House prices in London, most people agree, are too high. Orthodoxy on left and right says that this is due either to the free market or constraints on the free market respectively. The two sides propose different solutions. The right demand that planning controls be minimized or simply scrapped, while the left demand that new council houses be built. Oddly, this is in fact the same solution: build more houses. But when I hear the words ‘free market’, I reach for my revolver, for every market on the planet is shaped by government intervention, or distorted by monopolistic practices, or disrupted by political action.
There is a clear transfer of wealth from poor to rich, and it is not per se due to a shortage of housing, because the family still ends up with a roof over their head
Housing, it turns out, is a particularly unfree market, with some unique constraints. But let’s begin by imagining for a moment that housing is a free market. The implication is that house prices are so high because so many people want to live in London. This seems instinctively true, as the hinterlands of Britain become denuded of economic activity, forcing young people to move to the big city, and as Europeans continue to choose London, its sluggish economy is still doing better than their home countries. But even if demand for housing is up, there are two major versions of the product in demand here, not one. There is demand for housing as housing, and then there is demand for investment opportunities. They are both chasing the same product, it’s true, but the product means quite different things to the two different markets.
Much of the money chasing property in London has not been people looking for a home at all; it has been money looking for a return. This investment market has a lot of spare cash swilling about in it, and as a result frequently out-competes those looking for a home. Those looking for homes are being outbid, but they are not necessarily made homeless as a result. The family that couldn’t buy instead ends up renting their home from the investors who outbid them. This is a clear wealth transfer mechanism from poor to rich, and it is not per se due to a shortage of housing, because the family still ends up with a roof over their head. They simply have to pay through the nose for it, their rent going to pay the mortgage and profits of an investor purchaser.
Investors were sitting on a lot of unused plots, waiting for the land value to rise
What’s more, the fact that they have no choice to purchase a house means that the family are trapped as renters (and many feel trapped, though landlords love to talk about their ‘service’ to the proportion of the market who want to be renting, which does also exist), so the landlord can demand more rent than if they were able to escape. The inequality in property ownership reinforces itself through this constant upwards wealth transfer, yet the family does not end up on the streets.
Already the cry of ‘build more housing’ seems a little simplistic. Let’s look into the notion that this situation has arisen through a ‘free market’. The obvious government intervention in the market, the main constraint that developers complain about, is the planning system. It has become too difficult to develop, they complain, too bureaucratic and slow. But the current government has significantly loosened the system in recent years, introducing, for example, the ability to convert office space into residential housing. Has this helped ease the upward pressure on house prices? Not noticeably. Cause for suspicion of the planning constraint argument, perhaps. Here’s something even more suspicious: in 2013 the GLA estimated that there was outstanding planning permission for 214,000 houses in London either unimplemented or under construction. Since only about 30,000 were completed that year, it seems fair to assume that investors were sitting on a lot of plots waiting for the land value to rise. Is it possible the developers make their planning constraint arguments simply to reduce the cost of obtaining planning permission?
Land has its own unique characteristic: we cannot make more of it
Perhaps we do have a free market after all? Let’s not be hasty: there is another government intervention we’ll get onto in a moment. But first, what type of market is housing? It is not quite like other goods. It has several curious features: that everyone needs it, that it requires a good (land) very unequally distributed in the UK, and that the purchasing of housing largely depends on credit. Land, of course, has its own unique characteristic: we cannot make more of it, we cannot expand it in locations where demand for it is higher. This means there are two groups of people with an inordinate amount of influence in the housing market: large landowners, and banks. But even large landowners only have power and wealth through the banks, because it is banks that enable them to realize their wealth. It’s the banks who make large landowners larger landowners, while keeping buyers looking for a home locked out.
Contrary to popular ideas about how banks work, they don’t simply collect your savings and lend that out to other people. In fact, because the lending of one bank becomes savings in another, and vice versa, they can in theory lend as much as they like. The constraint on bank lending is not how much they hold in reserves, but whether or not they think they will get a return on their investment. In simple terms, banks create money through creating debt. A vast amount of this lending is against property, and that means a large percentage of the money circulating in the economy exists because it is backed by property price rises.
