How Liquidity Flows From Asset Markets Into The Real Economy - Part 13 of 17

But, the fundamental driver of all this is the astronomical rise in property prices. As I have set out previously, this process began, in Britain, in 1963, when Tory Chancellor Reggie Maudling tried to goose the economy with a dose of fiscal and monetary expansion that led to rising property prices. It was again used by Tory Chancellor Tony Barber in 1972. But, its most exceptional periods were that of the 1980's, under Thatcher, up to the housing crash of 1990, and then, again, under Blair/Brown, from 1997 on, until the crash of 2008, with an even greater use of liquidity to inflate asset prices from 2009 to the present. Alongside it, at different points, went other measures to boost the demand for property such as Mortgage Interest Relief at Source (MIRAS), which allowed property buyers (including landlords) to claim tax relief on the interest on mortgages, right to buy discounts for council houses (and later housing association properties, even though the state didn't own them), and, of course, all of the various Help To Buy schemes.

These massively inflated property prices, for existing property, mean that builders can charge similarly inflated prices for any new houses they build. They do not build more houses than they can sell at those inflated prices, which is why buyers are required to buy “off plan”, rather than builders building houses speculatively, and then hoping to sell them. The only builders that do that are the small builders, who must build and sell a minimum number of houses each year, in order to stay in business. The big builders, like any other landowner, can simply sit on their land banks, if there is not enough demand at these inflated prices, watching the capital gains accrue on the increasing price of the land. That is why the amount of new house building has been so low, despite these high prices, and no matter how much they are implored to build more, they will not do so, so long as they know that the result would be an overproduction of houses, and a fall in the price they could sell them at, resulting in lower profits, and a fall below the average annual rate of profit.

Consider the position discussed earlier where A and B are both owners of houses with a price of £100,000, who decide to exchange them. A buys B's house, not with money, but with his own house, and vice versa. It is a condition of barter, with commodity/asset bought with commodity/asset.  As described, on this basis, A and B could stick any price label on these houses they liked. It would not stop them exchanging on the same basis. This is what the proponents of theories of subjective value think occurs in relation to the prices of all commodities.

However, the trouble with this is that it assumes that the only commodities being exchanged are ones that have already been produced, and that no further production is taking place. Suppose that instead of houses, A and B are exchanging cars, each with a price of £100,000. What would stop them pricing these cars at £200,000, and exchanging on that basis? It is the fact that C is a car producer, and produces cars to sell at a price of £100,000, and so, in a money economy, if A asked B for £200,000, B would say, why would I pay that when I can buy the same car from C for just £100,000, and A would say the same to B. What determines that C's price is £100,000 is the actual cost of production, and competition from all other car producers, with the same cost of production, which means that C can only sell at that price, or lose out to their competitors.

Back To Part 12

Forward To Part 14