Saturday, 18 November 2017

Ricardo and UK House Prices

David Ricardo's Law of Rent states (as a stylised fact)  that rents are set by the difference in incomes (productivity) by those found at the margin of production and those found within it ie infra-marginal. That difference currently gets capitalised into rental incomes and selling prices.

We know that agglomeration increases productivity, so as London is over twice the size of any other European capital, its no surprise it has the highest incomes.

Furthermore, the margin of production for the UK no longer ends within its boarders. It is arguable that due to free movement of people within the EU, it stops there. But to a certain extent, due to globalization, margins extend around the world.

Is it really therefore such a surprise, as some people most definitely are, that prices in the UK, especially London/SE are so high?

Yes we can build, and in the short term prices will fall. But in the long term, margins will simply readjust and we'll be back to square one. 

Above taken from Inequality Matters

Friday, 17 November 2017

Economic Myths: "those who have worked hard all their lives to buy a home"

Sayid David was doing a fine job of playing both ends against the middle, as reported in The Daily Mail:

Mr Javid, a frequent critic of so-called Nimbys, said it was time to deliver 'moral justice' for the young – and warned older people they would not be permitted to stand in the way of a massive house building drive.

"What we need now is a giant leap … I still hear from those who say that there isn't a problem with housing... that affordability is only a problem for millennials that spend too much on nights out and smashed avocados.

"It's nonsense. The people who tell me this – usually baby boomers who have long-since paid off their own mortgage – they are living in a different world. They're not facing up to the reality of modern daily life and have no understanding of the modern market."

He's trying to claw back a few of the under-30 votes for the Tories with a couple of well-aimed blows at the NIMBYs and Boomers while ensuring that his party's major donors find it even easier to get planning permission.

He must know that you can give the land bankers as much planning permission as you like; it will not change their profit maximising level of output one iota - why would it? Even if they did increase output, it would only have a very short term and marginal downwards effect on prices.

But hey, he's a politician.

Here's the Economic Myth:

Lib Dem housing spokesman Wera Hobhouse last night criticised Mr Javid for his attack on baby boomers. She said: "This kind of language is divisive and unnecessarily sets one generation against another. It is patronising to tell those who have worked hard all their lives to buy a home and raise their children that they don't understand the housing market."

This "worked hard all your life" to buy a house is complete and utter bollocks (except for the very few people who bought something that was far too expensive). From the 1950s to the late 1990s, you could (if you wanted) have paid off the mortgage in ten or fifteen years and still been paying less per month than you would have been paying in rent for the same home; after that you are living rent free. All these Homeys have paid considerably less than tenants have.

For sure, there were a couple of nasty years in the mid-1970s when interest rates were very high; but inflation was even higher, so in exchange for two or three years of pain you effectively had half your mortgage eroded by inflation. My mum admitted to me that they paid off the rest of the mortgage they took out in 1964 with petty cash sometime in the mid-1970s. I bought a nice house in 1998 with a 20% deposit and paid off the mortgage in ten years (because that was the longest fixed rate period on offer).

There were another couple of fairly nasty years in the early 1990s as well, but so what, it was still cheaper than renting for nine out of ten mortgage borrowers. We note that these two high interest rate periods followed a house price bust; they took a different approach after the last one and pushed interest rates to zero instead.

It is true that some people with mortgages lose their jobs and struggle, but that is irrelevant, they'd have struggled to pay the rent as well. It's your "Losing your job" bit that causes the pain, not the fact that you chose to save money by buying not renting.

And even if it were true, are the Boomers saying that this is a good thing? That they want the all future generations to suffer as well? If that is a good way of deciding policy, then we would have to start another world war every twenty or so years.

But hey, she's a politician as well.

Thursday, 16 November 2017

Killer Arguments Against Free Trade, Not (1)

PaulC156 left a comment here:

Not sure exactly what you disagree with or how N Korea gets a mention.

I do not argue above for or against free trade but simply refer to historical reality.

Britain absolutely was not remotely free trade until they achieved economic dominance well into its industrialisation period circa 1840's. Prior to that it was the most protectionist of nations. Even then it returned to protectionism in the 1870's! Alexander Hamilton came to typify the US approach to free trade in the 18th C. Protect nascent industries (tariffs, quotas) until they are strong enough to outcompete foreign producers. That policy stood until the second half of the 20thC. 

As for Korea, South Korea is typical ditto Japan and modern day China. Massive state led investments allied with protection was the story for all these countries whilst they were industrialising. Still the case in China. S. Korea only liberalised in the 80's well after its industries were well established.

Ho hum.

1. North Korea is very relevant because it has just about the least free trade in the world, and its economy is pretty much on its arse as a result.

2. I certainly wouldn't hold up British Empire as a model of free trade, pretty much the opposite as far as 'everybody else' was concerned. Ditto USA.

