UK housing market unsustainable asset bubble?
tony at cultureshop.org.uk
Thu Oct 3 18:50:34 BST 2013
The housing market unsustainable asset bubble or ladder to prosperity?
Boait on . Posted in <https://www.positivemoney.org/category/housing/>Housing
Every time I attend to a lecture on house prices,
there is always a question in the Q&A from a
continental European (usually German or Dutch).
They ask, What is the obsession that British
people have with buying houses? We dont have
that in our country, we are happy to rent. After
mumblings from the audience the host will usually
say something like, yes, we dont really know either.
But the question whether you should rent or buy,
forces another question what is a house for
after all? Is it a home to live in, something
everyone needs? Or is it really an asset that
everyone should aspire to own? You could say it
can be both but is that even possible?
One consequence of everyone scrambling to get on
the housing ladder has been house prices have
been rising much faster than wages, which means
that houses become less and less affordable.
Anyone who didnt already own a house before the
bubble started growing ends up giving up more and
more of their salary simply to pay for a place to
live. And its not just house buyers who are
affected: pretty soon rents go up too, including in social housing.
This increase in prices led to a massive increase
in the amount of money that first time buyers
spent on mortgage repayments. For example, while
in 1996 the amount of take home salary that a
first time buyer on an average salary buying an
average house would spend on their mortgage was
17.5%, by 2008 this had risen to 49.3%. In London
the figures are even more shocking, rising from
22.2% of take home pay spent on their mortgage in 1997 to 66.6% in 2008.
High house prices also act as a mechanism for
transferring wealth from the young to the old,
from the poor to the rich, and from those that
dont own their own home to those that do. Even
those with housing dont benefit massively from
higher house prices after all, we all need
somewhere to live, and anyone selling their home
will find that on average other house prices will
have risen by the same amount, leaving them no
better off. In reality, only the banks and those
with many properties benefit from high house
prices: high prices mean that people will have to
take out larger mortgages for longer periods of
time, which means more money in interest payments for the banks.
So why are house prices so high?
Many of us were told that house prices are so
high because there are too many people and not
enough houses. The reality is that house prices
were massively pushed up by the hundreds of
billions of pounds of new money that banks
created in the years before the financial crisis.
Limited housing stock may have caused some
shortage in areas, and there are many other
complications too. But a fundamental driver that
caused a 300% house price increase in the ten
years up to the start of the financial crisis was
mortgage lending. During the period in question
the amount of money banks created through
mortgage lending was collectively £417,000,000,000.
So you might ask where on earth did that £417
billion come from in order to inflate these house
prices out of reach from ordinary people? Well,
when a new mortgage loan is made, the bank
doesnt borrow money from savers banks actually
new money with every loan they make. Those
numbers in your account dont represent a pile of
money in the bank; theyre just numbers,
accounting entries, in the computer system of your bank.
Paul Sheard, the Head of Global Economics and
Research, at Standard and PoorsFinancial Sevices Company wrote:
Banks lend by simultaneously creating a loan
asset and a deposit liability on their balance
sheet. That is why it is called credit creation
credit is created literally out of thin air (or
with the stroke of a keyboard).
As the loan is repaid, the money disappears,
whilst the banks keep the interest as
profit. And since a loan on a house is secured
by the house itself, and a substantial profit can
be made on the interest on the loan, it is a win-win situation for the bank.
But is it a win-win situation for anyone else?
Who benefitted from the banks creating £417 bn to
lend to mortgages? The banks yes, and people that
decided to become landlords of multiple homes,
yes. But in reality all that debt into a non
productive asset bubble really just laid the
foundations for the 2007 financial crises.
What would have happened if instead that £417
billion was used for something more useful, like
green electricity, building sustainable homes, or
retrofitting our housing stock to make them more
energy efficient? House prices would have stayed
lower. Yes, less people would own multiple homes,
and yes less people would own homes at all. But
we would all have more disposable income because
rent and mortgage repayments would be lower,
there would be lower household debt, and we would be all be better off.
So why are the government trying to help people buy their houses again?
The government has launched a scheme,
Help-to-Buy, offering financial support to help
people buy homes. The scheme has meant that first
time buyers, that otherwise would not have been
able to, have been able to get on the housing
ladder. The appeal of living in a home you own is
very understandable. But do the short term
benefits of more home owners outweigh the
problems caused by avoiding a long term strategy
to create a sustainable economy? We dont think
so. For the reasons outlined above, we think it
is not a good idea to direct government spending
into mortgages, and we are not alone.
On 18th September, Adair Turner, the former Chair
of the Financial Services Authority spoke about
the scheme on Newsnight. He stated:
I certainly have worries about the help to buy
I think we may be overdoing the stimulus
to the housing market and we may come to regret
that. I feel that we have a whacking great
hangover after a debt-fuelled housing boom and
our policy seems to focus on a bit of the hair-of-the-dog that bit us
He is not the only commentator warning, Ann
Pettifor is an economist who predicted the crisis
in 2006 (The Coming First World Debt Crisis).
She spoke about this subject on Radio 4 on August
15th, warning that the governments Help to Buy
scheme, under which people can take out
government-backed mortgages to buy new homes, will create another bubble.
We are making people think they can buy another
property and taking out mortgages which they
simply cant afford in the long term. Those prices will fall at some point.
I think its artificial and cant be sustained.
Peoples incomes are falling in real terms, and
have done so for five years. Now theres been
this sudden, go on lets just go made because everyone says its recovery.
At a fundamental level its quite dangerous
because household debt is still 153 per cent of GDP.
Theres nothing seriously underpinning this
recovery, and thats why its Alice in Wongaland,
the confidence fairy is out there.
Can an economy run on the feeling of being
wealthy, the so-called wealth effect, that
arises when houses price are increasing? Clearly,
it is not sustainable in the long run. We need
wages to catch up with rent and mortgage
repayments, and the only way to achieve that is
to get money to create jobs rather than to inflate house prices.
But will banks ever want to direct their lending
activities into productive industries such as
sustainable housing and green infrastructure,
rather than asset bubbles? We dont think so. We
dont think we can rely on banks with short term
profit motives that clearly dont fulfil the
wider needs of the economy. Therefore we need to
change the rules of the game. If we have people
that want to work and jobs that need doing, why
cant we create a system that achieves these things?
Positive Money is advocating that the Bank of
England create new money that can enter the
economy via the government. This could be done in
three ways: increase government spending; cut
taxes; or make direct payments to citizens.
Although each of the options has its own appeal,
we think that because the UK needs to reduce
unemployment, the biggest benefit to society
would be to increase government spending to
create new jobs. Opportunities to create jobs and
build a more sustainable economy lie in green
energy infrastructure, building sustainable and
affordable housing, and developing better public
transport. Its not that we cant afford these
things; its that we havent got an economy that works.
We believe that its time to radically rethink
how the system works and we have a blueprint for an alternative.
Please find out more at www.positivemoney.org
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