As soon as the money supply was checked house prices had to fall
and there had to be a recession. If property prices collapse
so will the UK banking sector.


12. The housing market

Few people understand why the price of property has risen so rapidly across Europe and North America over the last fifteen years. Most people are unable to understand why a young adult today cannot afford to buy a house when the same person could have done if they had lived in the 1960s and 1970s. Partly it is because banks and building societies have had excessive amounts of money to lend since 2000 and did so without reference to the ability of the borrowers to meet their repayment obligations. This caused prices to rise to unrealistic levels. However the main reason is because salaries have been falling in real terms by at least 6% per annum for the last 10 years and by probably 2% per annum for 20 years before that. The currency has also been hollowed out because the public component of GDP (using official figures) has risen from between 32% and 34% in the time of Margaret Thatcher to 43% today. It is misrepresented inflation rates over several decades that have been largely responsible for pricing the young out of the housing market. This process is ultimately like a game of pass the parcel. Eventually the music has to stop and then the value of homes has to plummet because young people cannot afford to buy into the market. Between 1975 and 2005 the age of a first time house buyer rose from under 25 to over 40. This was a good indicator that something was seriously wrong and shows well how successive governments have misrepresented the true level of inflation to keep the economy 'growing'. The period of very low interest rates had to end eventually and now that it has the consequences will be very serious.

It is often stated that Britain is one of the richest countries in the world but a large part of this 'wealth' is due to the value placed on people's homes. This means that most of this 'wealth' is unearned and very theoretical. It can be argued that the value of a house has more to do with the sums of money that the banks and building societies are or were prepared to lend rather than their actual value. The upward surge in house prices over the last 10 years was caused by large quantities of money being made available for borrowing at unrealistically low rates of interest. In crude terms interest rates more than halved and the value of properties more than doubled. In the last few months the money supply for purchasing houses has been dramatically reduced and interest rates have increased by a considerable amount relative to the levels that were available five years ago. In historical terms the recent rises have been small. Now that the amount of money that is available to borrow has decreased and the rates at which it can be borrowed have increased it is only logical that house prices should fall. To correct the problems in the market, house prices will have to fall back to their 'normal' historical levels. Much of the current difficulties have been caused by irresponsible lending practises by the banks and building societies encouraged by governments understating inflation rates to create the impression of growth.

Property has rocketed up in price in the last ten years but only because interest rates have been artificially lowered. House prices could not have risen much higher because it was getting difficult for new players to enter the market even with low interest rates. The only way that property prices could have risen much higher was if interest rates had gone still lower and if the Government had done everything in its power to restrict the supply of new homes. The fact that 70% of all the new dwellings in London were being bought for investment in 2006 shows the perilous state of that market. It was not new owner occupiers who were supporting the market but speculators looking for a quick return. A housing market that has few new players entering it has to collapse eventually. The housing market in Britain is a pyramid that has lifted away from its base. As a result property will not be a good place to invest cash for the foreseeable future.

The British Government cannot allow house prices to fall by very much as so many people regard their home as their main source of wealth although it was never earned. For this reason interest rates must remain low and the housing shortage must continue. Any bank or building society that looks as if it might fail has to be rescued by the Government so as to maintain confidence in the banking system. The Government has recently attempted to tie the banks and building societies together so that they are effectively responsible for each other's losses. This is a good way of ensuring that there is a domino effect if the mortgage market fails. However such an approach has other serious consequences for society. Low interest rates, that do not reflect the real level of inflation, will encourage some people to borrow but the consequence is that saving is pointless for the rest. This is why the level of saving by individuals is now at a record low.

The financial systems of the West depend upon public confidence. The governments of the Western Nations have been dependent upon their people borrowing more and more as their manufacturing capacity has been lost. Already there are serious problems for people who have borrowed so much money that they cannot support the interest payments let alone repay their loan. At least half the mortgage money borrowed within the last ten years could be lost if interest rates went back to their historical level. If the value of homes in Britain were to drop by say a third the banks and building societies would have so many repossessed properties to dispose of that homes would drop to half their current value. This would mean that the banking sector would lose over 700 billion. The whole of the UK banking sector would then collapse and there is nothing that the British Government could do about it.

