The landlords' party

Owen Jones says the Tories are the “Landlords Party”. This is true in a deeper sense than the mere fact that so many Tory MPs are themselves landlords. It’s because fiscal austerity has contributed to rising house prices.

There’s a simple reason for this. Fiscal conservatism and monetary activism – to use Osborne’s phrase – means low interest rates, low expected rates and low gilt yields. And as the Bank of England said (pdf), this means higher asset prices generally. This is simply because lower rates mean that future rents are discounted less heavily, which raises their net present value. As Simon said:

Just as low real interest rates boost the stock market because a given stream of expected future dividends looks more attractive, much the same is true of housing (where dividends become rents). Stock prices can rise because expected future profitability increases, but they can also rise because expected real interest rates fall. With housing increasingly used as an asset for the wealthy, or even as a way of saving for retirement, house prices will behave in a similar way.

My chart shows the point. It shows that lower index-linked yields have been accompanied by higher ratios of house prices to incomes. Yes, fiscal austerity means lower incomes and hence lower house prices, other things equal. But in reality, that mechanism has been more than offset by lower interest rates. And yes, George Osborne hit buy-to-let landlords with higher taxes – which perhaps vindicates Phil’s point that the Tory party “has not been a suitable vehicle for the interests it's supposed to represent.” And of course, austerity is one of only many causes of low real yields – many of which are global. But it has contributed to low yields and hence higher house prices.

On balance, though, the Tories have probably been good for landlords. This explains one of YouGov’s findings (pdf) – that homeowners vote Tory. 53% of these voted Tory against only 31% voting Labour, whereas among renters Labour led by 51% to 32%.

Which brings me to a problem. High house prices are probably, net, bad for the economy.

Granted, they provide collateral and so allow potential entrepreneurs to borrow. But this mechanism is offset by others. Rising house prices encourage banks to lend against property rather than to productive new firms. High rents depress disposable incomes and so reduce demand for new goods and services. High house prices lead (pdf) to long commutes and less job mobility which depresses productivity. And rising prices incentivize “property development” rather than more dynamic forms of entrepreneurship.

I suspect, therefore, that the Tories are now rather like the party they were in the days of the Corn Laws: they represent interests which are hostile to economic progress.  

There is of course nothing original in the claim that landlords’ interests are a block on economic growth. As somebody once said:

Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public…The land monopolist only has to sit still and watch complacently his property multiplying in value, sometimes many fold, without either effort or contribution on his part!

That was Winston Churchill in 1909. Tories like to compare themselves to him. But in one respect at least, they are more reactionary now than he was a century ago.  

Comments

[Tom Papworth]

Is it not more accurate to say "The homeowners party" rather than "landlord", which implies renting property out.

The effect of low interest rates on asset prices has benefited all homeowners, whether they are owner-occupiers or private landlords. And while landlords enjoy rents, owner-occupiers also enjoy imputed rents.

If anything, government policy has squeezed landlords - quite deliberately - relative to owner-occupiers.

So it may be the case that the Conservatives benefit landlords at the expense of tenants, but the biggest beneficiaries are owner-occupiers - who still make up the majority of households and own the majority of the domestic housing assets.

[Matthew Moore]

Everything except planning restrictions is a footnote to the problem of house prices.

The solution is supply side, everyone knows it, and yet no one will deliver it, because of vested interests in marginal seats.

Anyway, about how government is the solution...

[Chris E]

It's not just planning restrictions. The pricing dynamics favour building firms operating as landbanks and restricting supply to get the highest possible return.

Historically the only time supply has increased dramatically is when government has been involved in the building.

.. and while the Tories love to talk about Singapore, I'm betting they don't aren't referring to the bit where the 80% of the property is owned by a government run housing association

[reason]

I'm sick of this "planning restrictions" schtick. As though the same people who vote Tories aren't the same people who would be up in arms if you threatened to change planning restrictions in their back yards (these people are probably like so many so deregulation in principal only so long as somebody else is affected).

In urban environments, the price is largely determined by what people can afford to pay, so easing restrictions just affects the quality of the housing not the price (because land price changes gobble up any available disposable income). If you seriously want cheaper housing, you ensure there are more well connected (and human compatible) places to live via infrastructure investment and cleaning up brownfield sites.

[reason]

Oh and what Chris E said as well.

[Ralph Musgrave]

The normal assumption in economics is that GDP is maximised when prices (including the price of borrowed money) is at its free market level, except where there are obvious social reasons for thinking otherwise, as is the case for example with kids’ education.

Given that government borrowing has a huge influence on interest rates because of the sheer amounts that governments borrow, that begs the question as to what level of government borrowing would give us a genuine free market rate of interest. Well Milton Friedman and Warren Mosler (founder of MMT) said the answer is “nothing”. I.e. they argued that governments should not borrow.

The arguments here are complicated, but for various reasons I think Friedman and Mosler are right, or at least nearly so. And that in turn means that to maximise GDP, QE or “monetary activism” to use Chris’s terminology should be taken even further: i.e. government should print more money and eventually buy back the entire national debt. That is obviously at variance with Chris’s above conclusion.

Of course the latter policy would increase inequalities, but much of that profit would be taxed away via capital gains tax.

[Bommemort]

A simpler explanation is that homeowners are older on average (i.e. they had the opportunity to buy at non-insane prices). If only real wages hadn't been going down since 1997 while house prices headed for the stratosphere ...

