As anyone of my age knows, house prices are a middle aged person's obsession, for two reasons. First, baby boomers wealth is dependent upon their increase. Second, they have no idea how their children will be able to afford the houses they once bought.
Now George Osborne is to announce a plan today that supposedly helps people onto the housing ladder. Those earning less than £80,000 out of London and £90,000 in it (or let's for simplicity say well over 90% of the population) will be allowed to buy homes on a subsidised basis.
But let's be clear what this does. This is not a subsidy to buy homes. This is a subsidy to keep up house prices and to ensure people borrow the maximum possible.
George's economic plans are critically dependent upon house prices increasing at 6% per annum, and they are not. The result is that he is giving state subsidies to make sure that they do. As a result he is using state money to increase the wealth divide in society, keep housing unaffordable and keep the vast majority off the housing ladder.
This is no panacea - except for the debt free, ageing baby boomer, and a desperate Chancellor. Please don't read it any other way.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Sometimes, we need a reminder about how serious this problem is…
Last wekk, some old buffer popped up on twitter, and told the world that he started work as a graduate in 1975, on £5k a year.
He bought a flat in London, assisted by a mortgage lender, for £9k.
Today the flat is worth £700k, and his company recruits a graduate for £25k.
One of those numbers has risen by a factor of five.
The other has risen by a factor of seventy-five.
This isn’t just a London conversation-piece; economics isn’t a spectator sport, and a massive transfer of wealth has happened in our lifetimes. Further: we have irrevocably shifted from being an economy of producers and investors, to a neifeudal state if landowners and tenants, in property and services and commerce.
The flat. I bought in 1983 for £28,000 is now worth £450,009
I would now struggle quite hard to buy it if I started on my current income
It was quite affordable then
I’m a debt-free ageing boomer with four grown up kids whose chances of being able to afford a house like the one they grew up in (now worth about 15 times what we paid for it) are vanishingly small. I have watched the income from my savings and those of my dear old Mum dwindle to almost nothing but have thus far resisted the temptations of BTL/investing in property not least because I see them as borderline immoral (as indeed is George’s latest wheeze). But it’s hard, Richard. It’s hard!
That’s the paradoxical nature of the ‘I’m-alright-Jack approach, the nature of the present economy pressurises people who have equity to move into the housing scavenging market and creates the feeling that having a ‘moral position’ is leaving yourself high and dry.
The Tories know they have people by the short and curlies and that there are two classes :
Rentier Syphoner
Victim of rentier vampyrism
In the early 1980s there was, if I remember correctly an analysis bbc r4 program by Mary Golding about the then self off of council housing with big discounts.. She gave an account on how this policy had developed and the political engineering that motivated this.
In the late 1970s Chris Pattern had been give the task of coming up with a policy that had the aim of shifting the balance of popular support enough to keep the Conservatives in power. They knew that they then had a base of about 35% of support come what may, to this they intended to try to change the self perceptions of another 5 to 10% of the population as self interested property owners, who they believed would be inclined to vote for them.
The result was to sell on the cheap, stock that in effect is owned in common. This is a typical enclosure proceedure which inevitably favours those that can take on the debt and leaves the less well off with left overs. Houses as homes were turned into items of speculation. The Banks loved this but as you indicate as long as house prices go up.
This type of policy is copied from fashist Spain, Franco believed that people bound by morgages are quiescent. General Pinotchet also admired this policy.
This policy is in effect a version of what Baby Doc did during the phoney elections held in Haiti, a reporter was in his Range Rover which raced through crowds as Baby Doc threw coins at then, There was a thud and then a a bounce as the Range Rover ran over someone, they drove on without any one commenting. So it goes! Welcome to the battery hen society!
Right-to-Buy has divided the working class – which is exactly what it set out to do.
Although this in mo way applies to all, living in Kent I witness a smug indifference of many over 60s to the housing plight – and indeed any of the life challenges – faced by the young.
Instead there is a patronising perception that young people are lazy, or wallowing in a sense of self entitlement. They have an almost obsessive xenophobia hence the blight of UKIP growing in electoral strength here – they are now the 2nd party.
That generation easily forgets the advantages it experienced: full employment; cushioned welfare system; free higher education; rapidly increasing asset prices (from a cheap base).
All of which their voting habits have put at risk for the generations which are following.
I see that too
I do agree with some of your comments, but should we shift the balance to make the old poorer to help the young. I have three grown up children, two have mortgages with our help and we are not wealthy, working class, nurse and air conditioning installer, both retired.
