Why exactly is it so expensive for us to own a home?
It’s a staggering increase. Perhaps we can put it into perspective by looking at how the prices of other commodities have risen over a similar period of time. Using figures from a survey by Moneywise, the average cost of a loaf of bread in 1952 was 6p. In 2012 it is £1.25. That’s an inflation of 1,983%. Likewise an average pint of milk was 4p in 1952 and is now 49p. That’s an inflation of 1,125%. A dozen eggs cost on average 8p back then and £1.68 nowadays. That’s a 2,000% rise.
None of these come anywhere close to the inflationary increase of 8,000% on house prices over the same period so let’s go back to the original question: why is this the case?
The conventional wisdom is that it’s a simple case of supply and demand. The UK is a small, densely populated country. There simply aren’t enough houses. This high demand pushes prices up. Simple as that.
But maybe it’s not that simple. The campaign group for banking and monetary reform, Positive Money, believe that it is the debt-based nature of our economy which has caused such huge increases.
According to Positive Money, who draw on the work of economists such as Steve Keen and the head of the FSA, Adair Turner, it is the banks’ ability to create digital money when they make new loans that has driven the rise in house prices and fuelled the most recent and catastrophic housing bubble. This is because most of the banks’ lending – and hence most newly created money – goes into the housing market in the form of mortgage lending.
This increased money supply in the housing market creates an increase in demand for houses. The supply of houses, as we already know, can’t match this rising demand so prices are pushed up. The bubble is further inflated by speculators buying property (and borrowing from the banks to do so) because they know the prices will go up, thus creating even more demand and a vicious circle of price rises and increased borrowing until the inevitable bust.
“In effect the banks, by being able to create money and pump it into these property bubbles have been able to double the cost of a place to live for the average person.”
The founder of Positive Money, Ben Dyson, puts it like this: “In effect the banks, by being able to create money and pump it into these property bubbles have been able to double the cost of a place to live for the average person.”
Sadly, as Positive Money admit, there hasn’t yet been an independent academic study in the UK to test the correlation between banks’ lending and house prices, but a quick look at the figures certainly makes interesting viewing.
Between 1995 and 2007 the UK population increased by 5%, the housing stock increased by 10% and house prices increased by 350%, meanwhile mortgage lending by banks increased by 630%. Which of these figures is more likely to have led to a 350% rise in house prices: a 5% rise in population growth which is matched by an increase in supply of housing; or an unprecedented increase in mortgage lending from the banks?
There is further support from Australia and the US where empirical studies have been carried out which show that in US and Australian housing markets house price rises definitely are linked to increased mortgage lending. If it’s true in Australia and America why shouldn’t it be true here?
Australian Economist, Steve Keen, who is responsible for the studies says in an article entitled ‘House Prices and the Credit Impulse’: “Population dynamics – even immigration dynamics – have nothing to do with house prices. What determines house prices is not the number of babies being born, or immigrants – illegal or otherwise – arriving, but the number of people who have taken out a mortgage, and the dollar value of these mortgages. For changes in house prices, what matters is the acceleration of mortgage debt.”
In one sense whether house price rises are driven by population or lending is immaterial and that’s in the effect they have on buyers, especially first time buyers. According to Moneywise, nowadays the average UK home costs six times the average annual salary. And so, according to a study by housing charity, Shelter, access to home ownership is increasingly becoming a matter of inheritance only.
Even more sobering, according to the same report, a similar increase in the cost of private renting means the average time taken to save enough money for a deposit on a house is now 45 years compared to eight years in the past. All of which contributes to the average age of first time mortgage buyers rising by 10 years every decade.
All of which means, according to a spokesperson from Shelter: “We are redirecting money, very effectively, through the housing system, away from the poor towards the rich, away from the young towards the old, and geographically as well – away from the poorer parts of the country to richer parts of the country.”
This is all very depressing if, like me, you’re not even on the housing ladder yet, but does it really have to be the case?
According to the same spokesperson no, it does not. Before 1975 there were no booms and busts in the housing market at all. This was because in 1975 regulatory changes allowed the banks to start pouring money into the housing market. This was coupled with government tax breaks (which continue to this day) effectively subsidising home ownership.
It is government policy then and banking deregulation that has led to this obsession with house buying, speculation, crazy lending and unprecedented levels of debt.
According to head of the FSA, Adair Turner, over 75% of banks’ lending (and hence money creation) goes into property. If we could somehow reverse this trend and have the majority of lending going to businesses where it would lead to real growth, real production and real job creation, instead of into decaying assets that don’t produce anything of real value, that would perhaps be the beginning of the end for our boom and bust economy.Tagged in: debt, deposit, house prices, inflation, loans, Moneywise, mortgage lending, property, renting, Shelter, Steve Keen
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