It’s investor demand that pushes up London house prices, not demand for housing
Furthermore this process is circular: property creates money, money buys property. As long as prices keep rising, those who own property get richer, and the economy looks as though it is functioning well. But here’s the problem with the system: you only get money if you already have assets. Assets mean money, money means assets. If you’re out of that loop, as many people are, you are out of luck, and out of a home.
In a country with poor rental laws like the UK, many feel they need to own a house to feel stable. It is in the nature of a market where the number of products can be increased only with difficulty, and where people feel the need for those products strongly, that the sellers can force people to pay up to the limit of what they can afford, or what credit they can access. This means people will borrow as much as they need in order to get hold of a permanent home. So if banks offer four times their salary, they borrow that. If the banks offer five times their salary, they borrow that. Banks moving from offering four times your income to five times will inevitably push the price of housing up. To a significant extent, the available credit is the price of housing. The UK saw significant price rises prior to the 2008 financial crisis. This appears to be, to a significant degree, the result of increases in loan-to-value (LTV) ratios. That is, the banks lent more and more money against houses compared to their actual worth, and this pushed up prices.
Since the 2008 financial crisis, quantitative easing has been inflating asset prices, with property as one of the main ‘beneficiaries’. Inflating asset prices makes rich people richer
But what if banks offer more credit to those who already own property than to those who don’t own? After the financial crisis, the government pressured banks to offer lower LTV, particularly for first time buyers. Yet this affected those buying for a home, not those buying investments. If the banks are extending more credit to people who already own property than to people who don’t, it is the credit the banks offer to the asset-rich that sets the price of housing. To a large extent then, it is investor demand that is putting up London house prices, not demand for housing. Those who don’t own are priced out by those who do, not through some ‘natural’ mechanism, but through the banking system, the extension of more credit to those who are already rich.
If that still sounds like a free market, then it is time to talk of quantitative easing (QE). The UK, Europe and the US central banks have all done plenty of QE since the 2008 financial crisis. This means governments buying bank debts that aren’t being repaid, or are in danger of not being repaid. This replaces a bad asset on the bank’s balance sheets with a good asset – hard cash. The bank is suddenly richer than it was, so it pays more to shareholders and more to its top staff. If you give rich people more money, they don’t spend most of it like normal people, instead they put it into assets, chiefly stocks and property. Since the 2008 financial crisis, QE has been inflating asset prices, with property as one of the main ‘beneficiaries’. Inflating asset prices makes rich people richer. This is a beautiful virtuous circle as far as the rich are concerned. The more money they have, the more goes into property, so the more their existing property rises in value. Everybody wins. Except those who don’t own property.
Property speculation can easily lead to bubbles, but rents are more stable – look at the stability of rents compared to buying prices in the 2008 crisis
While banks can create money, they can’t do so on the basis of nothing. The property against which they loan has to look like a good investment, and what makes property look like a good investment is increasing prices and high rents. The former is circular and can lead to bubbles, but rents are more stable – witness the stability of rents compared to prices in the 2008 crisis. This is where it is important to talk about the government’s deliberate efforts to annihilate social housing in London. Scrapping council housing raises rents as people are forced into the private sector, and the public sector competition to the private sector diminishes. So those who propose building council housing as a solution are half right. But it is not so much that we need lots more properties, as that more council housing in large quantities would bring down rents, and thus yields on property investments, and so bring down house prices. Another option would be for councils to take a lot more existing property under their ownership, as they have done in the past.
There is also another factor to consider, which once again leads us away from the notion that increasing the amount of residential property is the answer. Over the last few decades the world has seen a massive increase in the total number of the super wealthy. They are in China, India, Singapore, Russia, Brazil. They all own property already and they all want to invest, and property is considered one of the safest investments. Their money is attracted to cities that are global brands – this problem afflicts San Francisco as much London, because who hasn’t heard of San Francisco? This, again, is not about an increase in housing demand. Rather it is an increase in money/credit chasing the houses in ‘global brand’ cities. As the money chasing houses goes up, the prices go up. Once again we see this is a story as much about the supply of money as about the supply of housing.
