Housing really is central to everything

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The following blog has been reproduced, with permission, from the CommonSpace website. Common Space is run by Common Weal, which is a pro-independence think thank in Scotland, for whom I have a lot of respect. Their daily email is one of the pleasures of my late afternoon: whether you’re interested in Scotland or not I recommend it.  The blog is by their head of policy, Ben Wray.  

THERE’S something different about the mood after the Grenfell Tower tragedy. There’s a sense that this is deeper than one tower, one company, one council, or even one prime minister – this is about everything. 

It feels like the whole fabric of modern British society has been exposed by this, to the extent that focusing on calling for Theresa May’s resignation feels like it is somehow majorly downplaying the depth of this crisis.

Getting one Tory to resign only to be replaced by another seems almost disrespectful as any sort of answer.

This feeling is likely to be derived from a deep truth: housing really is central to everything. We can’t understand our society, our economy, our geography, our psychology, what unites us, what divides us, family, debt, work, and wages, without understanding the role of the home in our lives.

Understanding how housing and the land it sits on operates in the modern economy is the essential starting point to getting to grips with the UK’s housing system. If we don’t understand the economic drivers of the housing system, it’s impossible to get to grips with the terms we have heard frequently in the aftermath of Grenfell, like gentrification, regeneration, land banking and so on.

In Rethinking the Economics of Land and Housing, Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane have produced a superb heterodox economics textbook that should be a vital resource on the bookshelf of all of those interested in getting to grips with housing in the UK.

It is a historical study, a theoretical critique and a policy agenda all in one, providing a systemic analysis of the central role of land in the UK’s hyper-financialised economic model.

The first thing to understand is that land is not like other forms of capital in the economy: it has unique qualities which have to be understood. Land is finite – there is a limited supply of it – and it is permanent – it does not depreciate.

This means it is a uniquely desirable type of capital; as long as populations continue to rise it is likely to rise in value too. As Mark Twain said over a century ago, “buy land, they aren’t making it anymore”.

Land therefore plays a very different role in market economies to capital: whereas Apple will produce more iPhone’s to meet demand, more land cannot be produced to meet housing demand.

This gives land and property owners special power in the economy: their monopolisation of the fixed supply of land can mean they extract the surplus value produced by growth in the economy through charging rent on use of their land.

This rentier exploitation is, unlike other forms of capital, entirely unproductive: it does not produce anything or provide any service; it is derived solely from the legal ownership of the land.

Remarkably, the unique role of land in the economy is ignored in mainstream economics: it is treated the same way as any other form of capital. This, the authors argue, is one of the root causes of the discipline’s repeated failure to see crisis coming in the global economy.

From the late 1970s and early 1980s to today, a great transformation has taken place in housing – land and property values have gone through the roof. The rise in property value has significantly outstripped rises in incomes and growth.

This has created a surge in wealth inequality between property owners and renters, and is the central finding of Thomas Piketty’s globally renowned book, Capital, which used historical data to show that asset price inflation now outstripped profit, making capital investment in the real economy a loser for any business man or woman compared to rentier exploitation.

This transformation has been driven by financialisation – the turning of social goods into financial assets. UK banks’ main role used to be as lenders to businesses. While lending to non-financial corporations has remained fairly static, mortgage lending directly to workers has surged, from 20 to 60 per cent of GDP.

Mortgage lending is now the main function of British banking. Once again, mainstream economics is unequipped to understand the role of financialisation in the modern economy.

Banks’ role is seen as recycling savers’ money to borrowers as credit for productive investment, oiling the wheels of the economy. But what the banks do with mortgage loans has little to do with investment, and even less to do with existing money in circulation.

When the banks create a new mortgage loan they create new money, and they create this credit often for existing property or land purchase, not new investment. This infinite supply of money in the form of mortgages interacts with a finite supply of land, inflating house prices.

“Rising prices mean households and firms must borrow more to become home or landowners. Therefore the supply of bank credit can be seen to create its own increased demand for even more credit, assuming a fixed supply of land. The demand for land can then stretch well beyond people’s incomes or firms’ profits – and the growth rate of the economy – in particular if people expect house prices to continue to rise faster than incomes,” the authors write.

Over 75 per cent of rising house prices since the 1970s can be put down to rising land values – less than a quarter is a result of rising construction costs, which have remained relatively static.

