I am on record as not being a great fan of central bank independence. That is because I am not keen on fundamental decision making being devolved to unelected and unaccountable authorities.
I have also argued that Bank of England independence is, in any event, a charade because the Bank of England Act 1998 allows a Chancellor to overrule it if they wish. And the Act could, of course, be changed if a government so desired.
But that said William Hague's attack on the Bank, the essence of which was that unless they increased rates to keep savers happy they shoukd lose their powers, provided some clear evidence on the folly of politicians when it comes to the economy.
Shelter suggested in 2014 that maybe one in eleven households could be tipped into mortgage default by a rate rise of 1%. I can't see why that has changed now.
And a rate rise at this precise moment of profound economic uncertainty when unemployment is at risk if rising, inflationary risk is real and even Tesco think that this may present many households with horrible decisions on what they can and cannot afford, would be economic madness. But that rate rise is what Hague wants to keep savers (or the wealthiest part of society) happy.
It takes remarkable incompetence to suggest such an idea at this precise moment. Hague clearly has that scale of economic incompetence.
Thankfully the Bank of England has indicated it will not be following his advice.
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But the price of housing needs to fall, and it won’t without the cost of borrowing rising. I have some sympathy with Hague’s view on this. The era of unnaturally low interest rates has locked us into a damaging long term spiral from which it will be painful to emerge. It just feels like another process by which the banks are being featherbedded.
Increasing supply is the only way to reduce house prices
In London there is effectively an infinite demand for housing.
There are more fundamental reasons for house prices:
– the money supply expansion
– large mal-distributive subsidies to the South (eg transport spending per head in South is far higher than in the North) that reinforce the advantages for businesses locating in London, driving the demand (necessity) to move to London for decent paying / interesting work.
– etc.
Positive Money talk about these issues.
There is not an infinite demand for housing
And nor is it all down to monetary expansion
Much of it is because prices are low in the opinion of international speculators – and they just got lower
And there is a shortage of supply where real people need it
It’s a mistake to think in just one way
Other things that would reduce house prices include:
Restricting access to mortgage credit (coming in Basel 3?)
Increasing stamp duty (impacting top end prices)
Changes to rules on foreign ownership, increasing taxes, restrictions.
Increasing taxes for second houses.
Reducing tax relief on mortgage interest for BTL.
Reducing housing benefit.
The one in eleven households that could be tipped into mortgage default by a rate rise of 1% made a poor choice to buy a house in the midst of a massive bubble at a time of historically low interest rates. I don’t want to see anyone lose their home but keeping prices at current ridiculous highs means that many more cannot hope to own their own home and are left to the whims of a poorly regulated private rented sector.
If you lose your home because payments increase then you still have the same means to pay rent up to the level of the previous mortgage. When prices fall you can buy at a new lower level, along with the millions currently unable to, and have a genuinely affordable mortgage rather than one falsely so.
There is no way that extra supply can be provided to bring down prices except in the very long run. The quick fix is LVT plus rent controls.
And how will you manage the negative equity, loss of labour mobility and failed banks?
With great difficulty I suspect but the current ponzi is no solution either. Spend on mortgages and rents are killing disposable income and the real economy with it.
One possible solution would be to restock social housing by taking on the houses and flats that trapped in negative equity or putting banks at risk. Of course this won’t happen but the, sadly, more likely scenario is an external shock leading to the mother of all house prices crashes.
I accept that
So the answer is not to tax more those who already are at heir limits
That’s lunacy, with respect to LVT fans, who would drive people into extreme poverty, never to recover
Negative equity will have to be dealt with at some stage anyway if we are ever going to fix the housing market. It’s recession and people losing their jobs which cause the problem. The banks will have to allow people to move with their current liability or else they will surely crash. But the banking system may crash anyway. Some sort of debt jubilee is essential.
And how can we do a Jubilee? Fairly?
