It puzzles me as to the various conversations surrounding house prices.
Last night on Question Time, structural engineer Roma Agrawal (and the others, so it doesn’t sound like I’m picking on her) mentioned that a solution to the nation’s housing issues is to build more houses.
Build more houses? All I see are houses being built.
The issue purely lies in property speculation and is not an issue of building activity. In fact, we have an oversupply of housing in the UK. In 2014, there were 28 million dwellings in the UK and only 27.7 million households. London’s dwellings increased more than the number of households between 2001 and 2015.
Of course it’s multifactorial, with social housing stock being low and there being a culture of property (land) being the ultimate investment for Brits, but no politician has mentioned the longer term trend.
The Lady of Threadneedle Street.
I’ve banged on about this on Twitter a million times but I want to have something here that expresses my views about this explicitly and more comprehensively than however many characters Twitter allows you to.
Here is the UK house price index.
And here is the UK 10 year bond yield over the same period (read as a proxy for interest rates).
Can we not see a correlation here? Is it just me that’s going crazy or do I not understand something?
It is absolutely insane – when you have low rates, where are you going to put your money? Into investments that are likely to yield more than the base rate. If it’s assumed that the base rate is going to decrease year on year then why would you be partial to simply saving? Why wouldn’t you enter the property market?
Here’s a chart of UK savings from 1952.
If you draw a line of best fit from 1980 to now, it shows progressively lower highs and lower lows. A trader would call that a downtrend. It makes sense since interest rates have been falling progressively since then. And where has that savings potential gone? Into property at progressively higher prices.
Back to the headline: why do politicians not want to acknowledge this?
Well firstly, it’s a global phenomenon. The same thing has happened across the world where property is seen as a speculative investment rather than an object of utility. If we look at most of Europe, they have an entirely different culture of investment – and especially do not consider housing as being a speculative asset as much as we do.
Here is a chart of Germany’s personal savings ratio.
What we can deduce here is that even since they’ve has the Euro and the real base rate has been negative, they still have a savings rate almost double of ours (UK chart is household savings ratio, the German is personal but should average out to be the same).
German homeownership was 51% this year – ours was 63%.
But this is due to Germans actually increasing in homeownership – their rate was 41% in 2004 – the increase most probably caused through ultra low rates and ECB’s penchant for asset purchases post crisis; ours has gone the other way – in 2003, our homeownership rate was almost 71%.
A final chart shows wage growth in the UK.
Compare again with house price increases – those who own hard assets end up seeing property price appreciation, charge higher rents which means the capability for firms to pay people decreases. It’s all about slimmer margins. What’s more, those who have a skinny and seemingly stagnant pay packet can’t buy since their outlay is on rent, and property prices keep going up.
Politicians don’t want to speak about this because it would also call into question the independence of the Bank of England.
The Bank’s QE programme is government debt cancelling – private interests love QE. The government loves QE; it cancels their debt after all. When the bank buys a government bond, it effectively pays interest to the Treasury until maturity. Which government doesn’t like that while being able to service the big banks and hand out tax breaks to their mates?
That’s for another day.
The final bit is that they actually probably don’t want to slump into irrelevancy and make it seem like it’s none of their faults – how will they include a huge manifesto push if there is no issue with regards to housing? What an awful situation that would be if everything were fine.
The solution to house price rises is to prevent this speculation; tax the value of land. This would create a society that looks to invest productively rather than sitting on land and seeing it grow just because everyone else and their nan are buying.
At the end of the day though, this is a central bank problem. It has happened again and again. In the 90s, loose Keynesian policy where interest rates didn’t match the credit requirements of the economy, led to margin being taken out to buy these super amazing dot com stocks that ended up being absolute turds. Loose interest rate policy gives rise to that great term irrational exuberance.
Debt based expansions lead to huge mis-allocations of resources in the economy, and Mr Can’t Do, Governor at the Bank of England, has come from Canada and caused the same issues here as he did there.
I still laugh when no politician mentioned the base rate cut in August 2016 but blame the fall in GBP entirely on Brexit as if exchange rate dynamics suddenly flew out of the window.
As Michael Caine said ‘you’re only meant to blow the bloody doors off,’ but the BoE has caused another bubble where the doors, windows, Laura Ashley furniture, dog, cat and roof are going to be blown off or away when we finally unravel this mess.