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.

Blue Labour's False Narrative On Housing

Blue Labour have said that they intend to build 1.5 million new homes over the life of this parliament. Of course, by that, they do not mean that they, personally, are going to build these houses. Starmer, Reeves and Rayner are not going to become brickies, or even hod carriers. Nor, even, do they mean that they are going to take direct responsibility for the state, either at national or local level, building those houses, as governments did in the past, for example, in the 1930's and 1950's, when the state directly created New Towns, Garden Cities, and local councils built large numbers of council houses. No what they mean is that they are going to set targets for Councils to achieve of houses, which, again, those councils will not build, but that somehow they must ensure private builders produce, in their areas.

As with all of Blue Labour's ideology, and policies this is fraudulent from start to finish. It immediately gives them a scapegoat for when this impossible task is not fulfilled. And, the task is impossible, as, already, the fact that Britain does not have the required number of skilled workers to build those homes illustrates. Of course, one reason it does not have those skilled workers is Brexit, which has cut Britain adrift from Europe, costing it £40 billion a year, in lost taxes, and around 4% of its GDP, but also, denying it the access to the workers required, which was one of the many benefits of free movement. But, even if it had the workers to build the houses, and to produce all of the materials, and so on required in their construction, the task is impossible, given the basis upon which it is being put forward.

The only time that Britain has built large numbers of houses, on the scale being suggested, is in those previous examples of where the state itself committed to building them, and that building was of large numbers of council houses for people to rent. The state was able to build those houses to rent, at affordable rents, because the state itself, bought the land, or simply acquired it via compulsory purchase orders, at realistic land prices, as against the astronomically inflated land prices that exist today. In the post-war period, for example, land accounted for 10% of the cost of building a house, whereas, today, it accounts for around 70%. The reason for that, is huge levels of surplus profit (rent) available to house builders, who can sell new houses at massively inflated prices, equal to those of existing houses, whose prices have been sent skyrocketing as a result of five or six decades of government induced speculation.

Blue Labour, like their Tory predecessors seem to think that prices, whether for houses or any other commodity, are simply a function of supply and demand. So, if prices are “high”, whatever that might mean, it is because supply has not risen to match the level of demand. All that is required, therefore, they believe, is to ensure that supply is increased. But, they never ask the question of why it is that supply has not increased, or if they do, it is only ever in the context that there is some monopoly preventing it, requiring the intervention of some state bureaucracy, such as the Competition Authority, or regulator, to ensure greater competition, or else, as now, with Blue Labour and housing, the problem is seen as other frictions such as a restrictive planning system.

What they never consider is that, in a capitalist economy, supply is provided by firms that seek to make profits, and whether they make those profits or not depends upon whether they can sell all of their production at sufficiently high prices. If producing more houses would simply result in unsold houses at such a price, firms would have to reduce the prices of those houses, and so not make those profits, and might even make losses. So, they are not going to do that. Its one reason that large builders sell houses to buyers “off-plan”, and only undertake the building of the houses, when they have obtained sufficient customers for them.

Now, it might be thought that, given the astronomical level of house prices, and given what was said earlier about “huge levels of surplus profit” available to house builders, that should not pose a problem. But, it does, because its necessary to understand that the price of houses is not determined by the cost of building new houses, but by the prices of existing houses. New houses account for only around 7% of house purchases and sales, in the UK. The rest is the purchase and sale of existing houses, as people move from one home to another. In fact, this is pretty identical to what happens on the stock and bond markets too. Very few of the shares bought and sold on stock markets are new shares. Again the figure is around 7%. The money flowing into the purchase of shares, as with bonds, goes, not to finance the expansion of capital via investment, but goes almost exclusively into the pockets of other speculators.

Speculators can, and do, drive up the prices of shares not because of any demand for shares driven by a potential for additional profits to boost dividends, but simply as a result of a speculative frenzy. When the state provides a safety net for such speculation, as it has done, since 1987, by providing additional liquidity from central banks, whenever, financial markets take a tumble, then, as has been seen, those prices can reach astronomical levels, unrelated to any increase in profits. The same is true with houses. If A and B own assets, be it a house, or a portfolio of shares, or bonds, then, even without any additional participants, the price of their respective assets can be driven up by both of them simply engaging in such speculation. A can offer to buy B's assets at double their initial price, so long as B offers to buy A's assets at an equally inflated price. They simply exchange between them their assets at these inflated paper prices.

That is what has happened with houses. From the early 1980's, Thatcher's government encouraged speculation of all sorts, including housing speculation. The introduction of a discounted right to buy of council houses was part of that process. Council houses provided a degree of security of tenure that also put a constraint on the rents that private landlords could charge in competition with them. By offering council tenants huge discounts of up to 60% to buy their home, the Tories created a huge incentive for such speculation. In fact, many of those tenants that undertook it came a cropper shortly after, because, as interest rates began to rise, they found they could not pay the mortgages they had taken on to buy the houses. But, that simply enabled other speculators to then buy up those houses from them, and turn them into privately rented properties in conditions where speculation was driving prices higher.