The logic of surging land values is not just to eat up incomes of those with mortgages, but to prevent many from entering the property ladder at all. This inequality is systemic to the housing system: if house prices were not out of reach of some, they wouldn’t be the exceptional asset that they are for others. Property speculation becomes an end in and of itself.

As this asset inequality reinforces itself, a middle class layer of rentiers is created: rising property allows you to then own and rent other property (including using existing property as collateral). This creates hundreds of thousands of buy-to-let homes, increasing the share of landlord control of the total housing stock.

For many, this is likely to be a much more reliable asset to rely on in retirement than a pension.

An alliance of mortgage owners, property developers and bankers all end up having a strong vested interest in keeping the supply of new housing low. Why? Because scarcity is what allows these groups to reap the fruits of financialisation: if everyone could have a nice home to live in, the cost would drop like a stone, and so would the profits.

The result is a “low-supply equilibrium” where supply is kept artificially below demand.

The only answer is bold government intervention to change how housing is supplied and owned; to put people before the rentiers. If anything, the reverse has happened – there has been government intervention, but mainly to provide a form of welfare which reinforces the existing financialised housing dynamic.

In the 1970s, over 80 per cent of government housing subsidies went towards supply-side intervention; mainly the construction of homes. Today that has flipped to 85 per cent of subsidies for the demand-side, in the form of billions in housing benefit payments, support for first time mortgage lenders and such like.

The fundamental issue of the monopolisation and financialisation of housing remains untouched. The result is a deeply embedded class divide based on those who own the land and those who rent.

Ryan-Collins, Lloyd and Macfarlane put this into a bigger historical context: “Projecting these trends forwards, it would seem that the 19th century picture of the land economy is beginning to reassert itself in the 21st: sooner or later, the majority will find themselves renting from a small, wealthy minority of property owners.

The fundamental issue of the monopolisation and financialisation of housing remains untouched. The result is a deeply embedded class divide based on those who own the land and those who rent.

“In this light, the 20th century begins to look like an exception, during which successive waves of policy intervention – into land, housing and finance markets – allowed millions to achieve the dream of a decent, secure home. But as homeownership reached its limits and government abandoned attempts to address the problem of rent, the dynamics of the land market have reasserted themselves once again.”

It is not for no reason that the 2008 financial crash centred on the US housing market. But whereas crises in the past have acted as a reset on asset values, the propping up of the banking system and continuation of neoliberal government policies has seen house prices bounce back quickly, and remain at a rate well above gross average earnings.

So we can’t rely on economic crises to change the game, and neither should we – the devastation crises reek are always weighed overwhelmingly on those who can afford to suffer it the least. So what sort of political agenda could change it?

First, it’s important to understand not all of the world is like Britain. While rising house prices has been a global trend, in countries like Japan and Germany house prices to earnings have been in decline since the 1970s, the reverse trend of the UK.

Germany is a society where most people still rent in a well-regulated sector, the mortgage market has more strict limits on it and most banks are public or co-operative owned and do not engage in land speculation.

The point is that there is different ways to do things, and if we want things to change we have to be open to thinking fundamentally differently about how we do things in Britain. Tweaks will be insufficient.

Other countries do not have a culture of privately owned land at all. In Singapore – hardly considered a communist country – 90 per cent of land is publicly owned. Land is leased by the state to private developers for a fee, and then returned to the state at the end of the lease.

The point is that there is different ways to do things, and if we want things to change we have to be open to thinking fundamentally differently about how we do things in Britain. Tweaks will be insufficient.

The authors make a whole host of policy proposals for reform that would each be worth an article in their own right. Some ideas should already be well known to followers of Common Weal’s work on finance, land and housing: Land Value Tax, promotion of community land ownership, a state investment bank, compulsory purchase at use value, a more pro-active approach to planning and changing accountancy rules to make it easier for government borrowing to invest in housing.

Others such as credit controls on commercial banks, legal reforms to private tenure ownership and measures to incentivise private land investment (rather than speculation) are new to us and highly commendable.

The authors admit that the proposals are a policy agenda rather than detailed programme for reform. For instance, Land Value Tax, they admit, would have to be carefully introduced with transitionary measures in place to prevent a banking collapse as land values reduce.

The detail of how exactly this could be done is not addressed. Perhaps one way of moving forward with the agenda outlined here could be more work in some of these key areas to make them policy ready.

A proper programme for land and housing reform is needed now more than ever.

You can buy a copy of Rethinking the Economics of Land and Housing, by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane, here.