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July 24, 2013

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Luis Enrique

now we just need food prices to rocket, and we'll all be working like crazy

actually, doesn't this story require rising, as opposed to high and stable, house prices? Or at least if one additionally supposes a stable population (and ignores IHT), then houses effectively pass down from parent to child (or more likely, grandchild)

Phil

Slight abuse of the comments box, but I was very struck by Unlearning's post on the LTV. IANAE, but I understood the LTV in one reading (it's not complicated) & was consequently a bit dashed to discover that Proper Economists all thought it was bunk. (This point was argued in a review of the recent "Marx as Victorian" book, to the effect that Marx adopted a Ricardian framework at just the moment when all the cool kids had dumped theirs, meaning that contemporary Marxists were forever stuck behind the capitalist times.)

Now I read that the LTV works (as I always thought it did) and that at least some of the critiques Proper Economists accept as debunking it, don't. Any chance of getting your thoughts on this?

The Thought Gang

I had a conversation with someone trying to broker a Private Equity buyout of my employer, and I was trying to get a handle on what an investor would think of 'us' as a management team.

"You guys are perfect", was the response. In essence, we'd (theoretically) achieved enough to be able to weigh ourselves down with expensive mortgages and would be petrified of the idea of losing our incomes. We might even all be eying up the chance to leverage ourselves up even more at the 'promise' of future riches. We're all 35-45. Apparently, once people are past 50 they're not as 'interesting' because they've settled down and paid for stuff.

SK

There are more dimensions to this problem:
-How does the high housing cost impact the Labour mobility?
-How does the high housing costs damage the reputation of UK as a place of aspiration (and i dont mean aspiration to BTL)?
-Whats the impact on government finances in the long term due to many generations not being able to save and requiring benefits (incl housing benefits) when they retire?
-whats the impact from a social perspective of making youth pay high taxes to support BTL landlords?
-Impact on families/society who have to move on a continous basis

There is alot of damage being done right now to UK from the high housing costs. If immigration stops and emigration increases, then there will be serious challenges for the future governments.

R F McCarthy (@RF_McCarthy)

Would add that the assumption almost universal in my generation that guaranteed property price inflation was the best way to fund ones eventual retirement made it even easier for the ruling elites to dismantle final salary pension schemes for everyone than them themselves.

SteveH

The post scarcity society cannot be talked about without considering the wider world economy. After all that is where most of the so called abundant products are produced.

It would be like saying because the top 1% in Britain can afford virtually everything they desire we all live in a post scarcity society.

I also think the left need to qualify the idea of work shyness and contextualise it within capitalism. It is a fundamental part of human nature to transform nature in order to provide for needs, in other words work is part of the species being. It is only alienated in class ridden/slave systems.

chris

SK - yes. There are countless ways in which high house prices do damage. However, all main political parties have been in favour of them (remember that they soared under the 1997-2010 Labour govt), so there must be some economic justification for them, mustn't there?
(Switch sarcasm detector on)

Blissex

Interesting article, but one of the point is not quite right:

«a massive housebuilding boom which reduced house prices and rental costs to reasonable levels.»

Similar countries have not had massive housebuilding booms yet house price bubbles have not happened or have been moderate.

By far the biggest impulse to house price bubbles has been government policy creating a debt bubble.

This seems to have happened mostly in anglo-american culture countries run by conservative governments who share vote-buying strategies.

In a first stage a debt bubble is created mostly by low interest rates making buying assets on margin quite cheap in absolute terms, and a relaxation in lending standards to enable a significant amount of small scale fraud.

The second stage after asset prices have already started to zoom up is regulatory relaxation of leverage ratios and accounting enforcement to enable systemic fraud; low interest rates no longer matter, as long as interest rates are lower than expected asset price rises, as Galbraith noted of the 1929 bubble.

The third stage is government financed laundering of the profits of reckless and fraudulent borrowing and lending, by buying worthless securities at par, lending direct to bankrupt financial companies at way-below-market interest rates to create fat spreads, and even direct capital injections to refill their bonus pools, accompanied by grinding currency devaluation and constant inflation to redistribute income from industrial sectors to asset speculators.