For those former tenants who didn't suffer that fate, when they came to sell their former house either because they could move to another house, or because they had died, it was again speculators that were able to swoop in, and buy them up. Around 90% of the council houses sold under Right To Buy, are now owned by private landlords. Again, as with the money that flows into stock markets that simply goes into the pockets of other speculators, rather than financing actual investment in capital, the money received by councils for the sale of their housing stock did not go into building replacement houses, and, indeed, the Tories placed restrictions on them being able to do so. So, the demand for housing was ramped up, whilst the supply of housing was curtailed. Prices rose fuelling even greater speculation, which drive up speculative demand even more.

Yet, as I have set out previously, the narrative that house prices have risen, and are high, because supply has not risen adequately is itself false. There are 50% more homes per head of population, today, than there was in the 1970's, before the huge rise in property prices started. The problem has not been the increase in supply of houses, but the creation of a huge speculative demand for houses. Either speculators have sought to buy them to take advantage of more or less guaranteed capital gains, underwritten both by central bank intervention, and by government policies to goose demand further, or else, individuals simply needing somewhere to live, have been drawn into a fear of missing out, in which they would pay whatever exorbitant prices were current, on the basis that tomorrow those prices would be even higher. That was encouraged by exceedingly low, and artificially sustained mortgage rates.

Again, a reflection of that is the huge shift in the nature of households, in which single person households have doubled, since the 1970's, from around 21% to 41%. It is this speculative frenzy, made possible by central bank and government policy that has artificially inflated demand for houses, and pushed up prices. It is the prices of these existing houses that determine also, the price of new houses, and those prices are way above the costs of production, which is the basis of the huge surplus profits for builders. However, what distinguishes house building, as with agriculture, or primary product production, from other forms of production, is that the landowner is able to withhold the use of their land, unless they have this surplus profit handed over to them as rent. In the case of house building that rent may take the form of actual rent, as manifest in the sale of houses as leasehold rather than freehold, or else takes the form of a capitalised rent, manifest in the price of the land, for freehold properties.

So, as Ricardo and Marx set out, in relation to agricultural rent, the fact of these high prices, and profits does not lead to a corresponding increase in production and supply, because the landowner simply appropriates the surplus profit as rent (price of the land), reducing the builder's profit down only to the average rate of profit. That the landowner might themselves be a large builder does not change that, because they had to buy the land from an existing land owner to begin with, at these inflated prices. As they see house and land prices continuing to rise, underpinned by state and government policies, they have no reason to build more houses than they know they can sell profitably, because, in addition to protecting those profits, they know they can also make capital gains on the land they own, by sitting on it. Only if they came to believe that land prices were going to fall, causing them to make capital losses, would that change, but there is nothing in Blue Labour's narrative, nor in its policy that would cause them to believe that. Quite the contrary.

Blue Labour's narrative continues to be that of the Tories of the need to make home ownership affordable by having low mortgage rates. But, low mortgage rates do not make houses more affordable. They simply act to push up house prices, and, again, to then push up land prices. In pushing up land prices, they push up that cost of building new homes, which means that the price those homes sell at, in order to produce an average profit for the builder is also raised. So, it is no use Blue Labour proclaiming that it is going to build 1.5 million houses, and that all that is standing in the way is NIMBYISM, and a restrictive planning system, because its own policies are acting to limit the number of houses that builders can sell at prices that will produce the average profit.

If they want to achieve their supposed target, they need to reduce land prices, and to reduce land prices, higher interest rates are required, or else, as with the post-war government, they need to compulsorily purchase building land at much lower than current prices. Alternatively, they could buy up land in the Green Belt, at agricultural land prices, and, then, redesignate it as building land. Again, as with the post-war government, the simplest route from there is to build a large number of council houses to rent, which again has to be coupled with scrapping the Right to Buy. That would provide decent homes for large numbers of people who can't afford to buy, and who are currently being ripped off by private landlords. It would, act to reduce those private rents too, and encourage many of those landlords to sell up, which would, in turn act to reduce existing house prices, as that stock of privately owned, rental properties came on to the market. Those falling house prices would act to cut land prices, and so, would make the cost of building new houses much lower.

But, Blue Labour, like the Tories continues to be in thrall to the idea of inflated asset prices, and so long as that continues the idea of increasing housing supply will remain a delusion.

Moneyweek and A House Price Crash

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.

I've dealt elsewhere with the fallacy that capitalist crises are caused by such “crackup booms”. See my book Marx and Engels Theories of Crises, for example. In short, credit is an inextricable element of capitalist development, and credit expands along with expansion of the economy. Low interest rates are a function of periods in which the demand for money-capital is lower than the supply of money-capital, which is essentially, when the rate of profit is high, but capital accumulation slows. That is periods when net output grows faster than gross output. That leads to higher asset prices due to capitalisation, and also leads to speculation. The speculation can lead to financial crises, but they are not the same thing as economic crises of overproduction of capital or commodities. Credit can delay the onset of a crisis of overproduction, and so exacerbate it, but it does not cause such a crisis, whose source resides in the operation of capitalist production itself.

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.

UK House prices, Inflation adjusted.