Inequality is a key driver of the London housing crisis, just as the housing crisis is a driver of inequality.
There is a side to this about which we have little evidence, where a little speculation is necessary until further studies are done. It seems that on a global scale, investment in housing is being chosen over investment in business. Why is this? Are productive economies faltering globally? Did the moving of manufacturing out of rich countries reduce the need or desire to invest in it? Did the withdrawal of government support for business, under neo-liberal ideology, in fact raise the risks of doing business to levels unacceptable to investors? We have no answers to these questions, but there are some deep long-term trends here, linked to the triumph of neo-liberalism, the effort of investigating which may turn out to be illuminating.
However this situation arose, there are many people who are able to and want to buy property in London: those doing well in financial services, those who already own property, those who got rich from Chinese factories. It leaves a long line of people behind them who merely need a home.
This, then, is the housing hustle: the economy has been structured and is being structured so that those with assets can gain more assets. The housing and the mortgage system is a money creator, and a mechanism for ensuring that further wealth and assets go to those who already have them. To some extent inequality is a key driver of the London housing crisis, but to an equal extent the housing crisis is a driver of inequality.
There is technically enough money/credit available to the rich to buy every new house in London for the next hundred years at absurd prices, no matter how many we build.
The current government is intent on making this situation worse, not better. They have, for instance, made money available for unaffordable ‘starter homes’ on brownfield sites (which by their definition can include council estates). This puts more money into the housing hustle, further inflating prices, while delivering a double whammy if carried out through the destruction of council estates.
There are many ways the scam can be challenged and undermined, and given the population increase in London, building more houses may be a part of that. But it is important to understand that house building will only bring prices down to affordable levels if measures are taken to control the wider scam. There is presumably enough money/credit available to the rich to buy every new house in London for the next hundred years at absurd prices, no matter how many we build.
So what can we do about this? Perhaps the most important measure would be a statutory cap on the size of mortgages given to buy-to-let lenders, capping LTV or loan-to-rental income ratios. This goes straight to the heart of the problem: credit availability.
A Land Value Tax would provide a brake on the creation of property empires
More council housing could also help as a method of rent control. There are other ways to control rents too, including statutory limits on rent rises. Government assistance to first time buyers should focus not on helping them to pay more (which helps raise prices) but on ensuring, through the tax system for instance, that those in search of a home aren’t constantly out-competed by investment money.
A strong measure with wider social equality advantages would be a Land Value Tax, to provide a brake on the creation of property empires. This would deliberately oppose the upward wealth transfer inherent in unequal property distribution. Another measure would be to limit ownership by foreign investors not living in the UK.
The government’s actions are very rational, provided we assume they are a government for the wealthy
There is one other possible solution, but it cannot be implemented by itself. If we were to see significant wage rises among the lower to middle salary range for the next few years, this would increase the number of people who could buy themselves out of the clutches of landlords. However in isolation there is a significant danger that higher wages would simply lead to higher house prices. The mere wage earners who want a house might be able to compete with the investors once more, but for how long? Another financial crisis that sent the asset-rich scurrying for safe havens could see them outbidding the new buyers once more, this time at an even higher price level.
Recently the government, under pressure, did scrap tax relief for buy-to-let landlords, and this may have some small effect on prices. But a small effect is all it is intended to have. We should be clear why stronger measures are not being implemented to control the housing crisis. It is not that the government does not understand the housing market. Treasury officials are not as confused and ill-informed as the editorial pages of newspapers; they know the effects of QE on property prices. But we have a government of landlords, and many members who aren’t landlords hold shares in companies that have much of their value in landholdings. Perhaps more importantly, the creation of money backed by property creates ‘economic growth’, as these things are measured by official statistics. The government is reliant on house price rises to make the economy look functional. The government is not controlling house prices, it is inflating them. That is what it wants to do.
The question is not, then, how can we persuade the government to follow a more rational course of action on housing; their actions are very rational provided we assume they are a government for the wealthy. But rather we should be asking: how should we deal with a government that pursues such socially divisive measures as a matter of policy?
Image: Casey Hugelfink
