Policy Research in Macroeconomics

Why building more homes will not solve Britain’s housing crisis

In an article for the Guardian, published on Saturday, 27 January, 2018, PRIME’s director drew a parallel between the Bitcoin bubble and the inflated London property market. She argued that “vast sums of money have been poured into finite supplies of bitcoins and London property. Both have consequently exploded in value, albeit over different time periods. And so both have become financialised assets that deliver capital gains far in excess of people’s ability to earn income from work, or from investment in the real economy. And as with bitcoin, so with London property: speculators are convinced that prices will continue to rise for ever.”

The full article can be found on the Guardian’s website by following this link. 

One Response

  1. Absolutely correct. The problem with housing provision is the same as with pension provision. It comes down to astronomically inflated asset prices. House prices have been inflated as a result of speculation, in the same way that bond and share prices have been inflated by speculation. The astronomical price of houses prevents workers from being able to buy them, and so also pushes them into renting, which then pushes up rents. The astronomical prices of shares and bonds has meant that workers pension contributions have bought fewer and fewer of them, thereby undermining the capital base of pension funds, and so their ability to generate the revenues required to cover the future pension liabilities.

    Because, the astronomical inflation of share and bond prices gave the illusion of high capital values of pension funds, it enabled firms to take pension contribution holidays, and by paying pension liabilities out of paper capital gains, rather than revenues (which became ever more difficult as yields on those assets declined, inversely to their rise in price) that further undermined the capital base of those funds, which has led to the huge black holes in pension funds that have been witnessed in recent years.

    The reason that builders do not build more houses is that they build to produce profits not houses. The astronomical rise property prices, led to an astronomical rise in development land prices. The astronomical rise in financial asset prices, by also causing a corresponding fall in yields, caused land prices to rise further, because land prices are capitalised rent, and as interest rates fall, so capitalised revenues rise. The astronomical rise in development land prices, thereby causes the cost of building new houses also to rise astronomically, because the price of land accounts for around 80% of the cost of building a new house.

    Builders will not build large numbers of houses at the kinds of prices that would enable them to cover these high land and construction prices, plus average profits, because there is not sufficient demand for them at those prices. It would lead to excess supply of new houses, and a fall in their price to levels below which the builders could make profits. That is why the builders prefer to simply bank the land, thereby making capital gains, whilst releasing only enough to produce the houses they know they can sell profitably – which is why most modern housing developments rely on selling off plan.

    The solution to the problem of housing provision and pension provision requires that these speculative bubbles be burst. A bursting of the bubbles in share and bond markets will allow workers pension contributions to buy more bonds and shares, and will also lead to higher yields on them, thereby providing the revenues required to meet future pension liabilities. A bursting of the house price bubble will also burst the bubble in development land prices, which will vastly reduce the cost of building new houses – vital also for any effective, large scale council house building programme. Its also obvious, therefore, why central banks and conservative governments have followed the opposite policy of ensuring these bubbles were inflated, because they thereby protected the paper wealth of all those who currently own the vast amount of these various assets. They have done so, even at the cost of the real economy.

    A sharp fall in development land prices, and a notification to all of the speculators that have bought land, shares and bonds purely in the hope of enjoying capital gain, that the party is over, will lead to those speculators also throwing the hoards of land and property on to the market, thereby reducing existing property prices, and making them again affordable to workers.

    The problem with housing is not a shortage of supply. In fact there is 50% more homes per person today than there was in the 1970’s. The problem is that the price of land and of property has been driven up as a consequence of speculation. I was disappointed to hear Jeremy Corbyn say that a Labour government would introduce a government backed and subsidised mortgage scheme for buyers who could not afford to buy. That is the last thing required. It simply replicates all of the aspects of government policy over the last few years that artificially supported demand for overpriced houses. If workers can’t afford to buy houses at their current massively inflated prices, then either wages need to rise (by about 60%), which isn’t going to happen, or house prices need to fall drastically. To get back to historical averages, of around 2.5 to 3 times average earnings, from current ratios around 10-12 times average earnings, they need to fall by around 75-80%. In the meantime, Labour should be proposing providing lots more council houses to rent, for those workers who can’t afford to buy, and should be reinforcing the commitment to supporting trades unions, so that workers can negotiate higher wages, and a substantial rise in the Minimum Wage, preferably for a Minimum Weekly Wage, rather than Hourly wage.

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