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.
No comments:
Post a Comment