
If share prices are falling sharply, you can sell them at a minute's notice, online. There is always someone who will be prepared to buy them. But, anyone who has tried to sell a house knows that even if you find a buyer, the process takes months, and by that time, prices could have fallen through the floor. But, even the task of finding a buyer takes months itself, and in a falling market no one wants to buy so prices simply collapse. Its the same problem that has been identified with bond markets, particularly the more high risk junk bond markets, such as those which have lent to the new, small energy producers, who are going bust as oil prices crash.
The Moneyweek article, suggests a number of reasons for the trigger for such a crash of house prices, some of which are reminiscent of Marx's description of the process of expropriating the French peasants via debt. Not only have we had, since the late 1980's, large numbers of people taking on increasingly unsustainable levels of private debt – which is everywhere a much bigger problem than government debt – both to buy property at astronomically inflated prices, but even those who actually owned their home, have been encouraged to take on debt, for example to buy another much more expensive house, to take out equity release in their home, to provide collateral to their children so that they can buy astronomically priced property, and themselves go into unaffordable levels of debt.
Then we have had all those unsophisticated investors who have been encouraged to take their actual assets, and turn them into debt, by speculating in the next big thing. Thatcher caused tens of thousands of council house tenants to become bankrupt and homeless in the 1980's, by encouraging them to buy their council house, which they could not afford, especially as interest rates soared, and unemployment rose. Then they were encouraged to take out private pensions at the height of a stock market bubble, so that not only were they subject to misselling, but the value of the pension itself disappeared in a puff of smoke as stock markets collapsed. Over the last ten years, as another stock market and bond market bubble has been stoked, which reduced yields to near zero, they have been encouraged to speculate once again, to provide for their pension, by buying into another massively overcrowded and inflated market – buy-to-let property. It too is set to lead to them losing their shirts.
As Moneyweek indicates, Osborne's Budget shows the first signs of how that will be done. He's started removing the tax allowance on Buy-To-Let mortgages, an allowance that was only introduced to lure the gullible into this speculation, and keep property prices inflated, in the first place. As I've reported in previous months, the big investors in this buy to let property already started getting out some time ago, as they saw the top of the market. A similar thing has happened in China. Millions of unsophisticated investors, essentially just gambled on the Shanghai Stock Exchange. They saw stock prices rising massively, and followed the heard to join in, often borrowing huge sums to do so. Having bought at massively inflated prices, they are now losing their shirt, as stock prices fall by 30% and more. Many of the same people have lost money in Chinese and other Asian property market speculation over the last year or so, and many will be the same people who are part of syndicates that have bought into expensive London property, purely on the basis of capital gains.
According to recent reports, prices in Kensington and Chelsea fell by more than 7% just in a single month, in June! The prices of the most expensive properties are already crashing, and that will cascade to the lower price houses.
Osborne has already stolen several ideas from Labour, in his Budget, and having boxed himself in on many taxes, he will undoubtedly be looking to taxes on property. The most likely is to introduce a form of mansion tax, by introducing several more bands of Council Tax, which is probably a more progressive form of taxation than the mansion tax anyway. The buy-to-letters are likely to be the first target, because its politically popular. Many will be surprised to find that they were and still are getting a tax allowance for their mortgage interest payments, where homebuyers had that removed long ago.
But, Osborne has also boxed himself in there, with his proposals for making Housing Associations sell their properties to tenants. The natural extension of that would be to give all private tenants the same right. That would be an even more open expropriation of private property than is Osborne's proposal on Housing Associations. Far easier then to divert criticism, by increasingly getting the buy-to-letters to move out of the market. Moreover, if Osborne goes ahead with the proposals to sell off more than £300 billion of UK state owned land, that would have a serious downward impact on land prices, so encouraging the speculators to get out now, which would only be a matter of the Tories giving insider information to their supporters.
As with the Council House sales, selling to the masses at the top of the market, and then buying back from them after prices have crashed is a tried and tested means of dispossessing them. A third of all council houses that were sold to tenants are now owned by private landlords, for example. The same applies with all those shares that were sold to Sid and his friends, back in the 1980's.
As Moneweek set out, there is also capital gains tax that could be applied to all houses, there is higher council tax, or even a special levy that could be imposed on the masses of empty properties across the country. The official figure for empty homes is over 1 million, but the real figure is much higher than that. I know of two pretty expensive homes in my village and the adjoining one, that will not be on that list, but which have been unoccupied for the last four years. So, with Osborne needing to raise tax, and having restricted his options in other areas, there are easy pickings here. Moreover, as the majority of people in the next couple of years will be renters, this changes the political mathematics. Already, a majority think that house prices are way to high, and that house price rises are a bad thing. Its only a few old Daily Express readers, who continue to think otherwise. Osborne has the potential to both raise taxes, and be seen to be doing something on house prices at the same time.
But, the real cruncher, as it always has been will be not taxes, as Moneyweek suggest, but interest rates. Bond prices across the globe are falling over all, even though in places they may rise as a result of a search for safe havens. Central banks are way behind the curve, and are likely to find that they have to raise official interest rates much faster and much more than they currently anticipate. As soon as that happens, property bubbles will begin to burst. Several billion Euros of mortgage debt was put on the market by European banks in the last week, as they no doubt see this crash coming. Property prices may well decline over the next 18 years as Armstrong predicts, but it will not be a slow continuous drop. There will be a sudden huge collapse, that will probably come out of the blue, overnight, as such collapses always do, followed by a series of recoveries, and subsequent declines over the period. But, the consequence will be that millions of people who went into astronomical debt to buy massively over priced property, and who took on astronomical amounts of other debt, be it credit card debt, student debt or whatever, will be ruined, just as happened on several such occasions before in history.
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