House prices & secular stagnation

Polly Toynbee says policy-makers must do something to curb the "insanity" of rising house prices. I sympathize. But there's a point here that most people are missing. It's that high house prices are not just a problem in themselves but also the result of a wider malaise in the world economy.

High prices might be - in part - a product of secular stagnation. This seems an odd thing to say; if people expect slower growth in incomes, house prices should be lower. However, three mechanisms might offset this:

1. Lower real interest rates. These naturally raise house prices by reducing long-term borrowing costs. It's no accident that the house price-income ratio has trended upwards since the mid-90s at the same time as real interest rates have fallen.

2. A dearth of investment opportunities in the real economy diverts cash towards other assets, such as housing. As both Hayek and Marx noted, when profits in the real economy are low, we get malinvestments. And as Paul Krugman says, in a stagnant economy bubbles are one way to create jobs. If we can't get rich by making stuff, at least some of us can get rich at the expense of younger generations. 

3. The Bank of England is loath to fight rising house prices in part because the economy is still too fragile to cope with higher interest rates, and in part because quantitative limits on mortgage lending would deprive banks of an easy source of profits.

These three mechanisms are reinforced by another. The same lack of safe assets in Russia, Asia and the middle east that has helped drive up bond and gold prices in the last 15 years has also raised central London house prices; folk used to buy houses when they were hopeful, but now some do so when they are fearful.

I don't say all this to deny that rising house prices also have domestic sources, in our silly planning laws and even sillier love affair with "bricks n mortar". And still less do I deny that prices might eventually fall a lot. I merely want to suggest that rising house prices are not just a disease but a symptom of the crisis of capitalism.

Comments

[Neil Wilson]

"In Newcastle nearly half, 49%, of new private homes built in the past nine months have been sold using an equity loan"

Loan availability drives house price moves. Cut loan availability and they'll stop going up.

Then you just have to solve the problem that people can't move around easily.

[Ian Bright]

Chris
I think you are correct. I suspect there is a system wide / market failure / crisis of capitalism factor at work. It is not only London where house prices are high. They are also high by historical comparison in many parts of Australia, Canada, China and now even in parts of Germany - to the point that the Bundesbank’s latest monthly bulletin warned of high housing prices in some major German cities.
Ian Bright

[Boffy]

In the 1840's, there was booming profits, which caused interest rates to fall, and made lots of money available, which went into speculation in the Railway Mania.

There has not been, and is not a dearth of investment opportunities in the global economy. That is why massive whole new economies have been developed in China and other parts of Asia, and why new ones are being developed in parts of Sub-Saharan Africa with growth rates near double digits. Its why whole new industries in various forms of technology, space science, genetics and so on have been developed. Its why global fixed capital formation doubled in the first decade of this century, and why the global labour force has doubled since the 1980's, rising by 30% in the first decade of this century alone.

Low interest rates as Marx points out, are a function of that massive rise in the rate of profit. But, if that interest rates had made houses more affordable then we would not have seen a massive expansion of the price-income multiple from an historic average of around 3.5 to around 10-12.

There is no shortage of supply. There is 50% more houses per head of population today than there was in the 1970's. What there has been is a shift in culture and demand. When I was growing up, no one thought that single people would automatically think they should have a place of their own. Most of us, lived at home with our parents way into our twenties or thirties until we got married, and in the meantime we would have been saving up a 20% deposit. The fact that this is now seen as some way exceptional, is only because of the shift in culture over the last 20-30 years.

The BoE is not raising interest rates out of concern for the real economy, but out of concern for the insolvent banks. In the real economy official interest rates are irrelevant. Zombie firms can't get loans. Large firms are sitting on huge cash piles, 9 million people now depend to some extent on Pay Day Loans with interest rates up to 4000%, and credit cards with 30% interest rates.

[Boffy]

Just to add, ironically, far from the bubble in asset prices being due to a "crisis of capitalism" its due to the opposite. The massive rise in the rate and mass of profits over the last 30 years is what has caused interest rates to fall.

The same process which was fuelled by a massive rise in productivity caused the massive fall in the value of commodities. To avoid deflation, capitalist states had to massively devalue money tokens by increasing credit and via QE. That is what has fuelled these bubbles in asset markets.

