UK House Prices Are Lower Today Than Ten Years Ago

An analysis by the BBC and the Open Data Institute (ODI) in Leeds, using Land registry data, shows that in most of Britain, house prices are lower in real terms today than they were ten years ago, in 2007. It shows that the bubble in house prices has been grossly distorted by the extent to which house prices have continued to be pushed higher in London and the South-East. That doesn't mean that house prices are not still in a bubble in the rest of the country, only that it is a smaller bubble than in the South. In large parts of the country, house prices have continued to fall not just in real terms, but also in nominal terms, as I've described over the last few years, in a number of blog posts. In fact, when my wife saw this BBC report, her first comment, was “I could have told them that, just from my studying of house prices.” 

It also exposes, from another angle, the fallaciousness of the argument that high house prices are a result of inadequate housing supply. In fact, as I've described in various posts, over the last few years, there is actually 50% more houses per head of population today than there was in the 1970's. The problem is not a lack of supply, but inflated speculative demand that has pushed up market prices, and which has thereby pushed up development land prices, facilitated by the ridiculous Green Belt constriction, which then pushes up the cost of new house building.

The real problem with the UK housing market is that prices have been pushed up due to speculation, in just the same way that the prices of other financial assets such as shares and bonds have been pushed up by speculation. That speculation has been driven into more and more speculative assets, the latest example of which is the bubble in worthless assets such as Bitcoin, and other crypto-currencies. It is the consequence of central bank and government policies, to keep asset prices such as property, shares and bonds inflated, because it is these paper assets – fictitious-capital – which are the form in which the capitalist class holds the vast majority of its wealth.

As the annual average rate of profit soared in the 1980's and 1990's, thereby increasing the supply of money-capital way in excess of the demand for money-capital, for real productive investment, global rates of interest were driven down to ever lower levels. The converse of those low rates of interest was higher capitalised prices of financial assets, and property. Eventually, the yields on these assets fell to such a level that the owners of them became more and more concerned not to lose capital value, as a consequence of a higher rate of interest, than they were to obtain a very marginally higher yield. The task of central banks became to keep those asset prices inflated, which they did by telling financial markets they had their back, whether it was via the so called Greenspan Put, which meant reducing official interest rates whenever the bond or share markets began to falter, or via the policy of QE, the LTRO's of the ECB, and so on, which pumped liquidity directly into the purchase of government bonds, and in some cases, commercial bonds, and mortgage bonds.

It is that central bank and government backed encouragement of such speculation, which drives potential money-capital into these speculative assets, and thereby drives it away from real productive investment, which has caused the bubbles in property prices, and in stock, bond and other asset markets. The bubble in property markets long preceded the financial crisis of 2007/8. In fact, as I've written previously, it can be traced back as far as Tory Chancellor Reggie Maudling in 1960, but it can most certainly be traced back to Tory Chancellor Tony Barber in 1970, with Nigel Lawson also giving the property bubble a further injection of hot air in the 1980's. 

What the 2008 crisis did was to halt that further inflation of that bubble in large parts of the country. Again illustrating the fallacy of the argument that the high prices are due to a shortage of supply, in 2007/8, prices dropped 20%, as the financial crisis temporarily put a stop to all such speculation. And, in large parts of the country, as this survey shows, the fact that wages then fell, or have been stagnant, in the aftermath of that crisis, has prevented prices rising again, despite all of the attempts to goose the market via, the Help To Buy scam and lower mortgage rates. The places where prices have risen, in London, the South-East and East of the country are places where domestic and foreign speculators have been able to, once more, increase speculative demand, and thereby push up prices.

In fact, not just since 2007/8 have prices in many parts of the country continued to fall. As I've reported in the past, I sold my house at the start of 2010 for £150,000, but I could buy the identical house today for £125,000, meaning not just a fall, since 2010, in real terms, but a fall even in nominal terms. The extent to which this was already a huge bubble is shown by the fact that this £150,000 was five times what I had paid just over twenty years earlier, just as the £20,000 plus I got for my previous house was four times what I had paid for that only a decade before. General inflation and wages had not risen by anything like those amounts during the same period. It is not that there is not housing need, the increased number of people who are homeless, sleeping rough or in substandard accommodation shows that there is, but need is not the same as demand. Demand requires that the need is backed up by the money required to purchase, and the fact is that house prices have been driven up by all of this speculation to levels whereby increasing numbers of people do not have the money to create that effective demand. That is also why builders have not taken advantage of these high prices to increase the number of houses they build, and thereby make bigger profits. They know that there is not enough effective demand, i.e. demand backed by money, to be able to buy a larger number of houses thrown on to the market, at these hugely inflated prices.