The recipe above has been followed many times in history mostly in third world countries.

The Thought Gang

"Similar countries have not had massive housebuilding booms yet house price bubbles have not happened or have been moderate."

From what I can gather, Ireland managed to have a massive house building boom AND a staggering price bubble. Which was neat for them. I think the bubble came first, but increased supply didn't seem to help much. It just enabled developers to lose their shirts as well as banks and mortgagees.

When I look at US house prices, on the other hand, they seem wonderfully low in comparison to the UK. You seem to be able to get a least twice as much house for your money over there. Am I right in thinking that they tend to be far less restrictive with their planning? Was their mortgage problem a result of a bubble in the UK sense... with everyone playing the game... or rather just that there was too much supply of not-expensive-by-UK-standards-but-still-too-expensive-relative-to-ability-to-service-debt housing?

gastro george

"You seem to be able to get a least twice as much house for your money over there. Am I right in thinking that they tend to be far less restrictive with their planning?"

You can get a lot of house in Stoke or Doncaster. It's not a lot to do with planning, but land availability where people can find available work at a meaningful wage.

SK

@chris

sarcasm accepted.

Suspect that the people responsible for making decisions in the parties/BoE/treasury are not tenants.

When was the last time that the Housing minister was a tenant and not a home (debt) owner?

If youth start to realise what game is played on their backs, then they wont be really happy. Many generations in their 20s/30s are being led to financial destiture.

pablopatito

Chris wrote "If we could afford to downshift in our 30s or 40s, who would choose not to do so?"

Er, pretty much everyone? The issue I have with your argument is that high house prices mainly effect the young. The majority of people in their fifties bought houses when they were relatively cheap. So you would expect these people to downshift. But I don't see that happening at all.

gastro george

Surely if house price inflation exceeds income inflation, then that is, by definition, unsustainable.

Considering we have historically low interest rates, imagine how bad the housing situation would become if rates rose to 15% ...

Boffy

Even as late as the latter part of the 18th Century, capital had difficulty recruiting workers, who were still able to obtain most of their requirements from the land, and so only needed to work a few days a week to obtain the money they needed for other purposes. Marx quotes a work from the time, that argued precisely this point.

It said that the prices of all the things the workers needed to consume had to rise sharply in price, so that they would then be forced to work 6 days a week for the same amount they were paid for 3 or 4.

The job was done, as the peasants were evicted from the land through the General Enclosure Act, which created a massive flood of potential workers into the towns. And, as Marx points out, lower wages also create an increase supply of labour-power, because each worker has to work longer hours to earn the same amount of money. So, long hours, low pay and high levels of unemployment frequently go together.

Today we have high unemployment, and much higher levels of under employment. People buying houses today have been turned into debt slaves, effectively renting their houses from the bank.

But, precisely because those actually in real work are already working long hours and working intensively, its unlikely that high house prices will create an even bigger supply of labour-power. In fact, in some senses capacity constraints are already being hit for particular types of labour!

All high house prices will then do is to push up the Value of Labour-Power, meaning relative surplus value falls, and UK Inc. becomes even more uncompetitive.

Blissex

«there will be serious challenges for the future governments»

Probably it is all part of the plan.

The *current* government has two serious challenges:

* Lose as few South-East Conservative seats as possible to the UKIP protest vote in the 2015 elections.

* Maximize the chances of economic collapse during the Labour government that will be elected in 2015.

The Chancellor in particular is not an idiot and is well briefed, and he knows very well that the UK housing bubble was enabled by oil exports keeping the pound strong and borrowing high despite low non-oil exports, and that therefore his edgy ruse for a new debt fueled asset price bubble can't run as long as the 10 years of the Thatcher or Blair eras.

And like all UK politicians he knows that there there is a huge chance of an Irish/Spanish/Greek style tipping point (the less likely best hope is 15-20 years of Japanese style grind), and that his main challenge is to make sure that he can kick the can down the road so it happens while the other party is in power.