In 1990, UK house prices crashed by 40%. The primary reason for that was that interest rates rose significantly. In fact, compared to today, rates were already high. In May 1988, Bank Rate was 7.38%, by October 1989, it had risen to 14.88%, or nearly double. It was that, which led to the crash in house prices. Similarly, in July 2003, UK rates were down at 3.5%, at the height of a new bubble, before rising to 5.75% in July 2007, as the start of the financial crisis took hold that was to lead to the collapse of Northern Rock, and then into the financial meltdown of 2008. Again, house prices in the UK fell by 20%, before the state stepped in. In neither case was that crash in prices precipitated by a rash of forced sellers.

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.

Someone, with a mortgage is, of course, not in such a good position, but provided they have the revenue to pay the mortgage, the same argument still applies. A small additional amount of money added to the now much reduced house price, still enables the seller to buy a significantly more expensive house than currently they could buy, and so, for anyone in that position, there is still an incentive to sell and move up. But, my guess is that we will soon see. Compared to May 1988, when Bank Rate was at 7.38%, its current rate of 1%, is ludicrously low, particularly given that inflation today is running at over 10%, whereas back then it was just 4.9%. A near doubling of the rate to 14.88% led to a 40% crash in UK house prices, back then. In fact, UK rates have already quadrupled from their low, and a move to even 2%, would mean they would have risen eightfold from it, so the effect on capitalisation, and on asset prices is going to be that much more significant. But, given inflation at its current levels, and its trajectory even higher, I doubt that Bank Rate is going to be limited to just 2%!

Occupation!

Its reported that anarchists, followers of Makhno, have occupied the London residence of one of Putin's cronies, Oleg Deripaska.  Good.  But, why stop there?  Russian oligarchs are not the only billionaires to have large, often unoccupied mansions in London.  There are many more owned by European, US, Chinese, Japanese, Indian and British billionaires.  Given the crisis of homelessness in Britain, and in London, in particular, under the disastrous management of Sadiq Khan, its time all of them were occupied, and made available to the homeless people of the capital.

As I wrote several days ago, that is the clear message that the US/UK and its allies have given with their economic war against Russia and China, and their own confiscation of property.  They have given the green light, for all to follow suit, and to begin confiscating the property of the global 0.01%, and we should do so.  It would be a good way of implementing the fundamental socialist position that "The Main Enemy Is At Home".  After all, its not Putin and his army that is the main enemy facing London's homeless, it is Boris Johnson's central government, and Sadiq Khan's conservative social-democratic London government, which together have failed to meet the basic needs for shelter of the capital's less well-off.  It is the conservative social-democratic policies of fiscal austerity, combined with money printing to inflate asset prices, including property prices, at the same time as ensuring that not enough social housing is provided, that has made houses unaffordable, and unavailable.

Jeremy Corbyn at least, as Labour Leader proposed such action to help quickly remedy the problem of homelessness, but, of course, the same politicians today who back confiscation of Russian property, as part of NATO's economic war against Russia and China, opposed Corbyn then, and will run a mile from suggesting any such action today.  Indeed, why stop at just the mansions of the rich.

The large corporations are also the collective property of the associated producers within them, i.e. the workers and managers, yet they are denied control over those enterprises.  Instead, shareholders, who do not own those companies, but are merely creditors of them, lenders of money, like a bank, or like a landlord lends land and property, have been given that control illegitimately.  Even a consistently democratic bourgeois government would remedy that situation, and change company law to remove the voting rights of shareholders, and give control of the companies to their workers and managers.  Of course, no government, other than a Workers Government is going to do that.  So, as well as occupying the houses of the rich, workers should also begin to occupy all of the large companies too, and begin to operate them under Workers Control, creating Factory Committees, as means of exercising such democratic control.  Of course, they will have to do that in the face of the inevitable opposition to such action that will come from the likes of Starmer, and the pro-capitalist leaders of the Labour Party.

As I said, the other day, in reality, the rulers in Britain and the US will be very circumspect in their actions of confiscating the property of Russians, precisely because, they know that it sends the message that all property is up for grabs.  In the 19th century, the followers of revolutionary bourgeois ideologists, like David Ricardo, argued that land should be nationalised, so that all rents would go to the state defraying its costs, and so reducing taxes, enabling capital to accumulate faster.  They never pursued that rational policy further, because the bourgeoisie, by that time also landlords themselves, feared that it would send the message to workers that all property could be taken out of the hands of private owners.  Its no surprise, therefore, that the capitalist cops have already stepped in to evict the Makhnovites, and to protect the property rights of Putin's friend.

Huge UK House Price Bubble Inflates Further

The house price bubble in Britain began inflating in the 1980's, as Thatcher, having defeated the working-class, after the Miners' Strike of 1984-5, began to pump liquidity into the economy, to finance the growing debt economy, in which households were encouraged to borrow to finance consumption, as their wages stagnated. It was given a twist higher with the further encouragement of debt and speculation resulting from the deregulation of financial markets – the financial Big Bang of 1986 – which occurred in both Britain and the US. It was the start of the process that led to the global financial meltdown of 2008, and why Britain was one of the worst affected by it. UK house prices have been continually inflated since the 1980's, in the same manner as the prices of financial assets, suffering the same kinds of crashes along the way. According to Nationwide, the average house price is now 10.9% higher than a year ago.

