Gary More Or Less Nails It On House Prices

I watched this video by Gary Stevenson (Gary's Economics), last night, which after about 10 minutes of intro, more or less nails the real reason why house prices are high, as I have described over at least the last 20 years, even before I started writing this blog.  That reason, as I have set out, and as Gary states in his video, has nothing to do with all of the usual superficial claims by politicians, journalists, and many orthodox economists (I say many, because assorted Austrian School economists have actually been distinguished by recognising the claims of inadequate supply etc. are not supported by the facts - there is actually 50% more homes per capita today than there was in the 1970's, when prices were much lower) about, imbalances of supply and demand, planning regulations and so on.  The real reason, is that ALL asset prices have been inflated over the last 40 years, and houses/property/land has become a speculative asset, just like fictitious capital (shares, bonds, mortgages, and their derivatives).  We have huge speculative asset price bubbles in all these spheres, starting in the 1980's, so the current house price bubble is just a symptom of it.

As Gary says in his video, the basis of that is that, if you give rich people money (he should really say, in this context, money tokens/currency/credit/liquidity) they will spend it, mostly, not on consumption, but on buying assets, and, currently, that means buying, mostly existing assets, i.e. existing shares, bonds, land, property.

Its only in that context that this huge amount of liquidity, landing in the hands of the rich leads to a rise in prices, as this demand for assets rockets compared to a limited existing supply.  This huge rise in those asset prices, with no equivalent rise in the revenues produced by those assets, inevitably means that the yields on those assets falls.  As I've set out before, shareholders, because they have control over companies they do not own, as a result of existing company law, were able to compensate for that by continually raising the proportion of profits paid to them as dividends/interest.  Haldane documented it as rising from 10% in the 1970's, to 70%, by the 2000's.  But, its pretty much reached a limit.

As I've set out before, inflated existing house prices (and existing houses comprise around 70% of all the houses that are bought and sold, just as the large majority of shares traded are existing shares, not new shares issued to finance real investment in capital), mean that builders of new houses make large surplus profits, selling them at these price.  As with all such surplus profit from activities based on land that is monopolised, those surplus profits, then form rent for the landowner.  Its on reason that there was an attempt to hold down house prices by selling them as leasehold rather than freehold.  But, for houses sold freehold, the rent simply becomes capitalised as the price of the land.  So, again, we see that the main reason that the price of new houses is high, is because land prices are high, and land prices are high, because existing house prices are high, creating surplus profits/rent.  Builders have to pay these much higher land prices to landowners, before they can even start building, and that is far more significant than any issue of planning restrictions.  The reason that existing property prices are high is because, like all other asset prices, they have been inflated over the last 40 years.

Gary is quite right in setting out that this inflation of asset prices is due to the demand coming for them from the rich, and that additional demand from the rich is a function of a growth in inequality.  I pointed out a long time ago that the QE and other liquidity injections by central banks that they claimed was to spur economic growth, was actually doing the opposite.  If the state and central banks had really wanted to encourage economic growth, they would not have combined QE with measures of fiscal austerity!  Increasing liquidity, as was seen after lockdowns, does cause inflation of commodity prices, where that liquidity lands in the hands of households, who spend it on consumption goods and services, particularly where they have been prevented from doing so, and where supply can't quickly respond to the surge in demand.  But, for forty years since the 1980's, the increase in liquidity went primarily to the rich, not to workers.  In fact, workers found their wages falling, and were led into additional borrowing, as seen in the surge in household debt.  So, QE, introduced because rising interest rates in the early 2000's caused asset prices to crash in 2000 and 2007/8, simply put more liquidity in the hands of the rich, causing asset prices to rise further, and as that proved an easier guaranteed bet than actually investing in real capital accumulation, it acted to drain liquidity from the real economy, causing economic growth to be slowed not accelerated.

The only criticism I'd make about Gary's account is that he doesn't really address the basis of the inequality, which, as I've set out in numerous posts, including those on Anti-Duhring, is a consequence of the ownership and control of the means of production.  In the past, for example, in the 18th and 19th centuries, if you put more money or liquidity in the hands of the rich, who were primarily private industrial capitalists, Gary's argument, mostly would not apply.  Those private industrial capitalists derived their revenues from profits, and as Marx sets out, in Capital III, Chapter 15, their primary driver was to use whatever money they had to accumulate additional capital (factories, machines, material, labour-power), so as to produce more profits, to produce on a larger scale, because that was how to beat the competition and stay in business.

"... the capitalist process of production consists essentially of the production of surplus-value, represented in the surplus-product or that aliquot portion of the produced commodities materialising unpaid labour. It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integral part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production. It will never do, therefore, to represent capitalist production as something which it is not, namely as production whose immediate purpose is enjoyment or the manufacture of the means of enjoyment for the capitalist. This would be overlooking its specific character, which is revealed in all its inner essence."

Even then, of course, there were those who thought that wealth could be created out of thin air by simply printing "money", such as John Law and The Pereire Brothers, with their version of QE, or MMT, which led to speculative asset price bubbles, such as The South Sea Bubble, The Mississippi Scheme and so on, followed by the inevitable asset price crash.  There were also those who engaged in the purchase of physical assets, such Tulip bulbs, creating an asset price bubble like that with Bitcoin, today, except that tulip bulbs have value, and Bitcoin does not.  But, generally, Marx's point was correct that, as far as the industrial capitalists were concerned, they needed more profits, more money so as to engage in real investment in capital, so as to make more profits, so as invest in more real capital.

That is not true, today, because the era of that ruling-class comprised of private industrial capitalists has ended.  The ruling-class, today, is not one comprising individual, private owners of real industrial capital (they now comprise the petty-bourgeoisie) but of owners of fictitious-capital, and their revenues come not, directly, from realised industrial profits, but from interest/dividends on their financial assets, from rents on property, and from realised capital gains on those assets.  Hence their concern not to have asset prices crash, and consequently, not to have economic growth rise too fast, leading to rising interest rates, which lead to the crash in asset prices.

If you want to address the highly inflated price of assets, which is, indeed, as Gary says, a function of the inequality of wealth and income, you have to address that inequality, but, you can't address that inequality by various measures of redistribution, taxation, benefits and so on.  It can only be addressed by dealing with The Property Question, i.e. the ownership and control of the means of production.  That is all the more pressing, precisely because those means of production - socialised capital - is the collective property of workers, and yet those workers are not allowed to exercise control over their own property.  That control is exercised, instead, by shareholders via their appointed Directors.  Those Director, and the share holders they represent have no direct interest in accumulating additional capital, as against "maximising shareholder value", which basically means, inflating dividends, inflating share prices and so on.

That is The Property Question that must be addressed.