I was emailed a report today, titled Rethinking the UK housing system for the twenty-first century, which is a useful summary of the background to this and the current state of play, which set me off on another train of thought.
1. I genuinely believe, unless somebody has evidence to the contrary, that our economic system can be described as Home-Owner-Ism, which is inherently flawed. Nonetheless, any system, however flawed, will retain the upper hand as long as it has acquiesense of at least half the electorate. So let's look at the rise in home-ownership since 1914, from page 12 of this. As we see, the 'tipping point' of 50% home-ownership wasn't reached until relatively recently (1971):
2. Home-Owner-Ism goes hand-in-hand with NIMBYism of course; so once more than half the electorate is a home-owner and hence a NIMBY, you'd expect new house building to drop off quite sharply, as confirmed in Table 3 from the BSHF report linked to above - new construction, which had averaged over 300,000 per year in the 1950s and 1960s slid to about 200,000 during the 1970s and has not changed since:
3. One of the aims of Home-Owner-Ism is to keep house prices as high as possible. We know that the ratio between earnings and rents are fairly stable because the ratio of house-prices-to-rents and house-prices-to-earnings are more or less identical (from here)...
4. ... and that in normal circumstances, rents and mortgage payments for similar properties would be much the same, so it is more or less impossible for house prices to rise faster than earnings for a long period. Indeed it would be nice if house prices went down relative to earnings, the same as the price of food or cars or televisions, but that's another topic.
Nevertheless, rising prices create a feelgood factor that can keep even a Labour government in power for thirteen years, but the bubbles must inevitably burst. Apart from a blip after the Second World War (genuine physical shortage), the bubble era did not kick off until the early 1970s either; and every house price/credit bubble has been followed by a nasty recession that puts us further back than we would have been if we hadn't had the bubble in the first place. Here's my chart showing house prices rebased in terms of 2007 earnings (for explanation of how I derived this chart, see here):
5. Ho hum. The only other chart I'd really need is the chart showing how tax receipts, as a fraction of total tax receipts or as a percentage of property values have drifted downwards since the Second World War (continuing Richard Cobden's famous trajectory).
We know that Schedule A taxation was abolished in 1963-64 and that Domestic Rates were replaced with Council Tax (via the Poll Tax) in 1989; we also know that while Council Tax has doubled, in cash terms, since 1997, it has halved when expressed as a percentage of property values. Because Home-Owner-Ists just love a cut in property taxes, from Dearieme's dad back in 1963-64 ("It's good for us, son, but not good for the country") to our likely next Prime Minister solemnly pledging, as Item One of his Blueprint for Britain, "We will work with councils to freeze council tax for two years - saving more than £200 for the typical family."
Just sayin' is all. Feel free to make up your own minds.
Thursday, 22 October 2009
Causation, correlation, coincidence or conspiracy
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28 comments:
triggers a lot of thoughts over at Schloss Drew (freehold), Mark
(wv = libiou, another evocative one - how do they do it ?)
Thjat house prices remain flat compared to income (or worse) shows that prices are determined purely by the maximum position on the demand curve (with maximum demand incresing in periods when people think property is an ever rising investment). That means the supply curve, which in a growing economy should be dropping as technology im proves, has NO influemce on house prices.
ie we are proven as seeing a housing monopoly imposed by government fiat. I wonder if that is within the remit of the Monopolies Commission?
Thanks for this nice update. Its very informative.
Neil, the supply curve is almost vertical because of (artificial) on quantity supplied, that's the key to all this.
Note the threefold rise in owner-occupation early on. That's presumably due to Lloyd George's war on private landlords. Then you have the rise in Council Housing, as Labour tried to "build the Tories out of London". But although Council Housing got huge subsidies, many people loathed living in it. So not only did government give daft subsidies to owner-occupation, it gave it other incentives too.
Top quality post, as always!
D,
1. The early rise may also have been due to loads of new housebuilding in the 1920s and 1930s.
2. The "war" on private landlords didn't really end until Housing Act 1988, AFAIA, and Labour keep trying to start it again.
3. Council Housing isn't particularly subsidised. By and large, the rents collected cover the cost of maintaining, insuring etc. Rents are less than private rents, but that is because the private landlord collects the 'ground rent' as well as the 'buildings rent' but councils just charge for 'buildings rent'.