Blissex

«People buying houses today have been turned into debt slaves, effectively renting their houses from the bank. [ ... ] All high house prices will then do»

Is to transfer income from people with less property to people with more property; it is a massive government instigates income redistribution system, for upwards income redistribution.

Every increase in land prices is not justified by higher value added, because there is no value added (for housing at least); it is pure economic rent extraction, a zero sum game. Every land capital gain, every increase in rent, is a necessary loss to someone less wealthy.

The people who benefited and benefit from government sponsored income redistribution are those whose portfolio is long land, that is mostly older and retired people, and mostly women; but not in the North or Scotland etc., but almost only in the tory (both Conservative and New Labour) heartland in the South East, and of course the Monaco-on-Thames area inside the M25.

«is to push up the Value of Labour-Power,»

Has not happened because a part of the pressure on land prices and rents is immigration from the North, Scotland etc., from and other lower cost countries, which both pushes down labour costs and raises house prices in the South-East.

Blissex

«If youth start to realise what game is played on their backs, then they wont be really happy. Many generations in their 20s/30s are being led to financial destiture.»

But that's precisely the plan: at some point anglo-american culture government went through a bit of arithmetic and found that to fund retirements a substantial chunk of GDP had to shift from younger to older residents to pay the level of pensions that older voters would demand, and older voters are a huge voting block, and if funded with taxes that huge shift would mostly be paid by higher income and wealth voters.

Anglo-american culture governments decided that they would not raise official taxes to do that, they would rig markets to the same effect, and the main way would be to raise house prices instead to create the same shift of GDP, or larger, as someone pointed out:

«guaranteed property price inflation was the best way to fund ones eventual retirement»

This rigging of the market to transfer a large chunk of income from younger residents to older voters (note the "residents" vs. "voters") was accompanied by vastly increased immigration and offshoring to push or at least hold down wages, in particular in public services like the NHS, which are also costs to retirees and high income and wealth taxpayers.

Asset price bubbles and immigration and offshoring have many advantages apart from obscuring the government instigated redistribution of a lot of income from workers to retirees:

* Extremely popular with older and female South East voters who tend to vote more often and swing vote more often than younger or male or Northern who tend to be locked into Labour voting and thus electorally irrelevant.

* Asset price bubbles result largely in capital gains that are largely untaxed, establishing a principle.

* The capital gains can be realized by remortgaging, a vital tool, as it generates huge profits for the financial sector and holds up property prices.

* Ensures that that income redistribution is progressive with wealth, that is wealth is not only redistributed from those who have none to those who have none, but even more from those who have some to those who have lots.

* By providing massive property based income for many people it drives them to seek lower wage increases, to not worry about pensions as in «made it even easier for the ruling elites to dismantle final salary pension schemes for everyone than them themselves», and to make most voters be indifferent to or hate trade unions.

Asset price bubbles and income redistribution via the magic of rigged markets has been "performative", that is has shifted a large chunk voters to to the right to side with big property interests.

Blissex

«The majority of people in their fifties bought houses when they were relatively cheap. So you would expect these people to downshift. But I don't see that happening at all.»

* Remortgaging to extract capital gains entirely tax-free without having to sell, while generating huge profits for banks.
* The desire of heirs to get huge windfall capital gains from inheritance, which has made them lobby hard their ascendants not to sell, and to demand free care for those ascendants (only partially successfully) leading to the "old ladies in mansions" story.
* Rent have gone up a lot too, and many middle aged or retired property speculators in the South East own several properties that generate enough income to live like a lady of the manor without having to downshift.

To get an idea of the size of the latter point, in a recent committee discussion with the BoE governor it came out that 40% (FORTY PERCENT) of all mortgages are interest-only.

As to the first point, remortgaging has given property owners a way to cash in (by borrowing) capital gains amounting to over 100% of GDP growth during both the Thatcher and Blair eras.

«Surely if house price inflation exceeds income inflation, then that is, by definition, unsustainable.»

If it goes on forever. But it can go on for a long time if it results in ever more redistribution from low income and poor people to high income and wealthy people.

