I noted this morning that Steve Keen has a video out on the housing crisis.
I am also aware that many here are not great fans of watching videos, so this is a summary of what he had to say:
Steve Keen argues that the United Kingdom's housing market has moved far beyond “crisis” into a systemic economic time-bomb. A typical home now costs nine times a typical household's disposable income. The last time affordability was this bad was in the 1870s, when Britain still travelled by horse and telegram. Today's median household brings home just under £37k per year while the median house costs £270k. Under conventional lending criteria, such a household would not even qualify for a mortgage. A market that excludes the median buyer is, in Keen's words, one where banks operate as “non-existent middlemen.” You need a bank loan to buy a house, but the bank will not offer one because housing is unaffordable.
Keen traces this dysfunction to a longer history. From 1845 to about 1960, inflation-adjusted UK house prices were remarkably stable: the price index was 47 in 1845 and still 47 in 1960. Housing barely outpaced consumer inflation, growing about 0.25 per cent annually. Then things changed. Between 1960 and 1979, real prices began rising faster, doubling roughly every 40 years. After Margaret Thatcher took power in 1979 and financial deregulation accelerated, price growth jumped to 3 per cent annually. Real prices now double every 23 years.
What changed wasn't that Britain suddenly ran out of bricks, land or skilled builders. It was bank deregulation. Prior to the 1980s, most housing finance came from building societies. Crucially, building societies do not create money. When they make a loan, deposits move internally. Banks, on the other hand, create new money every time they issue a mortgage: they simultaneously record an asset (the loan) and a liability (a matching deposit). Deregulation handed the mortgage market to banks, and mortgage lending exploded. Household debt quadrupled from around 20 per cent of GDP in the early 1980s to 80 per cent of GDP by 2007. The surge in debt fed a self-reinforcing boom. More mortgage lending drove prices up, which encouraged more speculation, which enabled yet more lending.
That spiral collapsed disastrously in 2008, but the fundamentals never changed. Keen argues this vicious cycle continues to inflate prices for existing properties far more than it expands housing supply. The result: worsening generational divides, widespread homelessness risk, and a housing ladder with the bottom rungs sawn off.
Keen proposes three policies to break the cycle. Two are politically realistic and must be implemented together:
Policy 1: The Property-Income-Limited Leverage rule (the PILL). This would limit how much banks can lend for a property based on a multiple of either actual or imputed rental income. While rents have risen, they remain well below the speed of house-price inflation. Today, the London mortgage lending is often 20–25 times rental income. Keen proposes gradually reducing this multiple to 10:1. That would sharply reduce leverage and undermine speculative demand. The effect would be downward pressure on house prices. Politically popular with locked-out young and lower-income households; toxic with highly leveraged older owners.
Policy 2: A new Affordable Housing Authority (AHA). This institution would provide zero-interest mortgages to median and below-median income earners. At current prices, a typical buyer borrowing at commercial rates (say 7 per cent) would spend over half their income on repayments and thus be refused a loan. But with a 0 per cent loan, the exact same household would spend roughly 26 per cent of its income, below the housing-stress threshold. The AHA would be funded by government money creation. Repayment would cover the principal only. This would cut banks out of a market they currently refuse to serve anyway.
These two policies are designed to counterbalance each other. The PILL reduces demand from speculative buyers and drags prices downward. The AHA introduces demand from real homebuyers and supports prices enough to avoid a sudden crash. Buyers win by gaining access, sellers win by maintaining a functioning market, and even banks win via interest on special AHA bonds sold to them to comply with current Treasury rules. The public benefit outweighs the symbolic discomfort of creating money directly for households rather than for banks.
Keen's third proposal, which he will discuss in his next video, is a modern debt jubilee to reduce macro-economically dangerous private debt without triggering crisis. He emphasises that private debt, not public debt, is the destabilising force behind most modern economic strife.
His conclusion: mainstream parties are unlikely to adopt such measures because they remain captured by financial interests and outdated economics. But in a country where more than half the population is priced out of homeownership, a party willing to listen to reality rather than textbook myth could win massive political support.
Do I think these will work? No, to be candid. I don't, because both are far too disruptive to be plausible, although the PILL has the greater merit of the two, and other options are available.
I will come back to this. Consider this a placeholder until I have time to do so.
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I have a radical solution.
