Sunday, 9 December 2012

Economic Myths: The UK house price bubble was merely the flip side of sterling devaluation

This is something which all sides like to trot out; mainly the Austrians and Faux Lib's, but also some of the priced out-conspiracy theorists, and the Homeys like to use the retrospective justification that owning land is the only good hedge against inflation (Home-Owner-Ism is in fact the main cause of inflation).

The theory ignores the basic fact that currencies can't all devalue relative to each other, and that there were price rises in nearly all Western countries (and in PR China) between the mid 1990s and 2008 or thereabouts. The argument that net immigration causes house price rises suffers the same flaw: even in countries with net emigration, there were house price rises over the same period.

And all the evidence points in the other direction: there is a positive correlation between the strength of sterling and UK house prices.There are subtle reasons why one causes the other, or perhaps they have a common third cause (it might be as simple as the fact that what is good for the UK economy is good for GBP and pushes up house prices and vice versa), see footnote*, but hey:

I think it would be fair to summarise those charts thusly:
- From 1990 - 1995, GBP and house prices both falling;
- From 1996 - 2008, GBP went back up sharply and then plateaued; house prices rose steadily throughout;
- In 2008 and 2009 GBP and house prices fell sharply
- From 2010 - today, GBP and house prices have been bumping along the bottom, both drifting down slightly.

That looks like a positive correlation, not a negative one which is what the Faux Lib's claim.

* The main cause of high house prices is an increase in the amount of credit created by banks; the bankers are probably the main driving force behind all this, along with a few very large landowners:


Richard said...

Get yourself over to the Liberal Conspiracy blog and demolish all the old faux arguments against a LVT. I am convinced that you have more chance of getting a LVT by convincing the Left than you will by getting anything from the Right.

Mark Wadsworth said...

RA, I posted a comment, it doesn't show up.

I see that Home-Owner-ist super c**t Richard Carey is at it again with his lies and bollocks.

Richard said...

" The UK house price bubble was merely the flip side of sterling devaluation "

I've never heard this theory but on every level it is complete bonkers. If anything it is the complete opposite in that a strong or overvalued currency could lead to an increase in house prices through the wealth effect. If the currency is overvalued people feel wealthier through having increased purchasing power and as a consequence could bid up house prices.

People forget that when sterling depreciated in 2008 by around 25%, that was it going to somewhere around fair value because it had been overvalued for about a decade. How anyone can say the UK house bubble in those years had anything to do with an alleged undervaluation of sterling is beyond me. The trend movement in currencies and even what is fair value for a currency is difficult to predict because there are so many variables. Sterling spent the noughties being overvalued because it is a risk asset that the rest of the world buys when the global economy is doing well. The huge flows of international capital flowing into the City of London in recent years helped to cause the overvaluation. Good for consumers of imports but not so good for produces of exports. That is exactly what we seen over the last ten years when shops etc did well and industry struggled. When the flows slowed down in 2008, sterling depreciated. Very little to do with house prices and if there was any effect it was in the opposite direction.

Lola said...

Question. Your last paragraph is exactly how I understand 'Austrians' define inflation, that it is the warranted expansion of money and credit [by definition by central banks and banks]. Yet you suggest in your first paragraph that they say something different. Eh?

By no means am I a gold bug, but if you plot all global fiat currencies against gold they all decline. Whereas if you plot oil v gold the price is broadly stable, ex quite a bit of oil price volatility, which I think you'd expect.

What's going on?

Richard said...

Mark Wadsworth said...

" I posted a comment, it doesn't show up. "

You may not have put your name in the column above the posting box.

Lola said...

Your third graph interests me. Working on the street, as it were, in respect of mortgages from the late '80's until, well, now, I can tell categorically that mortgage business went bonkers from about 1999 to about 2007/08. Personally once it got really obviously stupid from say 2003 onwards I set about stopping doing it, or rather re-directing my business elsewhere, on the basis that it was all going to go horribly wrong. Question 2, if a little provincial bloke like me could see this why couldn't the Great and the Good?

Robin Smith said...

This is a dangerous assertion: "The main cause of high house prices is an increase in the amount of credit created by banks"

Were it not for the hope value expected from increasing location values there would be no incentive to create more money.

So would it be better to say:

1) High rents start with the ability to profit from speculation in land values.
2) Its further fuelled to boom/bust levels by loosening of bank credit, which if land speculation were not systemically bad would be a good thing, due to price discovery

Beware of cart before horse.

Robin Smith said...

Lola: did you notice the mid cycle crisis in 2001?

1994 - End of last recession
7 years of slow growth
2001 - short crisis
7 years of boom growth coupled with credit loosening
2008 - 4 years of stagnation

= 18 year boom bust property cycle.

We should be into the next slow growth 7 year phase now. But I'm worried that the property market was not allowed to default properly this time.

My view is that only if we allow more starving people to die around the globe can we successfully make it into the next boom... just.

This is my view of the utter ignorance and stupidity of us all. Its not what I want not happen at all. I'm just pointing out what will happen.

Lola said...

