Uncharted Territory

October 18, 2010

Boris the Builder

Filed under: Economics, Housing market, Minimum wage — Tim Joslin @ 1:15 pm

When our civilisation finally collapses, and becomes of interest only to historians, explanations will be sought.  How did we throw it all away?  Many will argue that one of the main causes was a collective failure to regulate individual greed in one way in particular.  In the housing market.

This is what the Mayor of London has to say in this morning’s Telegraph:

“Recent pronouncements from the Coalition Government have suggested a new doctrine: that house prices should be flat, or flattish, while earnings rise to meet them.”

Makes sense.

“In other words, the British middle classes are being asked to wean themselves off house price inflation, and become more continental, with a higher proportion of rentals.”

An increase in renting compared to owner occupation is rather a non sequitur, but I’m still with you so far, Boris.

“And a lot of people will say amen to that. Why do we pump all this money into unresponsive bricks and mortar, when we could be investing our capital in stocks and shares and thereby in the flesh-and-blood businesses that add to the GNP of Britain? They will point out – entirely correctly, that this national addiction to house price inflation has bred a kind of financial illiteracy, an apathy about any other investment except the roof over our heads.

And they will point out that it was the house price bubble – the demented practice of giving vast mortgages to people with no incomes and no assets – that led to the crash. Better a stagnant housing market, they will say, than another great boom and another great bust.”

Still with you.  Though not sure about this use of the word “stagnant”.  The reason house sales are sluggish at the moment is that prices are too high.  Mortgages are more difficult to get and higher deposits are demanded, so obviously the same amount of activity will require a lower price level.

“Which is all very well, in theory.”

Uh, oh!  Where’s Boris going with this?

“In practice, it looks as if flattening off the housing market is both risky in the short term, and unachievable in the long term. The sad truth is that it is still psychologically essential to the British middle classes to have a sense that our principal asset is gently appreciating in value, or at least that it will over the long term.”

Unbelievable!

Even the most elementary reasoning shows house prices can’t rise faster than everything else indefinitely.  If they did, other things – food, energy, manufactures and so on – would eventually cost virtually nothing in comparison to house prices.

And more to the point, house prices can’t rise faster than labour indefinitely, otherwise everyone who doesn’t own a house would have to emigrate.

Unless…

Ah, Boris has a solution: build more “affordable houses”: Here’s his argument:

“…the best way to help those millions in search of an affordable home is not to try vainly to ensure that the present stock of housing becomes more affordable – ie falls in value – but to increase the supply of affordable homes.”

All very Alice in Wonderland.  Readers unfamiliar with the UK housing market may need some translation assistance.  “Affordable homes”, as used at the end, is a euphemism, spin for “social housing”.  The first use of “affordable home” is in standard English.  From now on, I’ll write “affordable home”, “affordable housing” in quotes when it means social housing and affordable, home and housing without quotes when the words mean what they say.

Let’s dispose of the argument against all this based on principle.  Boris clearly believes in a two-tier society.  A class of which I guess he is a member, who own their own property – appreciating in value forever – and another class who are housed at the whim of the state.  Hint: make sure you’re a “key-worker” or have lots of kids.  Kind of a socialised Upstairs, Downstairs, with a bit of hand-wringing charity thrown in.  I simply don’t agree with this worldview.

But let’s move on to the sheer incoherence of Boris’s proposition, though perhaps I should note at this point that Boris is guilty only of voicing the consensus view shared by virtually all UK politicians, even if a few pay lip-service to the rational and correct argument that the relation between house prices and wages needs to be restored.  Some even realise that it’s best to do this with a bit of general inflation rather than by house-price falls.

First, just because homes are rented for less than the market rate doesn’t mean they’re worth less than others.  They could be rented out for more privately.*  More to the point, the money to have them built must come somewhere.  The land has to be bought.  OK, the state can give planning permission on land it owns, but this is just chucking money away, since they could simply have sold the land off to a private developer.

Second, providing social housing will reduce demand for private housing.  The increased provision of houses would lower prices anyway.  So Boris’s plan won’t even succeed in holding up house prices.  So as far as the Upstairs are concerned, building “affordable homes” is just as bad as building private housing! Of course, social housing is less efficient for several reasons, not least because people won’t move for work, because they’ll lose their home and may not get another or at least have a long wait.  The state should just get out of the way and make it cheaper to build private housing by stopping demanding all kinds of goodies (including “affordable homes”) in return for planning permission (usually under Section 106 agreements).

Third, where do ever-rising house-prices lead us?  Well, unless the salary structure of the economy changes, there will eventually be no buyers.  Possible the wealthy will buy to let as they did up to the crunch in 2007, but that makes no sense, since the tenants won’t be able to afford the rent plus a profit for the landlord and letting agent, since if they could they’d be able to get a mortgage!   So eventually we’ll simply run out of buyers.  Prices will simply have to drop to an affordable level, since otherwise properties will simply sit in estate agents windows.

No, Boris.  You’re not a dumb blond even if you do mumble and bumble in a ditzy manner.  Thatcher was right on housing.  The answer is to make just about everyone part of the property owning class (or at least renting by choice rather than necessity).  And for that to happen house prices must be kept down to a reasonable multiple of the lowest salaries.  Say three times.

————

* Notwithstanding the revelations in a DWP report, also featured in today’s Torygraph.  As there is insufficient “affordable housing” the state often simply has to pay private-sector rents.  Except that apparently the system is so inefficient that landlords can get more rent for social tenants that for private ones!  Though working people on low incomes end up in poorer accommodation than the state would provide:

” ‘[Low income working] Households with children aged under 16 do appear to be worse off in terms of the property size that they occupy and the rates they would be entitled to if they were eligible for housing benefit,’ the study said.”

You couldn’t make it up.

Politicians of all stripes have created this mess.  Sorting it out requires a step back.  The basic principles need to be laid down.  Starting with fairness.

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