My eldest came back after TEFL teaching abroad, not a cat in hells chance of buying a home. High rent for him. I would sell our modest home to live in a caravan because they need help now, not when we are dead. But, we don’t agree on that. The so called affordable homes are complete rabbit hutches, how dare they expect people to live this way. I am heartbroken and bloody angry for our young.
They are our treasure and hope.
Agree Sylvia
I am sure I will face this dilemma
I also agree, Sylvia. I’m not in the first flush of youth either and I too spend a lot of time worrying about my two kids’ future security, particularly the one who is blighted by health problems and depends on me for his security. We must all do all we can to fight the lunacy of current house prices – and those that would magnify it.
Me too
Although I enjoy two in good health
And the issue then becomes that more and more of us bay boomers will have no reserves left to help fund our care when we need it, or the almost certainty of some form of private health insurance as a larger and larger element of health care is removed from NHS provision.
What might be even worse is that I understand that this funding maybe that which would have funded new homes built for affordable rent and allocated through the Homes & Communities Agency (HCA). Also, it might reduce empty homes grants – where LAs can buy substandard stock from the malfunctioning market and bring it up to a liveable standard as an affordable rented home.
My organisation still has enough money in its HRA (housing revenue account) to build a certain number of affordable to rent homes but it will now take 10 years instead of 5 – also because Osbourne is taking 1% of our income off us for the next 4 years.
Great isn’t it? As you say, Osbourne is using state funds to prop up a private market at the detriment of the need that is meant to met by the social sector by diverting these funds.
Nudge? This is just plain nasty if you ask me as LA housing lists will continue to grow – we won’t even be able to deal with the churn from the bedroom tax.
As you are an expert I appreciate your comment
An expert Richard! Me!
I’d prefer to call myself a ‘Perpetual Learner’.
Too many of the attitudes we see to young people above are because people think that they are experts.
Incidentally, being open to learning new things is what keeps me coming back to your excellent blog.
I came across a thirty or so year old the other day who called herself a thought leader
I had to laugh
There aren’t many of them
The rest of us just try to make sense of bits of it
Until you break the self-fueling link between the financial markets, banks, building societies and the estate agent chains they own (all of whom have a common interest in a one-way ticket of rising prices) then the cycle of house prices outpacing incomes will inevitably continue.
I’m not convinced the normal rules of supply and demand work with housing as most people cannot afford to buy one outright, so the availability of well paid jobs and affordable finance seems to be the bigger factor driving house prices.
There is a dilemma between maintaining house prices for those already invested, while creating affordable housing for those who are not. Radical re-balancing of the UK economy geographically is the only logical solution that I can see to this problem.
There is plenty of affordable housing in areas where there are few if any jobs! De-centralise and regionalise all government departments and financial businesses, incentivise regional development of high paying technology and science based industry. Eventually we will have a much better economy and society too!
Sadly I do feel a few property speculators in London and the south east may lose out, but really who cares?
“Radical re-balancing of the UK economy geographically is the only logical solution that I can see to this problem.”
How about forcing the banks to call in all BTL mortgages?
Tgat would cause market chaos
I prefe transition, not revolution
“I’m not convinced the normal rules of supply and demand work with housing”
Keith it doesn’t because it is a bubble that has been inflated by no-credit controls banking. Between 1997-2008 (GFC) there was a 370% increase in bank lending for housing including BTL’s. The banks made huge sums of money out of this then crashed and were bailed out-so anout of control banking system has directed the economy-how democratic is that?
High house prices are a massive wealth transfer mechanism.
For some reasons governments are terrified of falling house prices and negative equity.
Yet they positively encourage house price inflation. If you don’t own a house then a £10k increase in house prices means you have to borrow an additional £10k. You then have to pay interest on that £10k and pay it out of taxed salary. So that £10k increase in house prices is likely to cost you £25k of salary. An additional year of your working life gone.
HPI only benefits multiple property owners and those who stand to inherit large amounts of tax free property. In all likelihood that will include me (both my parents and my wife’s own family homes in the SE) but firstly I don’t want them to die and secondly I want to get on with my own life and be able to raise my children in the type of house I grew up in. Seemingly an impossible dream.
When you look at eye-watering house prices you wonder how there are any first-time buyers at all. But the reason is, of course, historically low interest rates. Which means that there is no chance whatsoever of an increase in the foreseeable future.