3. As to the ASEAN countries, let's agree for the sake of this argument that they protected they 'nascent industries' until they were ready to compete on a world stage. (With those countries, the distinction between government and private, or between society and economy is pretty blurred - are businesses partly state-owned or do business leaders control the government? If Prussia was an army with a country, South Korea is a vast conglomerate with a country. The ASEAN countries also seem to have a sense of national cohesion that allows this. So to say that 'the government protected its domestic industries' is a bit like saying that 'businesses looked after themselves' which is perfectly acceptable.)

But hey, even so, I'd hardly call the UK a developing country, so the justification simply does not arise.

Tuesday, 14 November 2017

"Free trade case in a nutshell"

Physiocrat on top form.

Monday, 13 November 2017

Please sir, the dog ate my homework.

From The Evening Standard:

A specialist in infectious diseases feared she had lost seven years of invaluable research on tackling Ebola after a prolific burglar raided her home as she treated ill children, a court heard...

Dr Fitzgerald flew out to Sierra Leone in 2014 to spend seven months helping tackle the spread of the virus, and has just finished her PhD on infectious diseases.

Bonus bit for Daily Mail readers:

Describing the moment, on March 28, when she learned of the break-in at her £1.8 million home...

"I live by myself and the idea of someone breaking in and rifling through my belongings was a violation."

Friday, 10 November 2017

"How much of your area is built on?"

Splendid stuff from the BBC.

No point me summarising, posted here for reference. Suffice to say, my local council area (half of which is inside the M25) is 80% farmland and only 8% built on - the local NIMBYs have been putting up a fine resistance to anything since forever.

Thursday, 9 November 2017

"You ain't nothing but a hound dog..."

The lyrics to that song were a model of brevity and simplicity.

Conversely, what makes "Africa" by Toto so enjoyable to listen to is the fact that each second line is so ridiculously long. They must have had a bet going or something. From

I hear the drums echoing tonight
But she hears only whispers of some quiet conversation
She's coming in 12:30 flight
The moonlit wings reflect the stars that guide me towards salvation
I stopped an old man along the way
Hoping to find some old forgotten words or ancient melodies
He turned to me as if to say "Hurry boy, It's waiting there for you"

It's only the second and fourth lines which rhyme, the rest all leave it hanging. Genius.

Just imagine Leiber and Stoller had applied this technique...

You ain't nothing but a hound dog
A member of genus Canis (canines) that forms part of the wolf-like canids, and the most widely abundant carnivore.
You ain't nothing but a hound dog
You and the extant gray wolf are sister taxa, with modern wolves not closely related to the wolves that were first domesticated
You ain't never caught a rabbit
And were the first domesticated species that has been selectively bred over millennia for various behaviours, sensory capabilities and physical attributes

"Three men tackle rogue six-foot emu rampaging through North Lincolnshire"

Spotted by TBH in the Scunthorpe Telegraph:

It took three men to tackle a six-foot emu that has allegedly been rampaging through North Lincolnshire for the past week.

Ted Phillips, owner of Shepherd's Place Farm in Haxey, said that he jumped on top of the ginormous bird this morning (Monday, November 6) after receiving calls about the escaped bird all week.

He had been advised previously not to tackle the bird but took the decision to take it on anyway after hearing that it had taken a trip to Haxey Primary in the Isle of Axholme, because emus can be aggressive.

He said: "It's a game changer when children are involved."

Mr Phillips leaped on top of the bird while two other men held and tied its legs together and a nearby policeman "did the best that he could". They then flagged down a conveniently passing builder's truck and took it back to Mr Phillips's farm.

"We don't know who the emu belongs to," he said...

I love the bit about the "nearby policemen".

Wednesday, 8 November 2017

Excellent work by the ONS

From This Is Money:

Property in the priciest area of England and Wales cost a huge 25 times as much as in the cheapest spot, according to a new interactive map from the Office for National Statistics.

It shows that one square metre of floor space, an area about the size of a red telephone box, costs £19,439 in the salubrious London borough of Kensington and Chelsea. 

However, in the valley region of Blaenau Gwent, South Wales, the same amount of space costs just £777. Use the interactive map below to see how much a square metre of property costs in your local area and how it compares

I'm not clever enough to embed the interactive map, but it seems accurate enough to me. It's too coarse grained for proper LVT or Council Tax revaluations, because it's at local authority level and in many local authorities there is too much of a difference between the most expensive and cheapest areas, but where I live it's pretty much equally expensive all over the council area, so I can use that to illustrate the point.

It says just under £5,000 per sq metre. On that basis, our house should be worth about £650,000, a tad more than we paid for it three years ago. Seeing as typical build costs for a new build are £1,000 per sq metre, that means that the value of my house is 80% location value and 20% bricks and mortar, a percentage we can apply to the rental value to arrive at the location element/site premium.

