Wednesday, 5 August 2015

Deliberately confusing cause and effect.

From an otherwise sound article in The Guardian, pointing out that until the late 1990s, most people didn't pay much or anything at all for the land underneath their homes (Bayard heartily disagrees on this point but he is wrong). This was the inevitable result of a package of government policies that had vaguely Georgist intentions, although the article does not explain it...

Meanwhile, young people who do not earn enough to afford a large mortgage are caught in a downward spiral of debt.

“Income inequality is the real underlying problem for buyers today,” says Danny Dorling, professor of geography at the University of Oxford. “People can’t save for a deposit so they are forced to rent, but rents are so high they can’t ever afford to save. Rich property investors are simply rubbing their hands with glee.”

It has bugger all to do with income inequality, of course people earn different amounts of money depending largely on how lucky and/or hard working they are but the differences are not that huge. The vast bulk of people of whatever age have a reasonable opportunity to earn at least an average income over their lifetimes.

The inequality in land ownership stems from... inequality in land ownership. End of. And in the absence of land value tax (or some other package of measures) land ownership tends to become more and more concentrated over time.

So gross earned income inequality before housing costs is not that terrible, or even a necessarily bad thing in itself and certainly not the cause of housing inequality. What makes the huge difference is rents, which some households have to pay out of net income after tax and which are collected by other households.

And this is where the vicious circle mentioned by Danny Dorling kicks in. Forget about vague terms like "wealth" and just look at people's incomes after tax minus housing costs or plus rental income.


Random said...

Mark, you have to read this:
Accounting for shit.

Random said...
Guardian on top form.

The Stigler said...

Probably mentioned this before, but it was also the case until around the mid-90s that Building Societies, the main source of mortgages, were against people doing the thing of moving house and paying for the current house by letting it. You were expected to sell your house.

The demutualisation of these organisations led to a rise in BTL mortgages and things like interest-only mortgages.

My suggestion to young people is to get out of London and the South East and go West. I'm not sure what the attraction is anyway. It's not like 20 years ago when it was the only place with good bookshops, arthouse cinemas and places to buy Livarot. You can buy/rent all of that from Amazon.

Random said...

Mid-90s. Sounds about right. BTL and ultra-homeownerism started just before Blair comes to power.

Dinero said...

Lets do a recap and look at Ricardo's law of rent.

According to that economic concept the reason that Housing/Rent costs consume more as a percentage of income over the progress of time is because over the progress of time the income, prosperity and salaries of people go up , and the people earning those incomes put the highest value on their dwelling location before all other costs which in themselves are fixed or diminishing costs.

Mark Wadsworth said...

R, I have it's a load of rubbish. I can't even work out whether it's leftie keynesian high spend rubbish or faux lib small government rubbish. The man does not know what money is.

R, I will ignore the Guardian link for now. Supply has little or nothing to do with it.

TS, yes, mortgage restrictions (and higher interest rates for BTL mortgages) were one of the key elements of the 20th century "package". Quite possibly the demutualisation was a large part of the reason why they went mental on buy to let.

R, again, yes, mid to late 90s is went Home-Owner-Ism finally took over. Let's call it 1 May 1997.

Din, yes, exactly. That is the underlying trend. But what is important is that the 20th century package suppressed this very effectively for decades and probably even reversed it*, it was second best to proper LVT/Georgism but looking back, it was pretty good.

Once they phased out the package, things caught up with themselves and the underlying trend is being reinstated**.

* 1990 - 90% were private renters, 1990 - 10% were private renters.

** 2000 - 10% were private renters, 2015 - 20% are private renters.

Random said...

It is taking the piss out of "national saving."
The textbook analysis aggregates together the deficits/surpluses of two sectors (private and public) that are *disaggregated* in terms of their spending (‘G’ vs. ‘I’ and ‘C’). You end up with a model that can’t possibly be stock flow consistent: if there’s a government deficit, the corresponding surplus doesn’t show up, since it’s all mashed into ‘national savings’.

Bayard said...

"most people didn't pay much or anything at all for the land underneath their homes (Bayard heartily disagrees on this point but he is wrong)."

OK, how do you explain that, in the five or six years before I bought it, my first house doubled in value? It was the same house, so the increase in value must have been the land. It didn't even have central heating in it when I bought it and as far as I could see the previous owner had done bugger all in the way of improvements.

Derek said...

Must admit I'm with you on that, Bayard. Surely one just needs to pull the old trick of comparing 3 bedroom semis in different parts of the country for 1970 or whenever to find out what the land value differential would be at that time. And one could deflate by the RPI to compare houses from different years. Not ideal but it only needs to be roughly correct.