[Ralph Musgrave]

Capitalism has been in “crisis” for at least a century. I fall about laughing every time I hear the phrase. As for Summer’s “secular stagnation” that’s a complete load of cod’s wallop. I’ve actually read Summers’s IMF speech, and basically he claimed there is nothing we can do about weak economic growth.

However, thicko Summers has more recently had a brainwave: he’s realised something that Keynes tumbled to almost a century ago, namely that it’s possible to get out a recession by raising aggregate demand.

As Dean Baker put it, “In elite Washington circles, ignorance is a credential.”

[paulc156]

@Boffy "The massive rise in the rate and mass of profits over the last 30 years is what has caused interest rates to fall."
Not clear that ROP has risen much at all.High in the 50's low in the 70's rose through the eighties and peaked in early 2000's but much lower than in 50's. Lower ever since.

[Boffy]

Actually, there is lots of evidence that the rate of profit and mass of profit has risen hugely. Firstly, if not, then where did all of the capital come from that built a Chinese economy of such mammoth proportions, let alone all of the other Asian economies. Where did all the capital come from that doubled the size of the global labour force during that period. Where did the capital come from that created all those new industries in technology, communications, genetics, bio-technology and so on?

Secondly, the same huge rise in productivity that slashed the value of nearly every commodity you can think of reduced thereby the value of Constant Capital (Fixed capital and materials) thereby raising the rate of profit. It also reduced the value of labour-power, increasing the rate of surplus value, and thereby also increasing the rate of profit.

It has also brought about a massive rise in the rate of turnover of capital, as both the working period and circulation period for capital has been slashed, again multiplying the real rate of profit.

Using a 2% p.a. rise in productivity as a proxy, I estimate that the rate of turnover of capital has trebled since the 1950's. In other words, if you measure the rate of profit (actually there are no accurate measurements of the rate of profit, because most are based on National Income data the which only provides information on V + S - wages plus surplus value)on the basis of profit in relation to output then you need to multiply the current figure by 3, to get a comparable figure to the 1950's.

I did that recently on the basis of data provided by Doug Henwood. You then get a rate of profit figure for the 1950's of around 7-8%, and a current figure of around 27%.

[Boffy]

I've set this out in a post some time ago - here.

[Boffy]

Ooops, here - http://boffyblog.blogspot.co.uk/2013/07/the-rates-of-profit-interest-and.html

[Dave Timoney]

In addition to the 3 drivers of higher house prices noted by Chris, I think there are 2 other secular trends that play a part.

First, the cost of housing (i.e. both mortgage repayments and rents) is influenced by the relative cost of other essentials, notably food and fuel. The 80s and 90s were an era of falling real prices for food and flat prices for fuel, which meant that the share of disposable income available for housing grew.

From the mid-00s, the real cost of these other necessities started to increase above inflation, so constraining income for housing. Schemes like Right to Buy are therefore a reflection of increasing utility and shopping bills as much as limited mortgage availability. Despite recent increases, we still have some of the lowest per capita fuel and food bills in Europe, hence our relatively high housing costs.

Second, the cost of housing also reflects longevity, or more specifically labour. The increase in the retirement age is a harbinger of increased mortgage terms. Current terms are based on a peak earning period of 25 years: start work at 21, buy a house at 31, pay off the mortgage at 56, retire at 66.

If the retirement age moves out to 75, we will have mortgage terms of 35 years. But that will not mean correspondingly lower repayments (monthly outgoings would be the same, to match market rents), rather purchase prices will be higher.

[Dave Timoney]

Re Boffy's point about investment and profitability, the phrase "dearth of investment opportunities" is unfortunately ambiguous.

It is possible to have both an increase in the quantum of investment opportunities (which we have undoubtedly had since the mid-80s) and a simultaneous decrease in the aggregate cost of investment, which is why "Large firms are sitting on huge cash piles".

The "problem" is that technology can deflate the cost of investment so rapidly that we end up with a surplus of capital, which consequently seeks a home in other asset classes, such as property, commodities, football clubs etc. As L Randall Wray said: "To put it in simple terms, the problem is that investment is just too damned productive".

