Tuesday, August 28, 2012
The rising cost of housing
Today's Independent sets out a compelling and insightful case as to why buying a home is so expensive and why prices continue to rise beyond the means of most of those seeking to get on the housing ladder.
They say that an average three-bed house cost £2,000 in 1952. However, in 2012 it costs £162,000. That amounts to an inflation rate of 8,000%. Putting that into perspective, the average cost of a loaf of bread rose from 6p in 1952 to £1.25 in 2012, an inflation rate of 1,983%. An average pint of milk was 4p in 1952 and is now 49p, an inflation rate of 1,125%. A dozen eggs cost on average 8p sixty years ago and is now £1.68, a 2,000% rise.
Campaign group, Positive Money, believe that they have the answer. they say that it is the debt-based nature of our economy which has caused such huge increases. Their theory also explains why the health of the economy is so closely linked with the housing market:
According to Positive Money, who draw on the work of economists such as Steve Keen and the head of the FSA, Adair Turner, it is the banks’ ability to create digital money when they make new loans that has driven the rise in house prices and fuelled the most recent and catastrophic housing bubble. This is because most of the banks’ lending – and hence most newly created money – goes into the housing market in the form of mortgage lending.
This increased money supply in the housing market creates an increase in demand for houses. The supply of houses, as we already know, can’t match this rising demand so prices are pushed up. The bubble is further inflated by speculators buying property (and borrowing from the banks to do so) because they know the prices will go up, thus creating even more demand and a vicious circle of price rises and increased borrowing until the inevitable bust.
The founder of Positive Money, Ben Dyson, puts it like this: “In effect the banks, by being able to create money and pump it into these property bubbles have been able to double the cost of a place to live for the average person.”
Although there has not yet been an independent academic study in the UK to test this theory the figures seem to speak for themselves:
Between 1995 and 2007 the UK population increased by 5%, the housing stock increased by 10% and house prices increased by 350%, meanwhile mortgage lending by banks increased by 630%. Which of these figures is more likely to have led to a 350% rise in house prices: a 5% rise in population growth which is matched by an increase in supply of housing; or an unprecedented increase in mortgage lending from the banks?
As ever though it does not have to be that way. It was certainly not the case before 1975 when regulatory changes allowed the banks to start pouring money into the housing market. This was coupled with government tax breaks effectively subsidising home ownership:
According to head of the FSA, Adair Turner, over 75% of banks’ lending (and hence money creation) goes into property. If we could somehow reverse this trend and have the majority of lending going to businesses where it would lead to real growth, real production and real job creation, instead of into decaying assets that don’t produce anything of real value, that would perhaps be the beginning of the end for our boom and bust economy.
Somehow, I do not think that it is that straightforward. There are too many vested interests in this mechanism, whilst from the Treasury's point of view a means of increasing money supply quickly and getting the extra cash out into markets is one they will not wish to relinquish easily.
One of the consequences of breaking this cycle, is the severe impact on the economy. Part of the reason for the current downturn lies in the non-availability of money for house purchase and the difficult terms that banks want to impose, including large deposits, before somebody can borrow to buy a home.
The withdrawal symptoms associated with closing down this merry-go-round would be painful and deeply felt, impacting on jobs and the country's overall wealth. It would not be an easy option for any politician.
They say that an average three-bed house cost £2,000 in 1952. However, in 2012 it costs £162,000. That amounts to an inflation rate of 8,000%. Putting that into perspective, the average cost of a loaf of bread rose from 6p in 1952 to £1.25 in 2012, an inflation rate of 1,983%. An average pint of milk was 4p in 1952 and is now 49p, an inflation rate of 1,125%. A dozen eggs cost on average 8p sixty years ago and is now £1.68, a 2,000% rise.
Campaign group, Positive Money, believe that they have the answer. they say that it is the debt-based nature of our economy which has caused such huge increases. Their theory also explains why the health of the economy is so closely linked with the housing market:
According to Positive Money, who draw on the work of economists such as Steve Keen and the head of the FSA, Adair Turner, it is the banks’ ability to create digital money when they make new loans that has driven the rise in house prices and fuelled the most recent and catastrophic housing bubble. This is because most of the banks’ lending – and hence most newly created money – goes into the housing market in the form of mortgage lending.
This increased money supply in the housing market creates an increase in demand for houses. The supply of houses, as we already know, can’t match this rising demand so prices are pushed up. The bubble is further inflated by speculators buying property (and borrowing from the banks to do so) because they know the prices will go up, thus creating even more demand and a vicious circle of price rises and increased borrowing until the inevitable bust.
The founder of Positive Money, Ben Dyson, puts it like this: “In effect the banks, by being able to create money and pump it into these property bubbles have been able to double the cost of a place to live for the average person.”
Although there has not yet been an independent academic study in the UK to test this theory the figures seem to speak for themselves:
Between 1995 and 2007 the UK population increased by 5%, the housing stock increased by 10% and house prices increased by 350%, meanwhile mortgage lending by banks increased by 630%. Which of these figures is more likely to have led to a 350% rise in house prices: a 5% rise in population growth which is matched by an increase in supply of housing; or an unprecedented increase in mortgage lending from the banks?
As ever though it does not have to be that way. It was certainly not the case before 1975 when regulatory changes allowed the banks to start pouring money into the housing market. This was coupled with government tax breaks effectively subsidising home ownership:
According to head of the FSA, Adair Turner, over 75% of banks’ lending (and hence money creation) goes into property. If we could somehow reverse this trend and have the majority of lending going to businesses where it would lead to real growth, real production and real job creation, instead of into decaying assets that don’t produce anything of real value, that would perhaps be the beginning of the end for our boom and bust economy.
Somehow, I do not think that it is that straightforward. There are too many vested interests in this mechanism, whilst from the Treasury's point of view a means of increasing money supply quickly and getting the extra cash out into markets is one they will not wish to relinquish easily.
One of the consequences of breaking this cycle, is the severe impact on the economy. Part of the reason for the current downturn lies in the non-availability of money for house purchase and the difficult terms that banks want to impose, including large deposits, before somebody can borrow to buy a home.
The withdrawal symptoms associated with closing down this merry-go-round would be painful and deeply felt, impacting on jobs and the country's overall wealth. It would not be an easy option for any politician.