Danny Dorling’s ‘All That Is Solid’ is very good on the issue of what to do about housing. I suspect that the negative equity trap is affecting more households than we are currently aware of and that’s something that will have to be dealt with sooner or later. Writing down some of the debt but increasing interest rates might be an option. But then we have to tackle the reality of how money is currently created.
The government creates money
Banks operate under its licence
You say that unceasing the supply is ‘the only way’ to reduce house costs but isn’t it a mistake to think in just one way?
Semantic nit picking will get you so far….
Increasing supply is certainly needed (including massive amounts of good quality and well-planned council housing – not likely in the present political climate obviously/admittedly).
However, there are some other, additional (if equally unlikely in the present political climate) possibilities:
Direct government control of mortgage lending (including minimum deposit sizes).
Direct government control of house prices
And as you have mentioned, increasing council tax at the top end (why did the Labour government 1997-2010 never do this….? ).
Possibly more imaginative use of stamp duty.
Debt Jubilee: As I’m sure you are aware, Steve Keen’s idea on this was to give “everyone” the same amount, where “everyone” included those without debt, as well as those with debt.Those without debt (or with debt less than the amount handed out) would be free to spend it how they liked, which would obviously be a (possibly inflationary) stimulus. I think when he first proposed this, the world was still reeling from the initial effects of the GFC, and inflation seemed to be the least of anyone’s problems. Perhaps it’s not the ideal solution now, although perhaps something along those lines could be considered. Something I would very much like to see would be a student debt jubilee.
Clearly the Tories are not going to do anything like this, and I can’t really see a revived LibDem party (perhaps in some new coalition) going for it either. Ditto Blairite Labour. Whether Corbynite (or similar) Labour would or could do it (in coalition with The Green Party…?), remains to be seen.
A truly reforming incoming government could justifiably defend the interventionist/dirigist nature of such policies as emergency measures, since by any standard we have serious problems in our housing situation, and they aren’t getting better with time.
London housing would seem to be a very special case, with a need for very special (interventionist) measures. Again, not in the present political climate, unfortunately.
I agree with direct interventions
Steve’s plan is just too much loose money floating to be viable
Richard
What is your view on inflation? Should it be allowed to rise? If so, how high? Do you agree with the Tesco view that 3% would be too high?
In broad terms I am relaxed about inflation IF there is protection for the lowest earners
But as the government is intent on harming them already Tesco’s concern is appropriate and 3% is too high
I’m sorry for being g confused, but I do’t have your knowledge of Economics. I did watch you being interviewed by Andrew Neil last year and you talked about wanting to create “a little bit of inflation”. Can you tell me why that was good but this if Latin would be bad. How much inflation did you have in mind then?
There is inflation and inflation….largely due to differing causes
This one leaves those on low incomes vey vulnerable because we have a government hitting the most in need in society hard
In principle I have no problem with 3%
But not with a government intent on harming those in need
Look at it from a massively tribal perspective, like Hague does. Tory voters are less vulnerable to higher mortgage costs because they have better income/spending balances for a variety of reasons. A mortgage crisis will absorb some of the blame for Brexit chaos, allowing Tories to say that the economic mess is not the fault of their Brexit, it is the fault of the sub-prime poor over-reaching themselves — it would have happened anyway, they’ll say. And every forfeited home becomes a new cheap investment opportunity for buy-to-rent. Obviously the right wing press would lap up a chance to deflect blame away from their Brexit baby. A mortgage crisis would be financially beneficial, and politically expedient for Tory Brexiters, and never mind the rest of us. Hague as a commentator is unchanged from Hague the politician — 100% focussed on his own tribe.
Not usually one to leave comments, but for a fan of taxation this seems an odd response. Surely taxation is the other answer. Tax of say 0.5% of purchase price paid for every year of ownership (commutable to 1% at the time of sale perhaps) would I suspect put massive downward pressure on price and the rate of tax could be varied until the desired effect was achieved. I realise there may be many other adverse consequences of such a tax, but surely increases supply is not the only way.