The process, started in the mid 1980's, quickly led to the biggest ever one day crash in financial markets in 1987. That in turn led central banks to respond by printing even more money tokens so as to reflate those asset prices. The same financial markets that had fallen by more than 25%, were 50% higher a year later. 

The UK property market, which had seen prices more or less double in just over a year, after 1988, crashed by 40% in 1990, under a combination of rising unemployment, and rising interest rates. House prices did not recover their pre-crash prices until 1996, and a new round of global liquidity injections took place in response to further crashes, such as the 1994 Bond Market rout, the 1997 Asian Currency Crisis, the 1998 Ruble Crisis, the collapse of LTCM, as well as the provision of liquidity ahead of the Millennium and any potential Millennium Bug.

The huge amounts of liquidity not only fuelled property price inflation, but also fuelled speculation in technology stocks, and any small cap stocks that acted as proxies for them. Shares in these companies rose by huge amounts and, the leading funds speculating in these stocks saw gains in their unit prices of around 70% a year for several years. That was until, some of the Internet stocks that had soared were seen to have no material foundation, much as with crypto-currencies, or meme stocks today. That together with an attempt to rein in some of the huge ocean of liquidity that had been released, and rising interest rates, caused the NASDAQ to drop by 75% in a few weeks. It took more than 15 years to recover, but, in the meantime, central banks continued to pump liquidity into the system to try to reflate asset prices, especially after 9/11 caused another shock to the system.

All of this liquidity acted to inflate asset prices, which was its intention, as the global ruling class, the top 0.01%, owns all its wealth, nowadays, in this form. In those economies where home ownership was dominant, it meant that house prices were also inflated. As with meme stocks, this creates an inevitable dynamic that leads to bubbles, and the subsequent bursting of those bubbles. As George Soros says, for a speculator, when you see a bubble starting to inflate, the thing to do is to rush towards it, because that is the way to make money – provided that you then, make sure to get out well before that bubble inevitably bursts. In other words, it is the application of the bigger fool principle. For big speculators like Soros that is possible, but for the small retail speculator, its usually not, as they found a few weeks ago, when they found they could not sell out of their positions in Gamestop. For any illiquid asset, this problem is compounded, and property is probably the least liquid asset of all. Shares and bonds can usually be sold at the press of a button, if the market is falling, even if you take a loss on your position. If house prices are falling, even if you can find a buyer, the process takes months to complete, by which time, prices can have collapsed, buyers disappeared, pulled out, waiting in anticipation of even lower prices down the road.

The current rise in UK property prices is rational in the short term, for the reason Soros describes, but only just, because, given the illiquid nature of property, and given the background conditions, the likelihood of prices crashing in the near future is extremely high, meaning that anyone buying now will be unable to get back out again quickly. In other words, it is likely to be totally irrational tomorrow!

The reasons for the current pop in prices is fairly easy to see. Large numbers of people have been given cash by the government as replacement incomes during the period of the lockouts. Those furlough and other payments went on for much longer than was originally proposed. They should have ended last September, and are still in place. At the same time, households ability to consume was constrained, meaning that their disposable income rose, leading to some debt being paid down, and even saving being accrued. For months, due to the lock downs, house purchase itself was not possible, meaning that planned purchases were delayed. The government has also further fuelled demand with its Stamp Duty holiday, and with large areas of business closed down, the demand for capital was suspended, leading to falling interest rates. At the same time, central banks printed more money tokens and bought even more bonds, raising their prices and reducing their yields, which created a further puff into the inflating asset price bubbles over the last year.

There has been a further factor, which is that large numbers of people living in London, and other large cities have felt encouraged by COVID and by the lock downs to move into more rural areas. In part its a desire to obtain more living space, and, in part, a result of the shift to online home working. Someone who is able to sell a poky flat in London for £1 million, and instead buy a four bedroomed detached house and garden, for £250,000 somewhere in the sticks, is not likely to quibble over the odd ten or twenty thousand pounds, here or there, on the price, in the same way that someone local to the area would, and so that has an inevitable short-term upward effect on the prices of all these houses being bought in those areas. A similar thing can be seen with what has happened to house prices in Cornwall.

So far, the continuation of furlough and other payments means that the large expected rise in unemployment has not occurred. In fact, as I predicted, as economies open up, there has been a significant increase in the demand for labour, because the process involves a rapid change in pace of economic activity. But, it is a combined and uneven process. There is a shortage of 70,000 lorry drivers, 180,000 bar and restaurant workers and so on, but that does not mean that there will not still be large scale unemployment as the furlough scheme ends. The workers in demand will not necessarily meet with the supply of the right kinds of workers who are unemployed, they may be in the wrong place and so on. Furlough schemes encourage employers to retain workers, but employ them less efficiently, part-time and so on, but when they end, they will have an incentive to dismiss workers, and use a smaller number more extensively and intensively. Rising wages for those in employment can go hand in hand with rising unemployment, and deprivation for many, as they see inflation rapidly eroding their incomes.