RS Nope. Not that clever!

I'd sort of figured out Georgeism before I'd even heard of it. It was clear that all profits return to rent, or more accurately why could people never create cash surpluses from earnings, especially average earnings? Every time they get a bit better off the rent goes up. The State recognised this years ago with a London Weighting for its employees.

My old man was a spec house builder and never factored land value increases into his profits because that appreciation was always needed to replace his land for the next scheme. Whereas when I worked for Barratts they didn't. Rather amusingly they, Barratts, bought some land that my dad bid for at a much higher price. When I worked for them they couldn't sell the houses for enough to make it pay until the house prices had inflated enough. The site was therefore never 'profitable'. That Barratt company was shut down eventually. (Barratts traded through local companies as part of the group).

Lola said...

Clarification. Barratts outbid the old man.

Richard Allan said...

Just an aside Mark, but you did say "RA" explicitly. Unfortunately I can't claim credit for the other Richard's insights!

Mark Wadsworth said...

R, ta, good possible explanations. As to LibCon, maybe I forgot to put my name in twice, I'll try again.

L, yes, their definition of inflation (volume) is different to the everyday understanding (prices), although in this case it's the same thing (house price inflation).

RS, I'm not making any "dangerous assertions". If there is a limited supply of something and people start doing leveraged speculation on it, then you get a bubble (in prices and in the amount of credit). It usually - but not always - happens with land prices, that's all.

RS: "I'm worried that the property market was not allowed to default properly this time."

It was barely allowed to default at all! They have made more progress in the USA, which is why things look slightly less grim over there.

L, ta for anecdote. It's good if you work things out for yourself, it's just a bit annoying when you realise that loads of other people already had done so before you (only you didn't know because they were hushed up).

RA, well spotted, force of habit.

Lola said...

MW. Actually I find it very reassuring that many others have worked out the same thing.

When you start out mostly you are arguing against prejudice and ignorance and being a lone voice is well, lonely. What also really annoyed me was lefties labelling me as a 'Tory', in the perjorantive sense, and righties being smug and condescending - until you backed them into a corner in an argument. I could never understand this polariastiuon betwene left and right. I am now sure that it's not that at all. The polarisation is really between authoritarianism (slavery - wage or otherwise) and liberty.

Mark Wadsworth said...

L, hence and why Robin Smith has come up with a good YPP slogan/riposte:

"Asking us whether we are left or right is like asking an atheist whether his is Protestant or Catholic."

YPP is firmly on the side of "liberty" (social and economic). There's not much point having the perfect economic system if the speed limit is 10 mph, music and alcohol are banned and women aren't allowed out of the house unaccompanied.

Lola said...

MW re last para. Mrs L holds that I am not safe out on my own....

Lola said...

Seriously though, if YPP equates to the Hayekian view of a 'Party of Liberty' then I am for it. But isn't that what the Libertarian Party (Thinks. How do you organise a party for libertarians...?) was about? And if so are not we liberty lovers, by our natures, too fragmented to make an impact?

Mark Wadsworth said...

L, I had some contact with the people who set up LPUK right at the start, and originally their outline manifesto did include something about shifting to LVT.

But then they realised the implications and/or got hijacked by Faux Libertarians and are totally officially rabidly opposed to LVT. So we parted on fairly bad terms.

Paraphrasing my earlier reply, even if we are completely socially liberal (drugs, gay marriage, smoking in pubs, whatever, topics on which I wholeheartedly agree with LPUK's stance), then that too is worthless without economic liberty. You need both.

Bayard said...

"Asking us whether we are left or right is like asking an atheist whether his is Protestant or Catholic."

Somebody at my school was from Northern Ireland and, fed up with being stopped by bullies and asked if he was Protestant or Catholic and having to guess the right answer, thought to say instead that he was an agnostic. Back came the question "Are you a Protestant agnostic or a Catholic agnostic?". So, sorry, RS, your riposte won't work in NI.

Lola said...

MW. Well, of course. And that, as I understand it, was Hayek's point. Liberty is indivisible. Social liberty isn't complete or possible without economic liberty.

Trouble is all the authoritarian numpties I have ever met (on both left and right) are enthusiasts for politicking. They don't seem to have hobbies or passions. Politicking is what they love to do. Whereas anyone half vaguely sensible realises that politicking is a juvenile waste of ones life when there is so many more much more important things to do. Racing old racing cars for example. (I hold to the view that the more utterly pointless a thing is the more important it is.)

. said...

The China effect began in earnest in about the mid 1990s. The inflation target meant that the deflation of goods prices imported from China was masked by a huge inflation in the price of goods and services which could not be deflated by the China effect. If we had kept the "real" value of Sterling flat then we'd have seen the relative prices of goods and houses stay the same, but goods would have gone down and housing up less.

I think we can say that Sterling's value was significantly watered down over the last 20 years in order to mask the collapse in consumer prices.

However I think you are right that this doesn't explain most of the housing bubble which was caused by bubble psychology egged on by a government that knew it would be unelected as soon as the music stopped.