To help boost and now to maintain the price of homes the British Government has deliberately restricted their supply. Maintaining house prices was done by forcing development onto difficult high cost sites and restricting access to easy green field sites. This suited the Government because it has always been easy to excuse development on previously used sites. Now there will be major problems for the Government and local authorities because it does not make commercial sense to build houses on difficult sites now that property values have dropped and speculators are withdrawing from the market. If more than a handful of new houses are to be built in the near future either property prices will have to rise back to the level in early 2007, which is highly unlikely, or the house builder's costs will have to fall. It is not just a case of land prices falling as much of the land that has planning permission for homes in the UK requires expensive enabling works or is in difficult locations that are intrinsically expensive to develop. If the Government wants a large number of reasonably priced homes to be built in the near future then it would have to adopt a very different attitude to green belt policy. It also means that the concept of planning gain will have to be dropped. The British Government has recently introduced the notion that all new dwellings should be ecologically sustainable and zero carbon. This might be wonderful for the environment but it will increase the cost of building a dwelling by at least 35,000. At a time of falling prices introducing regulations that will force up the construction cost of a dwelling is hardly logical. Having say 200,000 energy efficient dwellings out of a housing stock of 25,000,000 units is hardly going to make any difference to the global environment. One has to wonder why anyone would bother unless it is for some ulterior motive like forcing up the cost of new homes.

The Government has a vested interest in maintaining the price of houses. Firstly it stands to gain additional stamp duty and death duty. More importantly, until recently, people have willingly borrowed against the theoretical increase in the value of their home. This has kept the British economy running for the last ten years. One of the other benefits for the State is that people will have an asset that can be used to support them as they near the end of their lives. The cost of keeping an elderly person in a nursing home is over 700 a week. If a person lives for say three years in a home then the cost, with pocket money, will be about 120,000. No Government can start to contemplate this level of expenditure with a huge ageing population. If the Government can insist that some or all of the value of a person's home is spent on their care at the end of their lives then the cost to the State will be significantly reduced as life expectancy, after entering a residential home, is limited. However this assumes that enough people can enter the housing market to maintain the value of properties. It also assumes a massive level of undisclosed inflation otherwise younger people will never be able to afford to buy into a market that has dissociated itself from real wage levels.

The population is getting older. Another 3 million homes would have had to have been built in the last 25 years just to keep up with the increase in life expectancy. This is a fact that is never discussed when the housing crisis is aired. If the current increase in life expectancy of 1 year every 5 years continues then a huge number of additional homes will be required in the future. For the Government having an increasingly elderly population is a blessing as they tie up such a large part of the housing stock and so help to restrict supply. Migrants are coming into the country in large numbers, and an increasing number of people are choosing to live alone. The number of families waiting for a Council or Housing Association home is now 4 million people. The Local Government Association expects the total to reach 5 million by 2010. There are also many young people who need accommodation who know that there is no point in even bothering to register. The factors that are driving this demand include high house prices, the credit crunch, and fewer new homes being built. There is no mechanism in the UK that would allow mass housing on a scale that would solve this problem. To get the British housing problem under control it would be necessary to build a city the size of London. No British Government of any complexion would contemplate such an exercise, even if the country could afford it, because of the outcry from middle class voters.

When the price of houses fall back to their true level, which has to be related to average wage levels, it will be impossible to develop most of the large sites that now have planning permission. The politicians are now stuck because there is nowhere for them to go because they have been stressing the importance of overdeveloping existing urban areas. Gordon Brown's Eco-Towns are now stuck because no financial model will make any sense when applied to them now that the market has dropped back - not that the policy made a great deal of sense before the collapse of the housing market.