More importantly, as firms do open up they will need to borrow on a large scale, at the same time that governments are borrowing on an astronomical scale to finance all of the unproductive consumption and handouts they have undertaken, and are committed to continue to undertake. When it comes to house prices, far more important than what happens to wages, is what happens to interest rates. Interest rates affect house prices in two different ways. Firstly, a rise in interest rates means that, mortgage rates rise. With rates very low, even a modest absolute increase can make a huge relative difference. For example, suppose someone has an interest only mortgage on a £200,000 house, at a rate of 1%. That is £2,000 a year in mortgage payments, or about £175 per month. If the mortgage rate rises to just 2%, this means that the annual mortgage payment also doubles to £4,000 a year, or around £350 per month. To compensate would require wages rising by £2,000 a year. Yet, those rates are historically low for mortgage rates. The historical typical rate is around 7%, which would mean the annual interest being £14,000, or around £1,175 per month. So, this kind of rise in mortgage rates acts as a big factor in determining demand, and so house prices.

But, interest rates affect house prices in a second, and more fundamental way, and that is as a result of the process of capitalisation. If interest rates rise, then the capitalised value of all revenues on assets falls. That means that asset prices fall, including land. If land prices fall, then a major factor in the price of houses also falls. Currently, land prices are about seven times as high as a proportion of house prices, as they are historically, as a result of this long-term asset price inflation that has been fuelled by central bank liquidity injections. Suppose the cost of building the average new house breaks down as follows Land £70,000, Labour and Materials £30,000, Profit £100,000. Builders will only build houses they know they can sell at the selling price of £200,000, so that they can make the average profit of £100,000. If they built more, then, to sell them, they would have to reduce the selling price to say £150,000, which would take away £50,000 of their profit, meaning their capital could have been better used elsewhere. However, if, as a result of rising interest rates, the capitalised value of assets falls, and the price of land falls to £10,000, the builders costs are significantly reduced. They can make the average £100,000 profit, now with a selling price of just £140,000, indeed, they can make the average rate of profit of 100%, with a selling price of just £80,000!

But, at a selling price of £140,000 the demand for new houses would increase substantially, so that builders would then have an incentive to build many more, thereby, increasing the supply, with a consequent knock on effect to all other house prices. Moreover, at £140,000 not only would builders make much more profit in total, because of their much increased production, but they would actually also make surplus profits, because their rate of profit would now be 250%, as against the average rate of profit of 100%. That, of itself, would encourage builders to build more, and others to enter the building industry so as to obtain these surplus profits, which would increase supply and push down house prices, thereby increasing demand, and output further. When pundits talk about the need to increase the supply of houses so as to reduce prices, they first need to look at the question of the need to reduce land prices, which requires a rise in interest rates, as well as breaking the feudalistic monopoly on land ownership, and monopolistic restrictions on supply imposed by measures such as The Green Belt.

The current pop in house prices is likely to be part of the closing scenes of the drama prior to the denouement. By all historical measurements UK house prices are in a huge and unsustainable bubble. Like all bubbles it must eventually burst. Historically, the average UK house price has been equal to around 2-3 times average earnings. Median average earnings are currently around £31,000, which means that the average house price should be around £90,000, whereas it is actually around £240,000. But, also, historically, homebuyers have, generally, been married couples, in their mid to late 20's, whereas, since the 1980's, and particularly in the last 20 years, as the bubble has inflated, every single adult has been encouraged to think they should have their own home, if not be a homebuyer.

In 1971, 79% of UK households were multi-occupancy, 70% were occupied by married couples. Only 19% were occupied by single people, with a further 2% occupied by lone parents. By 2011, those figures had changed drastically. Only 59% were multi-occupancy, the number of married couples had dropped to just 40% with a further 12% co-habiting, and another 7% other multi-occupants. By contrast, the number of homes occupied by one person had almost doubled to 33%, with 8% occupied by lone parents.

(Halifax)

So, the historic ratio gives an inflated figure for what current house prices should be. Its clearly more affordable for two people to be buying a house, particularly two people in their mid to late 20's, than it is for a single person still in their teens, or early twenties. Rather than 3 times average earnings, therefore, something like twice average earnings would be a more realistic figure, which would give an average house price today of around £60,000, or about a quarter of the actual current average house price. In fact, given that house prices have been so much inflated above their long-term average, for so long, a reversion to the mean would suggest that they would need to fall below that long-term average for some time, either as a result of a large drop, or as a result of a continual decline in real terms.

House Prices Falling

According to Nationwide, UK house prices have fallen on an annual basis for the first time since 2012.  In June they fell by 0.1% compared to a year earlier.  They fell by a whopping 1.4% between May and June, but that is not as much as the 1.7% fall recorded in May compared to the previous month.  As an average monthly fall of around 1.6% that is equal to a fall around 18% for a full year, if it continues in coming months.

But, there is every reason to think that the fall in the coming year will be greater than that.  In 1990, when a recession led to rising unemployment, at the same time that UK interest rates were also spiking higher, house prices went from a ridiculous bubble to a bust in which they fell by 40%, in a matter of months, and did not recover, even in nominal terms until 1996.