4. By far and away the biggest subsidy is the tax free capital gains (and non taxation of notional rental income) that accrue to home-owners. Sure, council tenants save a couple of grand a year in rent (compared to private rents) but these savings pale into insignificance to the windfall gains to home-owners. This is a large part of the reason why people prefer home-ownership to council housing.
5. Agreed, some council housing is very badly run. But Crown Estates (which does commercial properties) is state-owned and is just the same as any other private landlord, so it is possible for the state to run social housing properly - preferably by sub-contracting it for a profit-share.
AC1, thanks.
In the 1930's ,coming off the Gold Standard led to low interest rates.These combined with the Depression hitting argicultural land values so providing cheap land
( the land market also appears to have taken fright at Part 111 of the 1931 Finance Act threatening Land Value Tax ,though not for long)created the conditions for mass buiding for sale :3 million houses between 1933 and 1939.Such a pity the war came along ; to see it in Chamberlain's terms.
"...so once more than half the electorate is a home-owner and hence a NIMBY...."
I would dispute that; my impression is that, in the countryside and country towns, it is mainly the incomers who are NIMBYs. They want to keep the town/village/hamlet like it was when they arrived. (Mind you, it doesn't stop them trying to change their own property into a replica of the suburbia whence they came) Also they tend to be retirees, so antagonistic to any development that creates employment.
Further thoughts on Home-ownerism: I am not convinced by your arguments that home-ownerism = NIMBYism = reduction in supply of houses = maintenance of artificially high house prices. Correlation is not causation, as you imply in your title. Yes I am convinced that the government panders to the home-owner and yes I believe that most home-owners think that house price inflation is a good thing, but I also think that only a tiny minority of home-owners would realise that restricting the supply of new houses would help to increase the "value" of their property and only a tiny minority of those would be arsed to do something about it. NIMBYism, AFAICS, is prompted by perceived loss of amenity (loss of view, increase in noise pollution, crime, deterioration in appearance of neighbourhood), not by belief in some (however valid) economic mechanism.
Hello. I understand that the situation in the US is alarming right now, however, if the government doesn't stop spending money on reforms such as the first time homebuyer credit or homebuyer credit, which will be even more costly than the first one, there will be no economical recovery, on contrary, I think we can expect another housing "bubbles".
Take care,
Jay
Jay,
I think you have your economics backwards. The government transferring assets from the productive part of the economy to subsidise rent-seeking and asset bubbles will stop any economic growth (as is currently happening).
You want economic recovery? Then stop fining people for creating economic growth and tax them for their land externality.
Bayard, I agree, NIMBYs seldom openly admit that they do this to maintain their property's value in £-s-d, but it is still very much on their minds.
Jay, I'm not sure which way round you mean that - do you think "homebuyers' credits" are a good thing or a bad thing? Like AC1, I think they are a terrible thing.
the ratio of house-prices-to-rents and house-prices-to-earnings are more less identical
More or less identical you mean?
JH, well spotted, I have amended.
One of the aims of Home-Owner-Ism is to keep house prices as high as possible
Maybe I've misunderstood.
"Home-Owner-Ism" is surely just the idea that it is a social good for as many people as possible to own their own homes.
I'm quite happy to think of high costs as an unintended consequence or more likely, the inevitable result of the contradiction between various policy goals but to say "aims" suggests a deliberate intention.
When politicians of both parties talk about the desire for "affordable housing" they are either lying or stupid. The latter is more plausible.
TDK, the HO-ists say that home-ownership is A Good Thing (and let us agree for sake of argument that it is).
But surely the best way to enable as many people as possible to be able to buy a home is to build a few more (maybe 300,000 or 400,000 a year) to keep prices down?
No, say the HO-ists, we have enough houses - what we need is e.g. tax breaks for first time buyers (which merely inflates the capital cost of a house as well as increasing income tax - the subsidy has to be raised from somewhere before it is dished out again).
Otherwise it's like the healthists saying "We want people to eat more fruit but we also want to restrict the import and production of oranges and apples. But that pushes up the cost, so we will subsidise importers and farmers."
But surely the best way to enable as many people as possible to be able to buy a home is to build a few more (maybe 300,000 or 400,000 a year) to keep prices down?