But as to trends, the even bigger one is that *private* debt has been growing faster than GDP for several *decades* now in many anglo-american culture countries, in particular in the UK. In recent years even a few times faster than GDP.

http://blogs.cfr.org/setser/2008/10/28/jp-morgan-is-now-forecasting-a-global-recession/
«In the US case, the consumer has been helped by roughly 3% of GDP home equity withdrawal a year for almost this entire decade.»

Boffy

@Blissex

"Has not happened because a part of the pressure on land prices and rents is immigration from the North, Scotland etc., from and other lower cost countries, which both pushes down labour costs and raises house prices in the South-East."

Confuses wages with the Value of labour-power. The evidence from all of the Housing benefit paid out is that it has raised the Value of Labour-power, and is one reason the Government has then tried to claw it back.

Workers cannot simply keep paying out for housing costs with money they do not have. Already, doing that has led to an unsustainable amount of debt that will cascade as interest rates continue to rise.

Either workers wages have to rise to cover those costs, or there comes a point when those workers from the North etc. stop coming to London, where they cannot afford to live. In fact, I can't for the life of me think why someone living in a £400,000 terraced house in London, doesn't just sell up, and by a nice £150,000 detached house in a semi-rural location in Stoke, and retire on the £250,000 difference.

There again, as soon as things settle down in Spain, I've got my eye on a nice ranch style villa with a few acres of land that's going for €230,000. For those who don't like the heat, again I can't for the life of me understand why the large number of retired Brits don't pick up a bargain in Ireland, for about a quarter of what they would pay in most of Britain, and about a sixteenth of they'd pay in London.

gastro george

@Blissex - some good points.

House price inflation has the added bonus, from the some points of view, of bringing forward tomorrow's expenditure to today. As you say, it's this, and the expansion of private debt, that has allowed the economy to limp forward in the absence of demand from real spending power (i.e. wages).

For to long, the middle classes have been complacent - looking at their appreciating house value as a guarantor of future prosperity, even in the face of wage compression and worsening conditions. Now they realise that they are the next in line.

jonathan

I haven't seen a mention of the Austrian economists take mentioned once here. Worth looking up the Cantillon effect which explains the transmission effect of newly printed money is more valuable earlier in the chain than later when its diluting effect is more apparent system wide and reflected in prices. Fiat money, fractional reserve banking and a democratically elected government promising more than can realistically be achieved without recourse to debt and the labour of future generations needs to be considered. The notion that somehow there is a sort of conspiracy of capital to raise house prices to enslave indebted mortgagees is how it may appear, like intelligent design arguments in evolution debate. More likely bottom up outcome of distorted monetary system... See Mises, Hayek et al.

SK

@Blissex

Thank you. Very good analysis.

Its a very sad story with sadly a bad ending for a large percentage of UK residents.

21st century serfs in the making from MPs who dont care.

weareastrangemonkey

"This forecast has been half right: real incomes are now 4.5 times 1930's level. But it has been half wrong; the average working week is twice Keynes's forecast. Why?"

The simple answer is that the income effect reduces supply of labour, demand for leisure, but the price effect increases the supply of labour.

The increased wages implies an increased opportunity cost of leisure. Each less hour worked in 2013 decreases income by more than an hour less worked in the 1930's.

The relatively high labour supply in response to higher wages is perfectly compatible with basic price theory. There may be other stuff going on but the failure of Keynes' prediction would still not be a big puzzle for late 19th century economists.

Keynes' prediction of 3 hour working weeks hinged on the notion that after basic needs are met that people do not have a strong desire for more stuff/services and would prefer more leisure.

It seems that he got this wrong. Why?

One answer is that people's innate desire for "stuff" is larger than he realised. Another answer is that he got it wrong when he thought that competitive consumption was a disease unique to the upper classes. Keeping up with the Jones' (or Patels) is certainly not a solely upper class pursuit. I suspect that both answers have a bit of truth. It is, however, in designing policy to curb competitive consumption that we can make many people better off.

chris

I failed to spot logical reasoning in the article.

Regardless of whether you are right or not.

Perhaps a rewrite is needed?

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