Today, as a result of the economic catastrophe caused by the government imposed lockdown, we have the worst economic slowdown in 300 years, putting the 1990's recession in the shade by a long way.  We have had economic output and new value creation deliberately scuppered by government action, and with huge additional costs imposed on top of the problem.  That in itself will cause inflation, as those higher costs, and reduced supply of commodities feeds through, as the ocean of liquidity pumped into circulation necessarily leads to rising prices.  Higher prices, will on their own lead to rising nominal interest rates to compensate, but other factors mean that interest rates are rising anway, even in real terms.

So, far the effects of the lockdown are not being really felt.  The furlough scheme means that many workers are remaining on company books so long as the government keeps paying their wages, but that scheme is being wound down from this month.  Many businesses facing have to pick up that tab have already started laying workers off.  Unemployment is then set to soar by several millions, and as in 1990, that sharply rising unemployment means that many people who were already struggling to pay mortgages, even with mortgage rates that have been massively manipulated by the state down to unsustainably low levels, will no longer be able to pay them.  For now, also, the government told banks and building societies to give homebuyers a mortgage holiday, so those difficulties are not yet feeding through.  As the mortgage interest holiday ends, and millions join the dole queue. there will be an sharp increase in repossessions, and of people seeking to sell houses they can no longer afford.

But, that is not at all.  The other consequence of all the borrowing resulting from the economic chaos caused by the lockdown is that interest rates are set to soar.  Companies profits have been smashed, even their incomes have disappeared in many cases, as their businesses have been closed by government diktat, or else have seen sharp declines in sales, whilst their costs have risen.  Many need to borrow just to pay their bills and stay afloat, meaning they have to pay whatever rate of interest is required to do so.  But, whatever shape the recovery comes in, as the lockdown ends, there will be a recovery.  People will again begin to spend money buying those things they need, and those things they have not been able to buy over the last few months.  Some firms will have to go from a standstill to increased production, others will have to take on additional workers to meet increased demand, as they try not to lose market share to competitors.  Both will have to borrow to do so.

Company borrowing is set to increase at a time when profits are being squeezed, and that means they have to finance a greater proportion of their capital from borrowing than from internal resources.  Those lower profits also means that less of those profits find their way into money markets, reducing the supply of loanable money-capital.  The consequence is that interest rates rise.  As millions of workers join the dole, their first response will also be to draw down any saving they might have, and to begin borrowing, often from high cost lenders, in order to survive.  Again, interest rates are pushed higher.

And, finally, the government has already borrowed massively and will have to borrow even more massively in coming months as it tries to save large strategic industries in aircraft production, car production, airports and so on, even before its commitments to spend on infrastructure, and the huge bills it will face to pay for the welfare benefits to millions of unemployed workers who have lost their jobs as a result of the government imposed lockdown.   This is borrowing on an unprecedented level, at a time when an economic slowdown has reduced productive capacity, and reduced the mass of profit available to cover either the borrowing or the capital accumulation.  This is almost a perfect storm for rising interest rates.

Rising interest rates not only mean a further problem for people already struggling to pay their mortgages.  Rising interest rates always result in a fall in asset prices, and a major component of house prices is the price of land as an asset.  But, the property built on the land has also become a speculative asset over the last 40 years, its price being bid up via speculation divorced from any real value represented by the house as a commodity.  In fact, houses as a commodity, should have fallen in value over the last 40 years, as with the value of other commodities, as a result of rapidly rising productivity.

Rising interest rates means falling asset prices, be it for land, shares, bonds and all the other assets like art, wine and so on that has been bid up into ridiculous speculative bubbles, reminiscent of the Tulipmania, over the last 40 years.  We are seeing the inevitable, but rapid reversal of the conditions that led to that asset price hyperinflation over the last 40 years, and house prices are set to crash spectacularly as part of it.

On every previous occasion, house prices when they have inflated into such bubbles have quickly reverted to the mean with a sudden bursting of the bubble.  That process began in 2008.  In the US, Ireland, Spain and elsewhere, house prices fell by around 60%.  In Britain they fell by 20%, but action by the state to artificially reduce mortgage rates, to pump huge amounts of liquidity into circulation, and to introduce measures to reflate property and other asset prices cut it short.   As the graph above indicates the reversion to the mean in Britain was never completed.  UK house prices need to fall by around 75% to bring about that mean reversion.  It may not be an actual 75% drop, as all of the liquidity pumped into circulation, now going into financing consumption, and so facilitating a rise in commodity price inflation, may mean that a 75% real terms drop manifests as only a 50-60% nominal terms drop, depending upon how high consumer price inflation moves.

How Should The Government Deal With Flooding

Once again we have properties being flooded.  Once again we have hand wringing, and calls for something to be done, including bailing out those who knowingly bought properties in flood risk areas.  What should the government do?