It appears from the number of mothballed building sites around the country that the moment the price of housing starts to fall, people stop building them. Also, if anecdotal evidence is correct, there are plenty of properties standing empty ATM. I am thus not convinced that the house price bubble is a simple case of supply and demand. The "classic" bubbles of the past were not driven by a restriction of supply, simply the conviction that prices were going to continue to rise.
Bayard, that is superficially true. But it is also true that the house price bubble period is a relatively recent phenomenom that coincides with a severe reduction in new construction.
I tend to disgree with MW on this, I think house prices are more linked to Credit availability than building.
AC1, that is also true, and maybe it's an even bigger factor than lack of supply.
But getting back to Bayard's point on bubbles, you can't have a house price bubble without a credit bubble, it's two sides of the same coin - banks wouldn't lend like topsy unless there was a general belief that house prices would keep rising.
I have heard that there was some sort of reform of the mortgage system in the 70's? - around then anyway, which made it much easier for first-time buyers to get a mortgage. If this is true, then that, combined with a sharp decline in housebuilding, would have started the first bubble. This, combined with massive gov't pressure towards home-ownership (thanks, Maggie), could have adjusted the public view towards the "your house is an investment" view and "Home-ownership" and was born. The bubbles that followed were then inevitable, given that public mindset.
(It's a bit like global warming, astrology or any irrational belief; evidence for is seized upon, evidence against is ignored).
Much as I dislike NIMBYs, I don't think the selfish little bastards are the villains of this particular piece.
"combined with a sharp decline in housebuilding" - but that's the killer Bayard.
In free markets if demand goes up supply is able to rise to match it.
Neil,
Two things we don't know for sure:
1. The price rise was caused by a supply#demand imbalance and not another cause.
2. The cause of the sharp reduction in supply - even in a free market there can be restrictions on supply e.g. a natural resource being exhausted.
Bayard, as you say, it's difficult to "prove" item 1 either way, but item 2 - the restriction in new supply - is completely down to planning restrictions as enthusiastically enforced by NIMBYs. There is no shortage in clay or sand or plaster or copper pipes or anything.
But surely the best way to enable as many people as possible to be able to buy a home is to build a few more (maybe 300,000 or 400,000 a year) to keep prices down?
No dispute with supply and demand
No, say the HO-ists, we have enough houses - what we need is e.g. tax breaks for first time buyers
Well I'm not sure all HO-ists say that but let's assume it's true. The question is why?
This is surely an example of what I called by contradiction between various policy goals.
Policy goal A is to get more affordable housing. Policy B is to prevent the development of land because things like the Green belt are perceived as a public good. Each policy contradicts the other.
There is a cost in paving paradise. However, there is also a cost in not paving paradise. Rising housing costs being one. The fact is most people, particularly on the left do not understand this trade off and assume that wise men can achieve both goals.
Otherwise it's like the healthists ...
No argument. Another example is the thousands of "Green Jobs" that are going to be created. Broken Windows and all.
The point being, these are not arguments about home ownerism but about statism.
If the government acts to encourage home ownership then there will be unintended bad consequences which will be solved by progressively more interventions, which in turn have their own unintended bad consequences. But equally if the government builds 400,000 homes per year there will be unintended bad consequences.
Don't forget, we did that once. We destroyed local communities and replaced them with jerry built houses and blocks of flats. That worked out well!
TDK, "...if the government builds 400,000 homes per year there will be unintended bad consequences... We destroyed local communities and replaced them with jerry built houses and blocks of flats."
Agreed - there will be bad consequences if the government does it:
1. Some slum clearances were badly handled; most families don't like blocks of flats. So this was statism as well.
2. If you build on brown or greenfield sites then there isn't a community to be destroyed, is there?
3. As to what type of housing should be built, that is best left to supply and demand. The cheaper the land, the more money people will have to spend on the house (a nice semi costs around £75,000 to build).
4. As it happens, I support the construction of new council housing because it's cheaper than paying housing benefit to private landlords.
If you subsidise first time buyers (or public employees, or immigrants or single mothers etc etc) while preventing the supply increase all you are doing is (A) spending money & (B) making it more expensive for everybody else. There is only 1 cure for a shortage.
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