Build enough houses for all sectors of the economy, especially affordable rented accommodation.
The problem isn’t supply of housing stock though. Well, not exactly… there are enough properties to house everyone. There just aren’t enough properties both for people to live and for people to speculate in and those who want to speculate don’t want that problem fixed.
Building more houses tends to just result in more speculators. You would have to build a million a year or more to make the speculators give up.
I think the solution involves punitive levels of taxation of speculators (e.g. 100% rent tax, 100% CGT and a 2% LVT on anyone owning more than two properties that they don’t live in at least 300 nights per year) introduced over a 10 year period.
Your first two paras are a neat summary of the issue.
I wish Prof Keen would change his marketing team – the male menopause imagery combined with angry man syndrome means that his important messages “debunking economics” remain largely sidelined in the real debate.
He has some very important things to say on private credit and how it is misunderstood etc. but instead we get treated to a rant about property prices which are currently lower than they were in 2003-4 in real terms.
Can someone give the good prof a recommendation for a good marketing/personal branding team…so that we can use his work to tackle the real issues facing the UK economy and the flawed orthodoxy behind them.
I have to agree with your first para
According to ONS the average house price in Bromsgrove, a Birmingham dormitry town, is 348K, which is ten times the average wage of 35K.
Whereas 25 yrs? ago the ratio of house price to wage was an affordable four to one i.e. 68k versus 17 K average wage.
These facts are from memory ref a recent BBC expose so its possible the 25yr period is +- five years but the main facts are correct.
Our dysfunctional housing market is, I think, the single biggest issue dragging our economy and our society down. The cost of housing sucks money out of young people’s pockets that might usefully be spent elsewhere, drives down the birth rate and fuels hostility to immigrants. And It clogs up the Labour market because people can’t afford tp move where the jobs are. Any government that dealt with this issue successfully could pretty well be guaranteed to stay in power for a generation, I think. So why don’t they? Do they not realise how bad it is? I think they do, but we are riding a tiger we can’t get off. Whatever is done some voters are going to suffer and be unhappy. A lot of people see houses as a kind of pension saving. If prices fall, there goes their pension. Younger people who have taken on big mortgages will end up in negative equity. No government wants a punishing house price crash on their watch. I can think of things that might help a bit, restricting conversion of properties to Airbnb, higher taxes on second home ownership, restrictions on selling flats to foreign buyers which then sit empty, but I suspect these measures won’t touch the sides. Over to you Richard.
Keen’s response is an emergency response to me. I agree with it on that basis. The emergency is in living space.
Not only is it an emergency because of that, but also the fact that the market is not working for new generations of entrants, it is also fueling the rise of Reform and fascism not only the UK but also Europe.
But let’s be honest. No matter what measures are brought in, those with the stranglehold on the market will not relinquish it without a fight.
I remember my generation being able to save and create deposits and pay mortgages. That is now much harder if not impossible. People need to start saving their pocket money from when they are children!! That is an emergency. Working people not able to afford their own homes? Paying mortgage level rents!!
Something has gone seriously wrong with capitalism, even if it is just Margaret Hilda Thatchers version of capitalism.
The is a huge number of properties in towns and cities that just need changing into homes.
Agreed
This is where planning is very silly – High Streets can’t stay as such forever
I was talking about building societies the other day. In the past when you purchased a house with a deposit it seemed like the money was allocated to the building industry to build houses. You could legitimately talk about a housing market. When houses are built and then sold. Today, when I purchase a mortgage, it seems that all a deposit does is fund a higher bid. It goes nowhere near the building industry. Only finance and landlords.
I think you would have to go back an awfully long way to a time when Building Societies used to use the money directly to build.
However, what has happened in more recent years is that to be able to compete with banks, building societies have had to start lending to the BTL sector. BTL mortgages have a much lower risk weighting assigned to them so financial institutions can lend a lot more to this sector than they can to owner occupiers based on capital regulation.
If building societies didn’t lend to the BTL sector, they would struggle to make enough money to compete with banks on interest and holding cash with them would be treated as unacceptably risky by financial advisors. This will slowly get worse and worse as house prices rise because residential mortgages per customer become “riskier and riskier.”
When I moved from Florida up to Baltimore in America I discovered that it was more cost effective to buy a house than to continue paying rent. What about the deposit? After I found my historic Stirling Street row home I secured a ‘HARP’ loan. No down-payment required, I also received extra funds to pay for some additional renovation work. Although it was part of a group of houses built in 1833, it was by no means a ‘fixer-upper’!
