Chapter 8 – Bifurcation of the Working-Class
Workers who, in the post-war period, and up to around 1990, were able to buy their own home, saw the effects of the asset price bubble favourably. In the UK, a £2,000 house, in Stoke, bought in 1960, by the time of the 2008 financial crash, had multiplied in price by around 75 times, to be a £150,000 house. A house bought in 1990, for £30,000 had multiplied in price, by 2008, by around 5 times, to £150,000.
If you were a worker, in a reasonably stable, even averagely paid job, you could have bought a house, at any time, between 1950 and 1990. The earlier you bought that house, the greater will appear the paper capital gain you have made. But, large numbers of workers, during that period, also did not have reasonably stable employment, particularly from the 1980's onwards. Some workers who had moved into a council house after the war, had got used to renting, whilst many saw the attractions of the huge discounts that Thatcher introduced to buy in the 1980's. Some who, by that time, were pensioners, either were unable to buy, or else, saw no advantage in buying their council house, when Housing Benefit, and Council Tax Benefit, meant they were sheltered for free. Many were unable to buy a house, and from the 1980's, also saw both council house and private rents start to rise sharply.
For all these workers, the sharp rise in house prices only illustrated this growing divide between wealth and affluence. In other words, even someone in a relatively well paid job, who might, therefore, be more affluent than their neighbour would appear less wealthy, because the neighbour, having bought their house 20 years earlier, now had an asset with a paper value of £150,000, whereas they did not. The neighbour may have paid off their mortgage, and so had minimal housing expenses, whereas they faced rising levels of rent, and the prospect of buying a house disappearing for them ever further into the distance.
And, this even applied to those who did manage to buy a house, by obtaining a mortgage. In the period up to the Financial Big Bang, in 1987, when most financial regulations were scrapped, mortgages were limited to 2.5 times household income. This placed a cap on the amount of credit that was available for housing demand, and thereby acted to limit the potential for house price inflation. And, for a long period, there was a fairly steady ratio of house prices to average income of around 3:1.
On this basis, house price inflation had been more or less a reflection of rising wages and general inflation. The £2,000 house of 1960 might have trebled in price to £6,000 by 1980, but this largely reflected rising real wages throughout the 1960's, and high levels of general inflation in the 1970's, which rose to over 20% p.a. By contrast, UK house prices quadrupled in the ten years between 1980 and 1990 alone, and during most of that period, general inflation was falling, and real wages were falling or stagnant, as unemployment rose to levels not seen since the 1930's.
First time buyers of properties then found that they could only do so by taking out mortgages that were now 5, 6 and more times their household income, particularly as the proportion of single person households rose more than 50%, from 19%, in 1971, to 30%, in 2001, as they were encouraged into such speculation, so as not to miss out. As buying became more difficult, the government introduced a series of scams, the biggest of which was the “Right to Buy” introduced by Thatcher, but also included various forms of shared equity schemes, through to “Help to Buy”, which, as seen recently, meant that half those using it, were people who were earning over £100,000 p.a., and had no need of it. None of these policies were actually intended to solve the housing crisis, because, in practice, by stoking demand, whilst doing nothing to increase supply, they only made it worse. But, as with the policy of QE, it was not intended to assist the real economy, only to keep massively inflated asset prices inflated, at the expense of the real economy. Another scam was the increase in properties sold leasehold rather than freehold, the consequences of which, gullible buyers have only recently become aware of.
As in the US, in the period prior to the sub-prime crisis, not only were mortgages given of 125% of the house price, as was demonstrated with the collapse of Northern Rock, but, in practice, borrowers were never asked to prove income or ability to pay, so loans were given way in excess of six times earnings. The assumption was that house prices would rocket year on year, so lenders would always recoup their capital.
In short, a division was created, within the working-class, between those whose paper wealth appeared to expand, because they had been able to buy a house, whose nominal value continued to inflate up to the financial crash of 2008, and those who had not. The division was even greater in relation to those who had been able to buy their house in the period up to the late 1980's, who saw the nominal value of that house rise massively.
A similar situation arose in relation to pensions and savings. Rising real wages, in the 1950's, 60's, and early 1970's, reduced the capital value of mortgages. Between 1965 and 1985, inflation adjusted asset prices fell, as rising interest rates reduced the capitalised value of revenues. Rising real wages, combined with falls in these real asset prices (shares, bonds) meant that workers, in those jobs that provided company pensions/superannuation schemes were able to build up pension entitlements at a diminishing real cost.
If £10 a month paid into a company pension scheme, in 1965, bought 10 shares, then by 1970, on an inflation adjusted basis, it might buy say 12 shares, by 1975 15 shares, by 1980 20 shares, and by 1985 25 shares. It is this accumulation of the capital base of the fund that provides the basis for meeting future pension liabilities, because those liabilities are funded from the revenue obtained from that capital, i.e. the dividends paid on shares, and interest on bonds. So, if each share pays a dividend of £1 p.a. or each bond pays a coupon of £1 p.a., a fund containing 25 shares or bonds will be able to pay £25 in pension, whereas a fund containing only 10 shares or bonds will be able to pay only £10.
To put it in other terms, if you are a landlord, if house prices fall, you can buy more houses to rent out. It is the number of houses you own, and on which you can thereby obtain rents, which determines your revenue. The more property prices fall, the more property you can buy, and the more rents you can obtain.
The same with pensions. The more share and bond prices fall, the more shares and bonds each £1 of pension contribution buys, and the more dividends, and interest the fund can then obtain. Those workers who were in jobs that enabled them to take advantage of lower cost pension provision, and home purchase, in the period from the 1950's through to the mid to late 1980's, thereby obtained considerable benefit, compared to their counterparts, who could not, and over those workers in the following generation, who were confronted by astronomically rising costs of shelter and pension provision, as asset price bubbles inflated at an unprecedented rate.