All of which puts paid to the KLN that working out the site premium is difficult.
Via Josh Ryan-Collins:

Which sort of illustrates the point that as land and buildings are such a huge proportion of national wealth, there is no point having a general wealth tax, you might as well just tax land (secured on the land and the buildings thereon). Seeing as you can apply a much higher rate to immobile land than 'mobile' (or easily hidden 'wealth'), that means overall you can raise more money more efficiently by exempting all other forms of wealth. There's also the point that most other wealth is used to generate income, and that income is taxed, so most other wealth is already taxed, albeit indirectly.

Which neatly deals with another KLN, and the squealing from the lefties for a general 'wealth tax'.

Epic neo-liberal propaganda fail.

From the BBC:

Could giving property rights to the world's poor unlock trillions?

They are not talking about 'property' in the legal sense, they are using it as shorthand for 'land'.

And no, all that would happen - as the article makes clear - is that banks will tap in to the rental value of land via loans. That's one of the reasons why the Homeys hate council housing - the banks can't earn anything from it.

In 1970s China, for example, where the Maoists weren't the rebels but the government, the very idea that anyone could own anything was seditious, bourgeois thinking. Farmers on collective farms were told by Communist Party officials that they didn't own a thing. Everything belonged to the collective...

This approach worked terribly: if you don't own anything, why bother to look after it... collective ownership of land left farmers in desperate, gnawing poverty.

So, in Xiaogang in 1978, a group of farmers secretly met and agreed a daring plan. Instead of farming as a collective, they would informally divide up the land, and each keep whatever surplus they produced after meeting collective quotas. It was a treasonous agreement in Communist eyes: discovery risked execution.

In fact, they were found out thanks to their conspicuous success: their farms produced more in one year than in the previous five years combined...

The experience in China shows that even informal property rights can be incredibly powerful. If you know your neighbours respect your boundaries, you can feel confident investing time in weeding your vegetable plot, or building a house.

Bullshit. This has bugger all to do with land ownership, it has to do with ownership of the food produced (the results of their initiative and work done, thus truly 'private property').

It is basic human nature. It's like piecework. If you pay an individual $x for each unit he or she produces, most will try and produce more units. In that case, neither the raw materials nor the finished product is ever the property of the workers, but they are paid for the labour element they add (their 'private property').Take a large group of people and tell them they get paid the same, regardless of how many or few the group produces, the ultimate outcome is that little or nothing is produced.

Clearly, with farming, you need some security of tenure (be that long leasehold or freehold) because it is a long term thing, which is why arable farm tenancies tend to be very long. Conversely, sheep farmers are happy to rent pastures very short term, because it's just naturally growing grass. Actually being able to sell the land (i.e. use it as collateral) is irrelevant; or else there would be no tenant farmers.

But in one critical way, it doesn't help me that my neighbours agree that I own my house. If I want a loan - to improve my house, or build a business - lenders need collateral.

Ah right, so the first thing you do if you want to start a business is buy some land, to be able to borrow against it? This is madness. What about the majority of people who don't own land? In real life, you build up a business or find some other way of earning enough money to buy land, just like any other consumption good.

Tenants are quite happy to pay for improvements if they know they have a secure/long term tenancy, I've seen it plenty of times (in Germany or people in social housing). In the UK however, no residential tenant in his right mind will pay for improvement because a
a) he could be kicked out within six months and
b) the improvements automatically belong to the building i.e. the landlord, so
c) the landlord can increase your rent to make you pay for the improvements you made yourself.

And land or buildings make particularly good collateral because they tend to increase in value, and it's hard to hide them from creditors. But the lender needs to be confident it could take the house away from me if I don't repay the loan. So, I need to prove that the house really is mine. That requires an invisible web of information that the legal system and the banking system can use.

For Hernando de Soto, this invisible web is the difference between my house being an asset - something useful that I own - and being capital - an asset recognised by the financial system... 

But how do assets become capital? How does the invisible web get woven? It needs a government. Enforcing property rights is one of the few things pretty much everyone on the political spectrum agrees a government should do, except perhaps the Maoists.

Here we get to the neo-liberal nub of the matter, dressing up land as 'capital'.

De Soto couldn't actually give a shit about third world farmers, he's a shill for the banks (which is why the Cato Institute give him such a glowing write-up). Loans and interest can only be repaid out of the future income/profit from that land anyway.

Farmers can afford to buy most of the stuff they need every year out of their savings from the previous year (by definition) and if they need something bigger, like a tractor, there is such a thing as hire purchase.

Borrowing any more than that, purely backed by the value of land is a recipe for disaster for any kind of economy, agricultural or developed capitalist.

He also inadvertently makes the Georgist point that 'land ownership' and 'government' are more or less synonymous. It is only governments who can really say who owns land (until and unless they are overthrown or the country is invaded).

Utter, utter twats.