A good well-thought out article, whose basic premise (the young are screwed over by unaffordable housing) is manifestly correct.
The problem is, though, that the high cost of housing is not fundamentally an issue of supply and demand, any more than the high cost of tulips during Tulip Mania was. It is true, obviously, that increased demanโฆ
A good well-thought out article, whose basic premise (the young are screwed over by unaffordable housing) is manifestly correct.
The problem is, though, that the high cost of housing is not fundamentally an issue of supply and demand, any more than the high cost of tulips during Tulip Mania was. It is true, obviously, that increased demand and restricted supply will lead to sustained price increases, but not to the extent seen in Britain and capitalist economies across the world. Rather, the cause is simple. Every house is bought with a mortgage; every mortgage is a fractional reserve loan, that means every mortgage creates money, that means prices go up. Specifically, prices go up where the money is being spent, which is houses. After two episodes of messing up and causing high inflation (20s and 70s), western financial elites have successfully figured out how to channel inflation into the stock market and asset prices, without it leaking out too much into general consumer prices, which they can then call 'economic growth'. And, indeed, this does create the effects of economic growth, except for those at the end of the queue.
In short, housing is a bubble. At this stage of the bubble increasing supply will not even exert a downward effect of prices. All new houses have to be bought with a mortgage. Every mortgage further blows up the bubble. There is no escaping this, except by popping the bubble, which will bankrupt most financial institutions overnight.
And yet there is no choice short of accepting homelessness as the new normal.
This canโt be solely attributed to a bubble, as evidenced by declining floor space per person. There is a shortage of liveable space relative to the population and its growth rate.
All economic phenomena are complex, so you have to filter out the signal from the noise. It is true that, unlike many comparable economies, Britain has both a growing population, and more restrictions on new construction. Nevertheless, the scale of the increase of prices seen for three decades is something that is not seen anywhere as a result of supply and demand, not even under famines and other extreme conditions.
There is only one thing that can produce that kind of price inflation: inflation. If I knew nothing about the UK except a graph of its house prices, I would tell you that it has an inflationary monetary policy in which new money is systemically funnelled into the housing market. And it does! Moreover, I would predict that the annual rate of house price inflation is uncorrelated to changes in population and housing stock, but corresponds to changed in the total supply of money. And it does!
We have lots of real-life experiments with this sort of thing. At the collapse of the Soviet Union, Israel's population suddenly expanded with the influx of more than a million immigrants, equal to nearly a quarter of the population, within two years. Effect on housing prices? minimal. Bank of Israel cuts interests rates to a quarter of a point in 2008 and keeps them there ever since: unprecedented (in Israel) house price rises so that less than two decades later young people cannot afford a house for the first time in Israel's history.
Declining floor space per person is not inconsistent at all with a bubble model. Decreases in quality of a product in tandem with increases in price are characteristic of all inflationary periods. The most you can say is that, in Britain, demographic and institutional factors combined to funnel a greater proportion of inflation into the housing market than would have occurred otherwise. But that's a done deal now anyway, changing those factors won't make a difference, unless you change them enough to pop the bubble. And if you want to pop the bubble, you could just do it tomorrow.
So Janet's real sin is not caring or knowing anything about monetary policy, and seeing the expansion of her net worth by 10% a year as a lovely, natural phenomenon, rather than an obvious freak that would impoverish her descendants.
Again, if this were true, we would see similar explosions in house prices in similar European nations under even lower interest rates. Germany, even after taking in a large influx of refugees from the Syria conflict has not seen as much growth in prices, for example. Youโre right to say itโs complex, but this is far more a supply demand story than an interest rates one. Hereโs more from Sam Bowman on this: https://sambowman.substack.com/p/its-the-supply-stupid
First, the fact that Germany did not see sustained house-price rises after taking in large number of refugees is an argument in my favour not yours, because what it shows is that even very large changes to supply and demand do not typically have large effects on house prices.
Secondly, low interest rates in the presence of fractional reserve banking always produce bubbles, but they do not always produce bubbles in the same place. They may produce bubbles in the stock market, in metals, in bitcoin, in tulips, in houses, or even simply in consumer goods (what people call inflation can be defined as bubble in consumer goods). What determines where the bubble goes are institutional factors. *As I already said* "in Britain, demographic and institutional factors combined to funnel a greater proportion of inflation into the housing market than would have occurred otherwise".
The point is that *now* there is a bubble that is decades old. You cannot stabilise this bubble, you certainly cannot convert the bubble into slowly declining prices. You can only prick the bubble. One way of doing that, theoretically, is to dump so much new housing onto the market that the bubble bursts. But if you want to burst the bubble, the bank of England can do it tomorrow at the stroke of a pen.
What this all means, to spell things out, is that the guilty parties are not NIMBYs (how many people today in London - center of house-price inflation - are called Janet and vote Tory anyway? LOL), but everyone who has ever taken out a mortgage. When you take out a mortgage you are party to a twofold criminal conspiracy. First, the terms of your loan are only available because the mortgage vendor is counterfeiting money and, second, he is offering you these terms because he believes the value of your property will increase *as a direct result of you taking the loan*.
As you will doubtless already know, essentially every serious free-marker economist of the 20th century at one point or another called for 100% reserve banking. Hayek is the partial exception since, in his Constitution of Liberty, he says one of the weirdest things ever written, which one may paraphrase as "the whole history of banking was a big mistake, but it's too late to fix and we have more pressing issues like crushing the unions and cutting taxes". But actually there are no more pressing issues (economic issues, at any rate) than money. If you have fractional reserve banking, your free market economy is a joke, which means your free-market party is a joke, which means politics is a joke. And the joke's on you.