It is interesting to note that politicians are still claiming to have been responsible for an increase in the number of completed houses since 2000. For the last five years politicians were able to claim success for delivering social housing on the back of planning gain. The increase in the delivery of social and affordable houses was only possible because of the very high prices that developers and builders could achieve. Only when house prices reached unsustainable levels was it realistic to develop difficult sites. As access to green field sites was so restricted it was possible to justify building on previously used land (brown field sites) even though the remedial costs were very high. Similarly building inside a heavily developed and congested area like central London was only viable if prices were unsustainably high. The amount of planning gain that was being demanded by local authorities now means that marginal house building projects will now make no commercial sense. Even with large amounts of cheap money available to borrow 70% of the new properties in Central London were bought by speculators in 2006 and early 2007. This shows that the price of even the most basic units were above the reach of ordinary people due to no small extent as a result of planning gain. Now that house prices are falling so the supply of houses that local authorities were obtaining from planning gain will cease.

The Government's current housing policy insists upon a pattern of development which will create a miserable set of conditions in a World that becomes increasingly short of energy. Instead of designing accommodation that can house people when the energy and resources run out the State is increasing the density in cities. Before WWII the population of London was approximately 8,000,000, by the late 1960s this had been reduced to 6,000,000. Recent Government policies have pushed the total back toward the pre War level which is why the infrastructure is overloaded. The problems of living in a city like London without electricity to keep the pumps running and to allow access to the top of high density developments is not considered to be of importance in the formulation of the Government's planning policies. Cities where street lights have to be turned off and where burning wood and coal is impossible will not be pleasant places to live. Life in low lying areas will be impossible as rising sea levels will eventually overwhelm the sea defences.

Despite what the Government keeps saying about the need to conserve energy there is no sign that it has any intention of doing much about it. To encourage people to build dwellings that have a low energy input during their construction phase and low energy input for the rest of their life the whole concept of planning would have to change. The only certain source of energy (away from the coast) is the sun. Homes would have to be widely spaced on south facing slopes to make best use of the sun. This requirement flies in the face of every aspect of existing planning law. The British Government still wants even higher housing densities. In such developments the sun will never strike the face of most of the buildings that currently have planning permission. The only practical source of heat will still be gas or oil. Heating with electricity was tried in the 1960s and early 1970s and found to be very unsatisfactory and expensive to operate. Retrofitting an apartment block or a high density estate with wood or coal burning stoves is hardly a practical proposition. When the gas supply ends the consequences will be very serious but only because of Government policies.

The misrepresentation of the real rate of inflation has created an environment in which saving is pointless. However home owners felt reassured because the value of their dwellings were increasing. These people are now watching the value of their homes fall. Even the recent small drops in value are serious for some older people who borrowed against the increasing value of their homes. Fortunately for the majority of older people the drop in the value of their homes is not yet serious. What it does mean is that the British Government now or in the future will not dare to do anything that would threaten the value that people attribute to their homes however serious the housing problem. This can be seen by the sheer amount of money that the State spends on housing benefit which is now in excess of 15 billion per annum. With this money the Government could have built 200,000 homes a year, every year for the last decade. This would have kept down the returns on rental properties and restrained house values. Neither of these are things that the British Government would want to happen. Such development would also anger the middle classes. Maintaining the very inefficient status quo is politically the best option. Forcing most new houses to be built in dense inner city areas and on previously used land was a good way to artificially force up the price of homes. The need for environmentally friendly zero-carbon homes and offices will be a good way to maintain prices as all new buildings will cost significantly more to build than those that are already on the market. Quite what the advantages are of having a few hundred thousand low energy dwellings out of a total of 25 million is unclear.

China is planning to build more than 100 cities the size of London. Few people in Britain question where the wealth and materials that are needed to build these cities will come from. The answer has to be trade with the West who have financial reserves to draw upon. Eventually these reserves will be exhausted and at that point the West will be left with a huge number of unemployed, unproductive and elderly people to care for. Being democracies the politicians will have to keep as much of the infrastructure running as long as they can and so taxes will keep on rising. The cost differential between the West and the World norm for businesses will have to increase until Britain is bankrupt and then it will implode upon itself. Before that happens there will be a large number of social problems caused by overcrowding, poverty and ethnic problems. In some areas care for the elderly is already breaking down and this is a problem that will only get worse as resources become more restricted.

Published: August 2008