A look at bank lending shows that nearly all of it has been going into property speculation of one form or another. That is the other side of the coin that sees small and medium sized firms unable to obtain bank finance, and turning increasingly to more costly forms of borrowing such as via personal credit cards, and is also why there has been a significant increase in peer to peer lending, which enables smaller firms to borrow, but at rates more like 10% p.a. It is also why ordinary households have been driven into higher levels of debt, and increasingly higher-cost means of providing it, again through the sharp rise in credit card debt, and more worryingly the rise in debt to payday lenders charging rates of up to 4000% p.a.

Its likely that the Bank of England will be led to raise its official interest rates next month, doubling it from 0.25% to 0.50%. To the extent that it is seen as part of a process whereby central banks are finding it impossible to reduce official rates any further, and where QE has already pushed up asset prices to levels where yields are near, at, or below zero for many government bonds, and so where the only reason for holding such assets has been to obtain capital gain, rather than yield, but where the potential for any such further capital gain has become increasingly diminished, and the potential for a sharp sell-off increasingly likely, the rise in official rates is likely to have perverse consequences, compared to orthodox economic theory. 

To the extent that it sends a message to speculators that they can no longer rely on the central bank having their back, it will see them start to re-evaluate the risk of holding UK government bonds. If the only point of holding them was to obtain capital gain, or at least in the hope of not suffering a capital loss, that motivation will be removed. Some institutional investors will have to continue to hold such bonds, but they may be inclined to switch where possible to alternatives, such as German Bunds. Other speculators, particularly foreign speculators will be even more likely to make such a switch given the risk surrounding the value of the Pound caused by Brexit. So, to the extent that these assets are sold, and the money moved out of the country to be used for speculation in other financial assets, rather than this rise in official interest rates causing the value of the Pound to rise, as orthodox theory would suggest, it could fall. In the same way, over the last year, as the Federal Reserve has been raising its official interest rates, and stopped QE, the value of the Dollar has been falling rather than rising. On the other hand, as the ECB has been increasing its QE in the last year, the value of the Euro has been rising.

Given that the Bank of England has admitted that a large part of the current rise in UK inflation, which today hit 3%, and is set to rise further, has been due to the fall in the value of the Pound, as a result of the Brexit vote, any further fall in the Pound due to a flight of hot money out of UK financial assets, as speculators no longer feel the hand of the Bank of England behind them, is likely to cause UK inflation to rise further in the next year.

In the last few months, the extent of that bifurcated housing market, whereby prices in London and the South-east has been driven by rampant speculation has also been reflected in the extent to which it is also highly susceptible to a crash, as that hot money disappears overnight. London house prices have been falling now for some months, and now they are falling at the fastest pace since the financial crash of 2008. The rise in the Bank of England's official interest rate, which is a part of a global move by central banks to raise rates, as they fear a new global asset price bust, is likely to halt that speculation even more sharply. Yet, as the Grenfell Tower disaster showed, again illustrating the fallacy of the supposed shortage of housing supply, there is a large amount of expensive unoccupied property in London that has simply been built and bought for speculative purposes, not even to be let out!

The rise in official interest rates is long overdue. The central banks even now are only being forced into it, because despite their attempts to divert all available money-capital into such speculation so as to keep asset prices inflated, the fundamental laws of economics have asserted themselves. As Marx put it,

“It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.” (Capital III, Chapter 23, p 378) 

Having driven yields to near or below zero, they instead found themselves living on capital gain, and thereby destroying the very capital base upon which the future interest depended. At the same time, the potential for making large profits, encouraged some to “ reconvert into industrial capitalists”, which we have seen with the development of new businesses such as Spacex. And, as the economy has continued to grow, despite the attempts to divert available money-capital into the inflation of asset prices, employment has grown, the demand for commodities has grown, and businesses are led inexorably to have to use their profits to invest in real capital, so as not to lose market share to their competitors, and the consequence is that the market rate of interest rises, irrespective of the official rates of interest.

It creates the conditions for a bursting of those speculative bubbles, and now the central banks are rushing to catch-up, to try to deflate the bubbles before they burst. The history of such attempts does not suggest a great likelihood of their success.