First of all, the government should ban development in flood plains, and alongside rivers and other locations with any significant risk of flooding.  Secondly, it should hold local authorities accountable for having given planning permission for developments in flood plains, and others areas of significant risk of flooding.  People who buy properties in flood plains and other such high risk areas, really should take responsibility for their own actions, and not expect others to bail them out, when their failure to consider risks comes back to bite them.  Someone who buys a house with a nice, pleasant, riverside location enjoys the private benefit of that, on a pleasant Summer day, when they look out on their surroundings, and that private benefit is not shared with the rest of us, such as the resident of a Council tower block in a grimy inner city location.  Yet, when that riverside property gets flooded, the occupant expects that the losses, instead of being privatised, as with the benefit, should instead be socialised, so that the tenant of the tower block must subsidise them via their taxes! 

This is rather like all of the people who bought shares in banks and other companies prior to 2008, and were happy to pocket the private benefits of the dividends and capital growth of those shares, but who, when those companies went bust, expected the rest of us to bail them out for their reckless speculation.  Its called moral hazard.  But, the state and the local state cannot totally escape their responsibility in that regard.  Someone who goes into a restaurant where hygiene standards are visibly below what they ought to be, should not be surprised if they get food poisoning, but we also expect the state to protect us against food producers poisoning us with the food they sell us, and we should likewise expect the state to impose minimum standards in relation to housing provision too.  All too often, local authorities grant planning permission for developments that are sub-standard, both because they are in flood risk areas, because they are on unsuitable land, liable to subsidence, let alone that they allow houses to be built that are too small, and crowded on to insufficient land areas.  They do so in order to benefit from the money they get from developers in Section 106 Agreements and so on.

Thirdly, the government should stop wasting money on flood defences.  Billions of pounds is spent on flood defences that make the problem of flooding overall worse.  At best, they protect some properties, but only at the expense of transferring the problem to other properties up and downstream that otherwise would not have been affected.  Often the flood defences do not even really protect the properties they are designed to protect.  They limit the extent to which rivers may break their banks, but they then result in water going into the subsoil, which finds its way into aquifers, as well as into drainage channels, which then can erupt as ground water, or come up inside properties via their own drainage and sewers.  It acts to create underground streams that erode the subsoil and structure, so that a longer term problem with subsidence is created.

But, more immediately, flood protection simply acts like a big game of Whack-a-Mole, pushing water from one place to another.  It prevents water from being dissipated into natural flood plains, which then acts as further encouragement for builders to build on them.  The more construction takes place on these flood plains so that they become concreted over, the more even rainfall in to these areas, instead of being slowed down, by trees and vegetation, and being absorbed into the water table, is instead fed out, rapidly, into drainage channels that, in turn, feed quickly into other water courses and rivers, so that water is quickly dumped into a small number of locations that then overcome the river banks, causing further flooding.  By changing the natural absorption of the water into flood plains, the natural build up of silt is also disturbed, which again results in flooding, as channels become clogged.

Instead of wasting billions on flood prevention schemes that do not work, the government should instead use the money to build large numbers of council houses, in areas where no such risk exists.  Then, again, instead of bailing out property owners, whose properties are bound to be flooded again and again, it should offer them alternative accommodation in a council house.  It would be up to the property owner whether or not to accept that offer, but, if they refuse, they should not expect that the rest of us should bail them out for their own private choices.  The consequence would then be reflected in the market prices of properties in those locations, and in insurance premiums.

Over time, the property prices in these high risk areas should fall to very low levels reflecting the risk they present.  In that way, it becomes possible for such properties to be bought up by the government, and the land returned to being a flood plain, which is the best flood protection there can be for everyone else.

Is Wonga Today's Northern Rock?

Wonga looks like it has itself run out of wonga, and is about to go bust. It will probably not be the last of the usurious lenders to go bust, as they face a double whammy, as with the financial crisis of 2008, whereby they face increased borrowing costs of their own, and at the same time rising defaults, or what amounts to a similar thing, a rising level of compensation claims levied against them by ambulance chasing solicitors, and specialist claims companies, acting on behalf of borrowers. The demise of Wonga is just part of a set of conditions that have considerable similarities to the collapse of Northern Rock, the onset of the credit crunch, and the outbreak of the financial meltdown of 2008. For example, in both the US and UK, there has been a sharp slow down in the sales of houses, partly as a reflection of the fact that house prices are grotesquely inflated, and partly as a consequence that interest conditions for mortgages are starting to tighten. 

In the UK, house prices in the most expensive parts of London are already down by around 25-30%, and demand for houses across the country has stagnated. Many estate agents in London have seen their share prices tank, as the housing market stagnates and contracts. And, now Countrywide, one of the largest chains of estate agents in Britain, has been forced to raise cash. 

The irony with Wonga is that the ambulance chasing solicitors and specialist claims companies that are now going after it, as their feeding frenzy for PPI claims draws to an end, is part of that same money for nothing, gambling culture that fed the speculative gains in financial assets and property over the last thirty years, which astronomically inflated house prices, along with stock and bond prices, and which encouraged reckless lending and borrowing practices, based on the mirage of rising asset prices as collateral, and simultaneously fuelling that very illusory rise in those asset prices. 

Wonga, like Northern Rock, and like many of the financial institutions that went bust in 2008, does not obtain funds from savers. A small amount of its capital comes from its own shareholders, and bondholders, but the majority comes from borrowing in the money market. As in 2007/8, as interest rates rise, the cost of that borrowing rises. That together with the fact that it is now facing these rising compensation claims has thrown it into a loss. The question will be how many other financial institutions that it has itself borrowed from, might be taken down with it? Indeed, as other usurious lenders go the same way, what effect will that have on other financial institutions? 