The struggle for profitability, particularly in manufacturing (see Robert Brenner, The Economics of Global Turbulence), is a consequence of continued over-capacity (i.e. historic investment) allied with rapid advances in productivity due to technology (containerisation, ICT, robotics).

Together these produce commodity deflation, which in turn feeds property inflation as both better-off consumers divert more disposable income to "saving" in bricks-n-mortar and businesses recycle the surplus via executive pay, dividends and capital gains (share buybacks).

The "crisis of capitalism" that Ralph scoffs at is not the result of some failure or entropic decline, but the product of success. The system is throwing off too much surplus value.

[Boffy]

Re. David's point about house prices, food prices wages etc. Its absolutely true that food prices etc. fell. That was one basis for the fall in the value of labour-power, which facilitated a rise in the rate of surplus value and profit. But, the latter was achieved precisely because real wages, particularly in the US and UK over that time remained stagnant or falling.

Disposable income for some workers - those of us who were older - may have risen, but for younger workers it fell. That is why despite continuously falling interest rates during the period, these younger workers could only be persuaded to take on mortgages for over priced houses, by continually reducing the deposit required, by encouraging them to take on mortgages that were 5.6 and more times combined household income compared to the 2.5 times of previous periods, why interest only mortgages were introduced, which then did not even require any arrangements to repay the capital - so now we have millions of people who have no possibility of ever paying off the capital sum of their mortgage, and have been turned into effectively people who rent their houses from the bank.

The encouragement for more people to buy houses, was a means of capital being able to realise produced surplus value via debt taken on by workers rather than via income. It meant that the number of cost centres (households) was increased, so that demand was increased. Each household has to buy its own requirements - cars, energy, furnishings and so on.

The longer life is also offset by the fact that people start work much later. People of my age started work at 15. Now a large proportion do not start work until 21. Where I started earning when I was 12-13, and built up no debt when I was at University - by the time I went to University when I was 24, I already owned my house outright - current new workers already enter the labour market with massive amounts of debt, which many of them will never pay off.

It means they also have large amounts of other debt, because their income does not cover their current expenditure. So, huge credit card debts are built up, and when that doesn't suffice, it has to be the Pay Day lender.

[Boffy]

I agree with nearly all of David's second post other than for the argument about rising disposable income fuelling house prices rises.

The huge rise in the mass of surplus value does not result in a "surplus of capital", as David says - though we may find that China is suffering from an overproduction of capital - but in a surplus of potential money-capital, as Marx puts it. That is exactly the situation he describes in relation to the 1840's, which led to massive increase in productive-capital, but also to the blowing up of speculative bubbles - Railwaymania.

It is potential money-capital, because Marx makes clear that money-capital is ephemeral. It exists only so long as it is actually capital in the money form, i.e. money in the process of being transformed into productive-capital. Surplus capital can remain within the circuit of capital for this purpose, or else it can leave it and simply become money, used to buy consumer goods, or to buy fictitious capital in the shape of shares, bonds to be speculated in property etc.

Its the latter that has been seen. Masses of potential money-capital turned into money lent out to workers to make up precisely for the fact that their real wages have been stagnant, and to encourage them to buy increasingly expensive houses, pensions and so on.

[Boffy]

Correction. Third para above should read "surplus value can remain.." not "surplus capital..."

[Boffy]

Anyone who thinks that there is some sense in which "this time its different" with the property market, that there is some real underlying difference because of insufficient supply etc. should ask themselves this question - why then was it that in 2009, house asking prices even dropped by 20% overnight, before liquidity was pumped into the system, an the banks stuffed with case to temporarily force down mortgage rates - the other side of which has been the forcing up of other interest interest rates.

How was this any different to the 40% drop seen in a matter of months in 1990, or the 60% drop in the US, Ireland, Spain etc. where people also thought that this time it would be different?

[Ralph Musgrave]

Low interest rates causing a house price boom is a beautiful illustration of the absurdity of using interest rate adjustments to regulate economies, as I myself, Positive Money and others have pointed out.

[gastro george]

"... limits on mortgage lending would deprive banks of an easy source of profits ..."

Isn't this part of the problem? In an era where a return on investment is difficult, then banks will have an obvious incentive to concentrate their efforts on easy profits, rather than those messy companies in the real economy.