Thursday, 30 September 2010

The illusion of housing wealth

I rarely sit at dinner party up where the guests gush with enthusiasm at the rising price of either petrol or food. I never hear, "You will not believe it but I when I filled my car up the price of a gallon was 10% lower and that was only last week!. I still have half a tank left so I really timed that refill perfectly!". They do however bang on all the time about how the price of their house has gone up 10%. At this point I usually tell them to cash in and move their families to a tent in a discreet and unpatrolled part of an english forest. The profits should afford them a first class commute to work every day and a luxury portaloo. This does not usually get a sensible response from the majority who feel somehow THEY uniquely have become far richer as a result of house price appreciation in the city they intend to live in for the next 20 years. Their wealth is defined in dollars or pounds not in how much space they can afford.

This illusion of economic progress which relies on the value of our houses going up is probably the biggest con our governments have perpetrated. And we have fallen hook, line and sinker. Just as governments publish dubious research on how it is healthy to get inebriated with 3 units of alcohol every night (keep the populace merry, and they will not notice the poor job we are doing), they have persuaded the country to remain punch drunk watching the value of their houses inflate. And hence a huge proportion of the nations economic output is devoted to producing clones of Kirstie Allsop for every one of our five hundred channels. And that is all the nation seems interested in watching. That and the National Lottery of course, essential viewing for those still aspiring to get onto the housing ladder.

Only in China it seems the government is prepared to take serious steps to stem the the property bubble by reducing credit (Chinese property tax). Their government has taken the radical view that more and affordable housing is preferable to expensive and scarce housing. In the UK, the BOE has cut rates to 0 to assist foreign speculators and property developers to deliver the opposite result.

Everyone in UK should be looking to purchase more space for their money - not less. Rapid house price inflation means that over time people have smaller places to live in, and rapidly. That surely is something neither the citizens nor its elected government can consider an economic good.


  1. "At this point I usually tell them to cash in and move their families to a tent in a discreet and unpatrolled part of an english forest. The profits should afford them a first class commute to work every day and a luxury portaloo."

    LOL! Excellent retort, and rather fitting for me to read at this time; I am seriously looking into buying a field/woodland and plonking some sort of portable dwelling on it. I'm seriously considering the potential of battling with planning if I get caught, trying to figure out how to get fuel, water, etc to such a place unnoticed, and to be forever looking over my shoulder in hope I don't get caught. But, this isn't because my property has risen by 10%, oh no. It has more to do with the fact me and my partner are pretty much priced out of most markets and we are at the end of our tethers. I mean, we could accept some damp, mouldy, run down rabbit hutch of a flat in some economically and socially run down area full of drug gangs and hundreds of miles from where we work. But we would prefer to live the rest of our lives without the fear that our property, car or persons will not be intact in the morning.

    I keep hearing of this house price crash, but being on the practical side of this, I still don't yet see it in my personal 'real terms'. Me and my partner live 200 miles apart and have been trying to buy a property for years. We both live ridiculously cheaply to save for a house. We make do with seeing each other less so the money we save on travelling can go towards our housing pot. We are both working long hours to save; and all we want to do is start our lives together; at this rate it is going to be another 5 years minimum before we can even potentially buy something... and that is assuming my partner doesn't get made redundant again... or that my business continues to pick up.

    I guess I'm in the demographic the media doesn't like to portray much - I want a proper housing price crash, and not some little 'blip' where average house prices are *still* 7 times the average annual income for my area, as opposed to the 10 times+ it was at the peak of the 'bubble'! A 'proper' housing crash is what this economy needs, but no politician will admit it, no media outlet will be seen to publicly discuss it in a none hyperbolic way. Our government would rather we all continue aspirationally living beyond our means and prop our lives up with credit.

    So yeah, thank you for saying to your dinner party friends exactly the kind of sentiment I want to say to every person waxing happily of their pointless, and artificially inflated, property price increases - because their 'increase' means more to me than it does to them... in very real terms.

  2. Well said Patrick. The house price bubble has been enabled by reckless lending but the market has been underpinned in the short term by the lowest base rate ever (saving the over-mortgaged and banks at the expense of savers) and, in the long term, by our tight planning laws, demograhics and taxation - all to support home owners. Wonder if it it something to do with most MP's having state funding for a second home until recently (and with a bit of flipping they can avoid taxes on this) and quite a few buy-to lets. Buy-to-let mortgages are tax deductible against rents which have been inflated by rising housing benefit contributing to the bubble. Then there are the foreign investors who can buy here and seemingly avoid any tax on rent and capital gains by doing it through off-shore companies - profiting from the services and political stability here without making any contribution to it. We need a land value tax as described by Martin Wolf in the FT.

  3. House-price inflation doesn't shrink houses - it just increases the prices. And transfers income from the younger generation to the older.

    At least your dinner-party acquaintances aren't bragging that Greenspan's largesse made them a telephone-number bonus in the financial markets.

    That really would be irritating...

  4. John, for a given budget, higher prices mean less space. Actually, my dinner party guests are acutely aware of their generation wealth benefitting from the Greenspan put, which is honest and more than you can say about central bankers statements of intent today.

  5. Patrick, you are quite right. It seems inevitable that one day we will all be living in billion-pound broom cupboards.