The problems faced by Countrywide illustrate the stagnation in the housing market. According to Rightmove, asking prices for houses fell by 2.3% in August. US existing home sales have fallen for  – four months in a row. US new home sales are also faltering, again hit by astronomical prices, and steadily rising interest rates. 

In the US house prices fell by up to 60% in 2008, before the Federal Reserve slashed its official interest rates, and Obama's government introduced the Troubled Assets Rescue Programme (TARP) which enabled it to bail out the banks, and mortgages, as homeowners began to simply walk away from properties whose price had fallen to a fraction of what they owed on it. US house prices, however, fell more, than in Britain, where they dropped by around 20% in 2008, before the slashing of interest rates, and introduction of various government scams such as Help To Buy, and tax subsidies for Buy To Let landlords pushed them back up again. US house prices probably need to fall by around 40% to get back to long-term sustainable levels, whereas UK house prices need to fall by around 75-80% to get to that level. In Europe, house prices in Spain, Portugal, Ireland and Greece, as in the US, fell by around 60%. Most of them have not recovered their previous levels, but they too probably need still to fall by around 30% to get to a long term sustainable level. 

The astronomical prices of property are just another manifestation of the hyperinflation of all assets, that has resulted from speculation, initially driven by low and falling interest rates in the late 1980's, and 90's, further encouraged by the scrapping of credit controls and financial regulations by Thatcher and Reagan, and then further hyperinflated, each time they threatened to crash by global central banks, keen to protect the fictitious wealth of the top 0.01%. On the basis of Robert Schiller's CASE index of cyclically adjusted price earnings, the US Dow Jones Index is as overpriced today as it was in 2007, 2000, and 1929. But, the Dow is not unusual. That level of overpricing is common to all global stock markets, and if anything bond markets are even more overvalued than stock markets, having been given protection from price falls by QE. 

The only thing that differs today from 2007/8 is that the level of private debt is much, greater, asset prices have been inflated to an even greater degree, official interest rates have already been reduced to near zero – in 2007 they were around 5.25% for the Fed Funds Rate, and the US Federal Reserve has inflated its balance sheet by about $4 trillion as a result of QE. In other words, the scope for remedial action has been severely reduced, whilst the scale of the bubbles, and of the debt likely to default has risen substantially. The Dow Jones peaked in October 2007, at just over 14,000. Today, the Dow stands at over 26,000, nearly double its level at the height of the previous bubble. 

In Britain, the tax subsidies given to buy to let landlords are being removed, so that many of them are now making losses, and those losses will increase as mortgage rates continue to rise, whilst the existing tax subsidies are removed. The number of buy to let mortgages is falling as more landlords begin to sell properties than are taking out mortgages for new additional lets. The only thing keeping them holding on to rental properties, as losses rise, is the prospect of capital gains, from rising property prices, but as house prices start to sink, that incentive becomes a disincentive. When they come to sell, these landlords will all rush for the door at the same time, and with housing demand already stagnant, the result will be a sharp crash in house prices. 

Its only massive levels of QE, and intensive state intervention to prop up asset prices, even at the expense of doing massive damage to the real economy, that has prevented that from happening already. 

Harold Wilson opposed the introduction of Premium Bonds, because he saw it as encouraging gambling rather than real wealth creation. In the 1980's, Thatcher took the exact opposite view. With the Right To Buy programme, offering massive discounts up to 60%, she encouraged the view that it was possible to get rich on the back of gambling and speculation on asset prices. That view was reinforced with the privatisation programme that sold off nationalised assets at prices that guaranteed that speculators who bought the shares would make a sizeable capital gain, often within a matter of weeks, or even days. The gambling culture was further encouraged when credit controls were scrapped, and financial regulations abolished in the late 1980's, by Thatcher in the UK and Reagan in the US. It set in place, the massive asset price bubbles of the 1980's and 90's, and each time they burst, such as in 1987, 1994, 2000, and 2008, the state and central bank was there to blow them up again conveying the message that it was safe to gamble on asset prices rising, because whenever they fell the state would be there to reflate them. 

This gambling mentality and culture was also encouraged by John Major who introduced the National Lottery, and by Tony Blair who not only extended it, but who also promoted the idea of super casinos, and extension of gambling, now supplemented by a huge online gambling industry, often going side by side with the provision of loans to susceptible individuals to engage in such gambling, by the usurious lenders like Wonga. In the 1970's and 80's, we started to see legal action against the big tobacco companies by people who had suffered ill health from smoking. Today, gambling is likewise recognised as an addiction, just as smoking was in the past. The various specialist claims companies, facing the drying up of PPI claims have an obvious new target, not just in the payday lenders, but also in all those betting companies, slots providers, bingo companies etc. that have led at least tens of thousands into a serious gambling addiction, resulting in serious damage to their finances, their health and other aspects of their lives. 

It is reminiscent of the last days of a decadent Roman Empire, in which various forms of debauchery all contend to bring about its demise.