A good well-thought out article, whose basic premise (the young are screwed over by unaffordable housing) is manifestly correct.
The problem is, though, that the high cost of housing is not fundamentally an issue of supply and demand, any more than the high cost of tulips during Tulip Mania was. It is true, obviously, that increased demand and restricted supply will lead to sustained price increases, but not to the extent seen in Britain and capitalist economies across the world. Rather, the cause is simple. Every house is bought with a mortgage; every mortgage is a fractional reserve loan, that means every mortgage creates money, that means prices go up. Specifically, prices go up where the money is being spent, which is houses. After two episodes of messing up and causing high inflation (20s and 70s), western financial elites have successfully figured out how to channel inflation into the stock market and asset prices, without it leaking out too much into general consumer prices, which they can then call 'economic growth'. And, indeed, this does create the effects of economic growth, except for those at the end of the queue.
In short, housing is a bubble. At this stage of the bubble increasing supply will not even exert a downward effect of prices. All new houses have to be bought with a mortgage. Every mortgage further blows up the bubble. There is no escaping this, except by popping the bubble, which will bankrupt most financial institutions overnight.
And yet there is no choice short of accepting homelessness as the new normal.
This canโt be solely attributed to a bubble, as evidenced by declining floor space per person. There is a shortage of liveable space relative to the population and its growth rate.
All economic phenomena are complex, so you have to filter out the signal from the noise. It is true that, unlike many comparable economies, Britain has both a growing population, and more restrictions on new construction. Nevertheless, the scale of the increase of prices seen for three decades is something that is not seen anywhere as a result of supply and demand, not even under famines and other extreme conditions.
There is only one thing that can produce that kind of price inflation: inflation. If I knew nothing about the UK except a graph of its house prices, I would tell you that it has an inflationary monetary policy in which new money is systemically funnelled into the housing market. And it does! Moreover, I would predict that the annual rate of house price inflation is uncorrelated to changes in population and housing stock, but corresponds to changed in the total supply of money. And it does!
We have lots of real-life experiments with this sort of thing. At the collapse of the Soviet Union, Israel's population suddenly expanded with the influx of more than a million immigrants, equal to nearly a quarter of the population, within two years. Effect on housing prices? minimal. Bank of Israel cuts interests rates to a quarter of a point in 2008 and keeps them there ever since: unprecedented (in Israel) house price rises so that less than two decades later young people cannot afford a house for the first time in Israel's history.
Declining floor space per person is not inconsistent at all with a bubble model. Decreases in quality of a product in tandem with increases in price are characteristic of all inflationary periods. The most you can say is that, in Britain, demographic and institutional factors combined to funnel a greater proportion of inflation into the housing market than would have occurred otherwise. But that's a done deal now anyway, changing those factors won't make a difference, unless you change them enough to pop the bubble. And if you want to pop the bubble, you could just do it tomorrow.
So Janet's real sin is not caring or knowing anything about monetary policy, and seeing the expansion of her net worth by 10% a year as a lovely, natural phenomenon, rather than an obvious freak that would impoverish her descendants.
Again, if this were true, we would see similar explosions in house prices in similar European nations under even lower interest rates. Germany, even after taking in a large influx of refugees from the Syria conflict has not seen as much growth in prices, for example. Youโre right to say itโs complex, but this is far more a supply demand story than an interest rates one. Hereโs more from Sam Bowman on this: https://sambowman.substack.com/p/its-the-supply-stupid
First, the fact that Germany did not see sustained house-price rises after taking in large number of refugees is an argument in my favour not yours, because what it shows is that even very large changes to supply and demand do not typically have large effects on house prices.
Secondly, low interest rates in the presence of fractional reserve banking always produce bubbles, but they do not always produce bubbles in the same place. They may produce bubbles in the stock market, in metals, in bitcoin, in tulips, in houses, or even simply in consumer goods (what people call inflation can be defined as bubble in consumer goods). What determines where the bubble goes are institutional factors. *As I already said* "in Britain, demographic and institutional factors combined to funnel a greater proportion of inflation into the housing market than would have occurred otherwise".
The point is that *now* there is a bubble that is decades old. You cannot stabilise this bubble, you certainly cannot convert the bubble into slowly declining prices. You can only prick the bubble. One way of doing that, theoretically, is to dump so much new housing onto the market that the bubble bursts. But if you want to burst the bubble, the bank of England can do it tomorrow at the stroke of a pen.
What this all means, to spell things out, is that the guilty parties are not NIMBYs (how many people today in London - center of house-price inflation - are called Janet and vote Tory anyway? LOL), but everyone who has ever taken out a mortgage. When you take out a mortgage you are party to a twofold criminal conspiracy. First, the terms of your loan are only available because the mortgage vendor is counterfeiting money and, second, he is offering you these terms because he believes the value of your property will increase *as a direct result of you taking the loan*.
As you will doubtless already know, essentially every serious free-marker economist of the 20th century at one point or another called for 100% reserve banking. Hayek is the partial exception since, in his Constitution of Liberty, he says one of the weirdest things ever written, which one may paraphrase as "the whole history of banking was a big mistake, but it's too late to fix and we have more pressing issues like crushing the unions and cutting taxes". But actually there are no more pressing issues (economic issues, at any rate) than money. If you have fractional reserve banking, your free market economy is a joke, which means your free-market party is a joke, which means politics is a joke. And the joke's on you.