Moneyweek magazine has generally set itself apart from much of the media in its attitude to house prices. On the one hand, there is the Tory press like the Daily Express and Mail, who know their constituency amongst elderly, home-owning Tory voters, who have seen the prices of their homes rise “exponentially” over the last 40 years, starting with the asset price inflation created by Thatcher, and which have been cheerleaders for ever more ludicrous house prices. Other parts of the media have been more circumspect, pointing out that such rises have excluded a large part of the population from home ownership, a factor that bourgeois ideologists have always considered important for a “property-owning democracy”. Others have even pointed to the destabilising effects for the economy itself that astronomical house prices create, particularly when followed by crashes. But, generally, the media has seen continually rising house prices as a good thing, just as they have seen continually rising stock and bond markets as a good thing. It follows from a view that sees wealth as emanating from these rising asset prices, rather than from the creation of new value, and use-values.
Moneyweek has been different. It is part of a stable of publications whose ideology is anarcho-capitalist, and whose economic doctrine is that of the Austrian School of Ludwig Von Mises. Mises saw the depression of the 1930's as being caused by a “crackup boom”, produced by low interest rates, and loose money, in the US. Indeed, the explanation of crises given by the Austrians, who believe that capitalism is a self-regulating system, if only the market was not interfered with by the state, or by monopolies of one kind or another, is based upon this role of credit, leading to speculative booms, that ultimately turn into busts. So, its no wonder that Moneyweek has always seen the house price bubbles across the globe, and as a UK publication, that in Britain, in that light.
However, when examining the rise in house prices, or other asset prices, the role of credit is significant, as it is in examining the inevitable bursting of those bubbles. Indeed, its why, as I have set out in numerous posts over the last decade, the state has been so intent on preventing a rise in interest rates, which would cause a crash in astronomically inflated asset prices bubbles in numerable spheres, because the global ruling class, now owns all its wealth in the form of fictitious capital, i.e. in the form of all these financial and property assets, and besides which, social-democratic states, dominated by the ideas of conservative social-democracy (neoliberalism) have themselves staked everything on the idea that real wealth stems from continual rises in those asset prices. They have been prepared to sabotage the real economy with fiscal austerity, full-scale lockdowns and so on, so as to ensure it, and the most ludicrous example of that is the zero-Covid strategy, and continued lockdowns imposed by the Chinese state, as it tries to prevent a heavily indebted, and bubble-filled Chinese economy from overheating.
Moneyweek's line has been to argue that the most advantageous outcome would be for Britain's property bubble to deflate slowly, as a result of property prices either falling slowly, or rising for a long period at a slower pace than general inflation, and so falling in real terms. This is the line pursued in their latest article. In it, they set out the data in relation to UK and international property prices. They set out how rising interest rates in other international property markets, that are even more bubbly than that in Britain, has already led to a slowdown and even falls in property prices, as they ask the question “Is Britain Next?”. The argument, they put in relation to rising interest rates, however, is only very partially correct, as I have set out in posts in the past. Let's look at that again.
They miss out of their argument the role of capitalisation. That is odd, because, as Marx describes, in the 19th century, liberals were very keen to turn everything into some kind of capital, including human capital. The means of doing that was via the idea of capitalisation. In other words, anything that produces a revenue is turned into some kind of capital, and the price of this capital asset is then determined by the revenue it produces, and the rate of interest. In other words, if the rate of interest is 10%, and you have a hectare of land producing £1,000 of rent per year, the capitalised value of the land is £10,000, i.e. you need £10,000 of capital to produce £1,000 of interest from it.
So, if, today, the rate of interest rises from 1% to 2%, that halves the capitalised value of revenue producing assets such as land. Over the last 40 years, land prices rose astronomically for a number of associated reasons. As interest rates fell, the capitalised value rose. As the average industrial rate of profit rose, this actually reduced the surplus profits produced from agriculture and mineral production, and so rents, which acts to counteract the rise in capitalised values. However, because asset price inflation caused the prices of existing houses, and other property to rise astronomically, the price that builders could pay for land rose correspondingly. If they had not paid higher rents then they would have made surplus profits when selling the houses/property they built on it. Landowners soaked up these surplus profits via higher land rents/land prices. That is reflected in the much higher proportion of new property price that is today accounted for by the price of land, than it was 40-50 years ago.
That was exacerbated by the fact that, although only 1% of the UK land mass is taken up as residential property, the Green Belt policy acts as a massive monopolistic weight on the land market, preventing a vast amount of it ever being available as supply. With the prospect of land prices continuing to rise by significant amounts each year, it fitted with the growing mentality of wealth generated from rising asset prices, rather than from the creation of new value, and corresponding revenues. It encouraged landowners to simply sit on land and property, even producing no revenue, in the expectation of capital gains, and so kept large amounts of such land, sterilised.
As interest rates rise, the capitalised value of land falls, and capital gains turn into capital losses. Those hoarding land, in the expectation of capital gains begin to want to sell it, and given that land and property markets are illiquid, i.e. it cannot be sold quickly in the way say bonds and shares can, any large-scale selling can quickly turn into a fire sale, causing prices to fall sharply. But, falling land prices, mean that this large component of new house prices is also reduced significantly. It means that builders can sell houses more cheaply, and those lower new house prices, particularly if they come in the context of no longer rising existing house prices, puts further downward pressure on all house prices.
Its true, however, that new houses form only a part of the total supply of houses coming on to the market, and a further source of supply is existing home owners who put their house up for sale, as they seek to move to another, usually better, home. However, Moneyweek seems not to have accounted for the fact that any such new supply, is also matched, more or less, by a corresponding new demand, which cancels it. Moneyweek's argument as to why rising interest rates will not lead to a house price crash in Britain, depends upon this latter element of supply, and on the fact that a) a significant number of homeowners do not have mortgages, and b) of those that do, many have fixed rate mortgages. It revolves around the idea that a crash can only occur if there is forced selling of houses, by people who can no longer pay their monthly mortgage bill. But, that argument is clearly false.
