UK housing market – unsustainable asset bubble?

[Tony Gosling]

The housing market – unsustainable asset bubble or ladder to prosperity?

https://www.positivemoney.org/2013/10/the-housing-market-unsustainable-asset-bubble-or-ladder-to-prosperity/
Written by 
<https://www.positivemoney.org/author/franpositivemoney-org-uk/>Fran 
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 don’t have 
that in our country, we are happy to rent.’ After 
mumblings from the audience the host will usually 
say something like, ‘yes, we don’t 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 didn’t 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 it’s 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.

Emacs!



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 
don’t own their own home to those that do. Even 
those with housing don’t 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 
doesn’t borrow money from savers ­ banks actually 
<https://www.positivemoney.org/how-money-works/how-banks-create-money/>create 
new money with every loan they make. Those 
numbers in your account don’t represent a pile of 
money in the bank; they’re 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 don’t 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 
scheme
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 government’s 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 can’t afford in the long term. Those prices will fall at some point.”

“I think it’s artificial and can’t be sustained. 
People’s incomes are falling in real terms, and 
have done so for five years. Now there’s been 
this sudden, go on let’s just go made because everyone says its recovery.

“At a fundamental level it’s quite dangerous 
because household debt is still 153 per cent of GDP.

“There’s nothing seriously underpinning this 
recovery, and that’s why it’s Alice in Wongaland, 
the confidence fairy is out there.”




An Alternative

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 don’t think so. We 
don’t think we can rely on banks with short term 
profit motives that clearly don’t 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 
can’t 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. It’s not that we can’t afford these 
things; it’s that we haven’t got an economy that works.

We believe that it’s 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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