Sunday, 20 April 2014

UK House price to earnings ratio vs RPI inflation since 1948

It appears to be agreed that the rate of inflation is to a large extent down to what the government does (or doesn't do) and IMHO, the UK government stokes inflation as hard as it can once house prices peak and then start falling:
It's largely an electoral thing, because UK governments which allow house prices to slide nearly always lose the next election, so even if real house prices are sliding, the government can mask this by cranking up inflation.

Inflation also provides the Homeys with a wonderful justification: "Land is the only thing which beats inflation".

Well yes, of course, because the whole game is rigged. That's about as valid as saying "Solar panels and wind farms are a good investment." From the investor's narrow point of view, they almost certainly are... but only because of subsidies and tax breaks for the investor, which 'everybody else' has to pay in tax or higher electricity costs. Until and unless these forms of electricity generation become cheaper/more efficient than existing forms. It appears that solar panels will reach this stage in a couple of years, but that is a separate topic.

Suffice to say, the government and the subsidy collectors cannot justify the subsidies for solar on the basis that solar produces inflation-beating returns.

If the government were funded out of the rental value of land instead of taxes on earnings and profits, people would then get used to the idea that "Land is the only thing which doesn't beat inflation."

It's quite difficult to stoke inflation in the absence of currency controls, (in fact, currency controls are in themselves a cause of inflation), so after 1980 or so, inflation in the UK was never anywhere near what it had been in the 1970s and hopefully never will be, but that's not for lack of trying (0.5% bank base rate, QE, Funding for Lending, Help to Buy, VAT increases and so on):


Bayard said...

That first chart is depressing. If house prices have been 9 times disposable income before, they can be again.

Mark Wadsworth said...

B, for sure, but that was a post-war thing with genuine scarcity, you could equally say if they've been 4 before, they will be again (and they will).

Francis said...

What's "disposable income" here?

Mark Wadsworth said...

F, a good question. I assume it means net income after PAYE is deducted or income tax paid.

Bayard said...

Mark, it's a case of lies, damned lies and statistics, I think. After the war, very few people were buying houses anyway. Even the well-off middle classes rented. So the average house price may have been nine times the average disposable income of the nation as a whole, but not nine times the average disposable income of the house-buying classes. I lived a house that had increased in value five times over the war - from £50 to £250. That's no more than £40,000 by today's prices.