There is, of course, another group of sellers, besides builder and homeowners, and that is the large number of landlords, including the buy-to-let variety. Huge amounts of rental property was, in fact, developed, including considerable amounts financed by overseas consortia, whose purpose was never primarily to obtain rents, but was based entirely on the prospect of obtaining perennial capital gains, as property prices rose. Whilst all of the buy-to-let landlords may have entered the market on the basis of potential revenues from rents, as they offered a better return than interest on savings deposits, or pensions, that too, quickly became secondary to the potential to obtain capital gains. Landlords have been hit by changes in taxation, and as they face higher mortgage rates on their portfolios, the maths will continue to fail to add up. With rental yields, after tax and interest being squeezed, and with capital gains turning into large capital losses, that is a huge amount of forced selling waiting to hit the market.
The Moneyweek argument is correct in the first part of its analysis. That is that, when buying houses, people, have come to look not at the actual price, but at how much they can pay in mortgage each month. If we take a 20 year mortgage on a £200,000 loan, that is £10,000 a year, and if interest rates are 2%, that is £4,000 a year in interest. If £14,000 is the most a buyer can afford, they are limited to buying a house for no more than £200,000, assuming a 100% mortgage. If interest rates rise to 4%, however, that is £8,000 a year in interest, which means £4,000 a year more than they can afford, so they are limited to a smaller mortgage, and so can only offer a correspondingly lower price for any house they buy. It would mean being able to offer only around £150,000, so that the capital repayment becomes £7,500 a year, and interest of £6,000 a year. That means that this reduces prices by 25%.
The thrust of Moneyweek's argument is that, although this is the consequence from the side of demand, it means that from the side of supply, existing owners, seeing these lower prices would simply sit on their hands, rather than sell, and so, this reduced supply would counter the reduced demand – what is in effect a shift to the left of the demand curve. They point out that, in Britain, only a third of homeowners actually have a mortgage, and so a rise in mortgage interest rates will not affect them. Moreover, less than 10% of those with mortgages have variable rate mortgages, the rest having fixed rate mortgages. However, as they also point out, half of them have only 2 year fixed mortgages, meaning that many of them face, having to re-mortgage, at much higher rates in the near future, and at a time when they are also facing much higher costs for energy and so on.
Their argument, therefore, is that a house price crash is only possible when existing homeowners cannot afford to pay their mortgages, and become forced sellers, which requires either much higher rates than currently exist, or else requires a recession, leading to large numbers of people no longer having the income to pay their mortgage. But, that is false.
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| UK House prices, Inflation adjusted. |
The fact is that house prices are determined by what buyers are prepared to offer for the houses that do come up for sale, not by those that do not! It is always the case that houses do come up for sale, and the fact is that if potential buyers of those houses, as a result of higher mortgage costs can pay less for them, then that is all the seller can get for them. A housebuilder, for example, does not have the luxury of being able to say, I will just sit on the house, until prices are higher, particularly in conditions, where they see no prospect of such a change in conditions. They build the houses only to sell them, and make a profit from it, and until they sell the house their capital is tied up in it, and cannot be turned over to use to build more houses, and make more profit. Moreover, with falling existing house prices, and lower capitalised land prices, resulting from higher interest rates, builders who have lower costs for land, can sell their houses at these lower prices, and still make a higher rate of profit, and, as demand rises, as house prices fall, they also sell more houses, can build on a larger scale, and so make larger amounts of profit too. So, whatever existing homeowners do, this feeds into increased supply at these lower prices.
But, the Moneyweek argument in relation to existing homeowners is false too. As they point out, two-thirds of homeowners do not have a mortgage. So, what is the effect of higher interest rates and lower house prices on them? I am in this position. In 2019, I bought my current house for £225,000. As a result of the money printing during the lockdowns, and subsequent further asset price inflation, today, it would fetch £350,000. But, I would be highly delighted if its price were to fall to just a tenth of that, to £35,000, as a result of rising interest rates, and a crash in asset prices. The reason is that, by the same token, a £1 million house would then sell for just £100,000, and there are quite a few of them I would like to be able to buy at that price, which would only require me to add £65,000 to what I got for my current house, whereas, today, I would need an additional £650,000!!!
That is also why many of the arguments about the effects of inflation are also wrong. The usual argument put in relation to inflation is that it erodes the value of savings, but it depends what the purpose of those savings is. If, here, the purpose of the savings is to buy a house, then inflation of commodity prices is irrelevant, if a consequent rise in interest rates leads not to an inflation, but a crash in house prices. Far from the value of any savings being eroded, they would be significantly inflated. Few people save to pay for everyday consumer goods, which they buy out of current income, not savings, and particularly in current conditions, where labour is in increasingly short supply, and so where wages rise, increased consumer goods inflation is simply bought out of inflated incomes.
What is more, if you are saving to buy a house, and interest rates rise, that means that instead of the paltry interest you currently accrue, it starts to be actually significant. True, if you were using those savings to buy consumer goods, whose prices are rising by, say, 10% a year, the interest would not compensate for those higher prices, but if you are saving to buy a house, and house prices are falling, then the opposite applies. If house prices crash by 90%, then every £1,000 of interest you earn on your savings becomes worth £10,000. Indeed, that becomes a further incentive to save, and hold off purchase, until house prices do fall further, because, in the intervening period, a larger amount of interest will have been added to your funds.
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