Much easier to simply increase the top rates of council tax
Re: council tax, what about regional inequality? The people of Middlesborough need more services than those in Kensington but are less able to pay. I am not sure what the solution is but I think regional inequality is pretty much as bad as income inequality. London sucks the talent out of the regions and inequality keeps on growing. The point above about infrastructure investment is one way to address this. Moving government out of London could also help.
I entirely accept this
It is one reason why fiscal devolution is such a bad idea
What do you expect from Hague. As an advert for a competent politician he’s dire. But then again, there aren’t many that can say anything competent on economics anyway (think Chris Leslie). Personally, I don’t think most of them care – though from what we hear Hammond does. Ideology rules the roost. Evidence is clearly the domain of “experts” and they can be ignored.
Incidentally, I see from your Tweet sidebar that you have something about ACoBA. As I don’t use Twitter could you put the link on here?
Bizarrely it seems Hammond gets it – but only as electoral policy
This is the link – Hislop quite amusing http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/public-administration-and-constitutional-affairs-committee/the-role-and-effectiveness-of-acoba-and-the-independent-adviser-on-ministers-interests/oral/40972.html
One paragraph confused me where Haugue states that low interest rate does not promote spending but rather more saving to get the equivalent return. Is there much basis to this claim?
None that I know of
I think we ‘dodged a bullet’ with Hague’s failure to hold high office and proceed to leadership, decades ago.
A bullet, perhaps, or maybe the dinosaur-killer asteroid of astronomical incompetence that is crashing into us today.
I would never have accused Osborne of incompetence: he was the worst Chancellor we’ve ever had, by several different measures; but he had an agenda and he pursued it with considerable success.
Considerable, but not commendable success: Osborne’s agenda was repellent and entirely contrary to the public good.
He was politically inept: but many Chancellors have been appointed because of that, and not despite it – Number 11 is a great deal of power and it is best wielded by a creature of the Prime Minister’s making, doomed without his master’s protection.
Where, then, does that leave us now?
I am horrified to discover that mere ineptitude is more destructive than the worst of Osborne, and I see no-one in the cabinet with any hint of doing any better. Hague isn’t even the stupidest of them.
As I’ve said before, I do not buy into the view that that house price inflation is just driven by a lack of supply – there are other dynamics within the market that have an inflationary effect:
1) The supply of credit money (which as always seems infinite until of course it contracts when we don’t expect it to for some reason).
2) The fact that a house as well as being a good (something we consume) is also a financial asset a store of wealth/ an investment. When we produce a lot of a good the price tends to go down; even though assets might be plentiful, there is a tendency for asset prices to go up as returns/further borrowing is realised.
3) Purchases from overseas persons as well as the house prices themselves do have a knock on effect on even more moderate housing in the market.
4) The hidden hands in the market itself – estate agents who make those markets.
5) The cost of remdiating brownfield sites. The Government is set to get rid of all its grants to reduce the cost passed onto to the buyer by 2017 after a gradual decline.
I’d say that what we are seeing is a failure of the market to price housing in order to make it accessible. This is also a barrier to the consumer. Or the asset value of housing is too powerful in the price making mechanism.
So I’m not so sure that what we are seeing is driven solely by lack of supply which is a very orthodox view (used I feel to justify destroying the countrty side with high value executive homes and the like).
I come to this blog because of the heterodox ideas about the economy, money and everything else and I think that the housing market is worthy of the heterodox approach too because otherewise we are oversimplifying the problem and missing out on possible policy opportunities that might make a positive impact.
I mean look at the Help to Buy policy to be implemented by the HCA. From March 2018 grants to develop affordable housing (council/housing association) are ending and instead money will be made available instead to house builders/buyers in the private sector . Prima facie this is good news for buyers but the concern is that this money will just contribute to HP inflation (not to mention that the Council housing homeless lists for lots of genuine reasons are growing bigger and as a result development of genuine affordable housing is slowing down).