LVT is the only solution to the housing problem – a massive Council house building programme will not suffice. But LVT, however it is introduced will, because of the perceived trajectory, bring house prices thumping down. And that will lead to the collapse of the finance sector – in fact similar to what would happen with a hike in interest rates. (The majority of bank loans are secured on land values – even commercial ones.) At some point finance will have to take a hit – which is what should have happened when it crashed previously.
This is a subsidy to keep up house prices and to ensure people borrow the maximum possible
High UK house prices are a consequence of excessive levels of private debt in the economy. It is this accumulation of private debt which is the basis of Steve Keen’s debt deflation concept. The problem of high private debt levels, which depress the economy, can only be temporarily fixed by encouraging the creation yet more private debt which stimulates it again in the short term term but worsens it in the longer term. But that’s a bit like a junkie needing a bigger and bigger fix. He needs at some point to choose a healthier lifestyle.
But that’s not going to be easy whatever happens. If house prices do fall to make them once again more affordable to younger people many existing borrowers will be bankrupted with negative equity problems. A general inflation in wages, prices and salaries but not in property prices is theoretically possible but politically unlikely. Something will have to give in the next few years but the options are limited. Interest rates can’t go any lower than they are. My expectation is that the next crash will be brutal and much worse than anything we’ve seen in our lifetimes. It’s not surprising that politicians on both sides of the Atlantic are scared of bringing that about by raising interest rates even slightly.
Long after Marx and Engels predicted that capitalism contained the seeds of its own destruction, Keynes did a pretty good job of explaining that it didn’t have to. More recently the Post Keynesians and MM Theorists have developed that explanation, so it’s somewhat ironic that the neo-liberals, and ordo-liberals in Europe, seem determined to prove him right after all!
“If house prices do fall to make them once again more affordable to younger people many existing borrowers will be bankrupted with negative equity problems.”
There’s the rub. This crash in prices is desirable, of course. Peter- do you think that a bail out of negative equitiers (below certain income/asset/saving levels) could be a technical possibility here?
Yes it is possible. It more a question of politics than economics. A fall in house prices will create a problems for the banks too. It may well be a better option both politically and economically to support householders in some way rather than let the free market impose its discipline on those who have bought overpriced assets on borrowed money.
But I wouldn’t be too optimistic about that. I’d advise all younger people to just bide their time and rent for the time being.
I am sure Steve Keen would remind you that ‘debt-deflation’ is Irving Fisher’s concept.
That’s a good point. Keynes was thinking along the same lines too in the 30’s.
Simple enough to understand corrupt politicians favour the money lenders. House mortgage lending makes up the bulk of their profits. Since most of the electorate are economically and monetary system illiterate it is an easy game for politician shills to pull the wool over the electorate’s eyes.
Our largest growth industry seems to be BTL. Even here in the Poundland Powerhouse of South Yorkshire, BTL is becoming the preferred pension for many professionals of advancing years. My daughter (a teacher) and her partner rent from a dentist. Even though house prices are amongst the lowest in the country round here, very few young people – even graduates – can afford to buy. So we are also witnessing the rise of the Rentier. £500 a month in rent from a stone terrace you bought a couple of years ago for £100k is not a bad return.
£500 a month in rent from a stone terrace you bought a couple of years ago for £100k is not a bad return
It’s 6% gross ie before any expenses are taken into account. 3% net maybe? So that wouldn’t be unreasonable from the renters POV in a flat market. But the expectation of the landlords is that there will be a rising asset price too. It’s the “safe as houses” mentality.
It’s that mentality, in the UK, that needs a big jolt. Keynes looked forward to the ‘Euthanasia of the Rentier’! I wouldn’t quite go that far but I’d be happy to see the rentier class hit hard in their pockets where it hurt.
Sorry to wheel this one out again (sorry Richard!) but just to get accross that the root of this issue is market fundamnetalism and the self reduction of Governments to a supine state.
Here’s Gordon Brown in 1997:
“Gordon Brown said: ‘I will not allow house prices to get out of control and put at risk the sustainability of the recovery.’’
Of course whereas Brown was merely supine the present lot are hyperactive in this regard.
Maybe
I will plug the data in when I get the chance
Brown’s economic “plan” was to allow deregulation of the bank lending standards – boosting short term profits to the moon. First interest only mortgages at high multiples of salary, then interest only mortgages on multiples of made up salary, all over”seen” by Brown’s FSA. The increased profits from the banks were to be taxed and re-distributed, eventually as tax credits as Britain gave up competing for good jobs in the newly globalised world.