I had just started a new job as a surgical tech at Johns Hopkins, so I had a steady income, but I wasn’t earning a huge salary. However, at that time in the US, there were HUD loans and what were called ‘Fannie Mae’s’ which catered to lower income households seeking to buy a home. These were zero down-payment loans where home buyers could negotiate a standard ‘fixed mortgage’ with a rate that wouldn’t change over the life of the loan. If the base interest rate droped, it was possible to shop around for a better fixed-rate deal.
Sadly I had to walk away from my home in the States, when I finally lost the battle to restore my job, after I blew the whistle. The ability to fire employees without cause in the US, plus the impact of suddenly losing all healthcare benefits attached to that job at the same time will gag even the most conscientious worker! So-called ‘business friendly’ laws are not in the public interest. Maintaining our solid employee rights, strengthening unions and the social safety net while keeping our NHS out of private hands are all crucial to personal security as well as public safety in this country.
I doubt I would have ever attempted to buy a house here because of the hefty up front deposit, and the mortgage rate subject to change like the British weather. I really feel for the younger generation with sky high rents, in so many cases, they cannot even afford to move out of their parents home let alone buy a house of their own. How do we expect them to settle down and have children when we pile on so much debt? As you consider a future post on this subject, could we implement programs like the ones I benefited from in America here in Britain?
There is a blog coming on issues you touch on
“They aren’t just buying houses. They are dismantling the American Dream, piece by piece, with a playbook so sinister it would make a Bond villain blush.
A few weeks ago, BlackRock allegedly bought 50,000 homes. Then, they sold three to themselves for more than double the price.
Your neighbor’s home value just “doubled” overnight. Congratulations. Now you can’t afford the property taxes to live there anymore.”
Source: Camus on X. https://x.com/newstart_2024/status/1982754661955252253
Read
https://policy.bristoluniversitypress.co.uk/the-property-lobby
I suggest as a start we need to control who is allowed to own Land and Property in the UK and the uses they can put it to.
Secondly I suggest there needs to be controls over housing finance and the sorts of houses developers are building and the price they sell for when new
John,
I agree.
At risk of going slightly off-topic, we also ought to consider:
– Transparency of ownership – and the ability of local authorities to enforce maintenance orders on owners (who many not be known or live in the UK) — or to simply have ownership applied to them if they have made reasonable attempts to trace the owners. That would protect many buildings that are neglected as part of a cynical strategy of future development.
– Huge increase in the minimum standards of any development — have houses built for people to live in – not for living to be sacrificed to maximise builder’s profits. Why are our space requirements, insulation, etc, so much less than the European norm?
Why weren’t these regulations and any planning related aspects not addressed at the beginning of this parliament — and well before the stated plan of 1.5M houses?
Many thanks for the summary. Prof Keen has clearly thought this out carefully. What is not as clear as I’d like, though doubtless Prof Keen is well aware, is some of the rationale for these proposals.
There are, as noted in other comments, sufficient houses. The problem is the price is too high. If the price falls, which it has to, then the current total housing debt (mortgages) will fall; as mortgages are paid off less debt will be taken out. That’s the problem with bank created money – it’s temporary and has to be paid back. If this happens money that was created as a result of deregulation will disappear. Large quantities of money will be sucked out of the economy (like a massive dose of QT). Without additional policies this would have a deflationary effect and, quite likely, result in a recession.
If house prices fall, for whatever reason, temporary bank money has to be replaced to avoid the deflationary effects.and there is only one place this money can come from, government money creation. Prof Keen has proposed a sensible mechanism to create this money (though I disagree with issuing AHA bonds). His two proposals do indeed have to be implemented together to avoid deflationary/recession effects.
If one believes house prices have to fall then the government necessarily must create more money. Prof Keen has made a sensible proposal. It is entirely reasonable to dislike his proposal. But that then requires a sensible counter proposal for a mechanism for appropriate money creation.
The following link may be of interest, to anyone unaware, of a related, US centric analysis.
https://economicsfromthetopdown.com/2024/10/23/the-american-housing-crisis-a-theft-not-a-shortage/
I will suggest an alternative as soon as I have enough time.
Time is a bit pushed right now.