However the deregulation of the banks caused the whole system to blow up (it is ever thus), and left the tax payer on the hook for the bail out bill and the cost of the in work benefits.
William Black provides a nice explanation of the mechanism involved in this Ted talk – note the explicit reference to the deregulation competition between London and New York. https://www.youtube.com/watch?v=ClfBxWPkBKU
Crosby got a knighthood and a few million, Brown wears his underpants on the outside of his trousers pretending he saved the world, and the young got the shaft.
As someone who actually LOST £50k on a house sale recently I feel I can speak with a different perspective.
However my feelings on this issue are pretty much congruent with Richard and others on this site and the recent kick in the wallet does not change the underlying truth that the housing bubble/s is bad news – especially for the young `uns.
Brian – hat’s off to you for seeing the larger picture and not just the ‘I’m-alright-Jack’ perspective-many can’t do that (about 24.9% of eligible voters!).
I wonder if the multiplier associated with this planned spending is greater than or equal to 1.
Greater, I am certain
It seems to me that we need a better term than “multiplier”. A tendency to save maybe?
If the Govt spends a £ (or maybe a penny which isn’t divisible) into the economy, what can happen to it? It can either be returned to the Govt in tax, or it can be saved. There are no other options. I’m counting ‘lost down the back of the sofa etc’ as saved. These savings can be domestic or overseas.
In that sense the multiplier can never be greater than 1 because it is impossible for Govt to get back from the economy more than it has spent into it in the first place. If there are no savings and no de-savings then tax revenue has to equal total govt spending regardless of the level of taxes providing they are finite. But if the level of tax is too low there will need to be too many transactions and so inflation will be a problem. If taxation is too high there will be too few transactions so we’ll have recession.
So a multiplier of 1, in a more meaningful sense, means that extra spending will be neither saved not desaved. Zero means it all will be saved. Greater than 1 will mean that the tendency of extra spending is to reduce saving.
How do we know what will happen? We don’t! So we can’t really say what the multiplier is. We can only guess.
You seem to be ignoring the variable commonly called C
I don’t think so. C as the consumption (by consumers who buy goods and services) appears in both the supply and uses equations, of the national accounts identities, so doesn’t appear in the well known sectoral balances equation.
The question of whether there is positive or negative multiplier is really only of concern if the currency is pegged to gold or some other currency. In those cases there is a real constraint on stimulus spending/taxing. Governments then do need to know what effect that will have on their deficits. Currencies weren’t freely floating in Keynes’s time so his concern was valid.
That’s not the case now. The only constraint is demand pull inflation on government spending/taxation and that’s hardly any constraint at all right now.
This is where the identity does not work: it is a static and you are trying to apply it dynamically
“This is a subsidy to keep up house prices” It sure is – but don’t think that it will be very effective.
There is an interesting precedent. In 2009 the Australian Labor government introduced a “First Home Owners Grant”. In his blog, Steve Keen promptly re-labelled it the “First Home Vendor’s Grant” because the idea of it was to put a floor under house prices and to a large degree, it worked.
I don’t think that Osborne’s idea will work quite as well however, with the reason being that the Australian grant encouraged younger buyer’s to take advantage of prices that had fallen. It served as an additional incentive to an existing temptation.
Subsidies of this type may be effective at creating a price floor but they are not so effective in a rising market. The subsidy makes little difference when the level of temptation is near zero.
There is no longer a line between the government and banks. It’s now a governbankment. The more houses cost then the more money banks make in mortgage interest and so the more hours we have to work to service that debt. The more hours we work the more tax we pay the governbankment.
High house prices are the means by which the governbankment keep us under control. Working an ever increasing amount of hours to service debt. House used to be bought using 3x single income, now it’s 4.5x joint income. Two workers paying taxes instead of one. Houses would be cheaper if everybody stopped doing joint income mortgages. Freedom!
I might just have a slight quibble about the wording of the title but this is an interesting read.
There’s a house price bubble in all the Anglo Saxon countries (including those with low population densities) ie USA, Australia, NZ, Canada as well as the UK. Germany has a refugee and high immigration problem too, so the usual arguments as to why UK prices are high need to treated sceptically. It has to be connected with the creation of cheap credit leading to a price bubble.
In the longer term prices in the UK and Germany can’t possibly continue to diverge. There has to be a painful correction for UK property holders and probably sooner rather than later.
http://www.forbes.com/sites/eamonnfingleton/2014/02/02/in-worlds-best-run-economy-home-prices-just-keep-falling-because-thats-what-home-prices-are-supposed-to-do/