(and your sly conflation of "homeowners" and "landlords" disregards the fact that 95% of homeowners just want one roof - over their heads)

[aragon]

http://www.telegraph.co.uk/property/house-prices/almost-no-evidence-london-homes-owned-foreign-buyers-left-empty/

Foreign Buyers speculating in the London Property represent 18% of the Market.

The fact that any new properties are bought buy-to-leave is a scandal and less than 1% of new build is not insignificant.

https://order-order.com/2017/06/16/sadiqs-report-says-corbyns-empty-luxury-flats-claim-is-a-myth/

"Yolande Barnes, director of Savills world research department, says:

"Foreign buyers are often the focus in discussions about the housing crisis, but really they are only one element in an incredibly complicated picture. Without them investing in properties at the top end, we would not have been able to fund very much social or affordable housing since the financial crash."

It is only in a bizarre financialised world that this make sense.

We don't need foreign buyers (with or without mortgages) rent seeking and speculating in the London property market, a market manipulated by the banks and Government, with 'Help to Buy' etc.

Of course asset inflation is bad for the economy but good for property owners and the Banks.

[aragon]

Correction: That is upto 18% (17.9) of new build.

[Dave Timoney]

@Tom Papworth,

The home-ownership rate has been in decline for over a decade now. The converse of this is an increase in the number of people renting, which either means more landlords or larger holdings. Either way, there is a landlord interest that is thriving and the Tories appear more concerned with it than with home-owners.

[Blissex]

«sly conflation of "homeowners" and "landlords"»

So called "homeowners" are their own "landlords", it is a distinction without a difference.

«disregards the fact that 95% of homeowners just want one roof - over their heads»

Maybe in the north where real property prices have been falling.

But really in general the success of the drive to home-ownership depends mostly on the promise of massive tax-free work-free capital gains.

What the great english middle classes want is not to own a home, which is often an expensive hassle, but own a property deed giving the right to highly leveraged government guaranteed speculation, with 100% net returns per year in cash invested.

And not just S Beeny says it, but also B Johnson and A Haldane (BoE Chief Economist):

http://www.telegraph.co.uk/finance/personalfinance/pensions/10717846/Budget-2014-the-Lamborghini-ride-that-says-power-to-the-people.html
“I think the vast majority will want to put their pots into the market with the greatest yield over the past 40 years – and that is property”

https://www.theguardian.com/money/2016/aug/28/property-is-better-bet-than-a-pension-says-bank-of-england-economist
“Haldane believes that property is a better bet for retirement planning than a pension. “It ought to be pension but it’s almost certainly property,” he said”

and G Osborne:

http://www.spectator.co.uk/columnists/politics/8886331/the-party-modernisers-are-thatchers-true-heirs/
“His Chancellor and chief political strategist, George Osborne, is constantly looking for new ways to create Tory voters.”
http://www.independent.co.uk/incoming/inside-westminster-george-osborne-s-housing-boom-will-echo-into-the-future-8869835.html
““Hopefully we will get a little housing boom and everyone will be happy as property values go up,” George Osborne is said to have quipped at a Cabinet meeting earlier this year.”

[Blissex]

«We don't need foreign buyers (with or without mortgages) rent seeking and speculating in the London property market,»

Oh we do need foreign buyers, property deeds are a significant export and source of foreign earnings, and have replaced scottish oil among exports.

German exports come from "low-productivity" investment in manufacturing industries, english exports come from "high-productivity" speculation in south-east property.

[Staberinde]

I'm fortunate to own a house in Greater London.

It's gone up £200,000 in value over the five years I've owned it.

I live there, and the only benefit I've derived from the increase has been a change in the loan-to-value ratio, which has resulted in a cheaper mortgage when my fixed rate ended a while back.

If you were to tax me monthly on this virtual gain, I'd resent it. Is my owner-occupier behaviour something society seeks to discourage? My income (like most peoples') hasn't kept pace with inflation, so it's not as if my wealth enables me to fund more expenditure - including on tax.

Of course, at some point in the future I might move. Would i then realise this virtual windfall? Not if the asset I seek to purchase has also increased in value in a similar way. So if I'm taxed when I sell, it's effectively a tax discouraging the transaction, not a tax on unearned wealth.

The only fair and effective way of taxing my unearned increase in wealth is in the circumstance when I choose to sell the property and buy something less expensive (or not buy anything at all) with the proceeds. In other words, it's equity release that realises the £200K.

However, this makes the tax hit quite intense. At 20%, that would be £40K - and it would be worth my while spending many thousands on a tax advisor who could help me avoid a good chunk of it.

As someone in his early 40s, I don't expect pensions to be worth much by the time I get to retirement age (I assume it will be 80-odd by that time), so I'd have an extra incentive to cling on to whatever unearned wealth my house had generated by then.

This is why taxing property wealth is so difficult. Even those of us who recognise that our wealth is unearned and undeserved and would happily pay more tax as the price for living in a civilised society must fund taxation from our incomes, which are stagnating or regressing. And we foresee a future where society wants us to contribute more to our upkeep when we stop working. £40K in property taxes is a knee operation in America, and that's what we fear tomorrow's healthcare system will look like in the UK.

No wonder so many of us believe the better answer is to increase the housing supply in the very large proportion of the country that is under-developed and invest in regional policy that creates desirable jobs and lifestyles in places other than the capital.

[Bonnemort]

Blissex - for a (I assume) lefty you ain't arf fond of quoting capitalist types.

"the success of the drive to home-ownership depends mostly on the promise of massive tax-free work-free capital gains"

Utter nonsense. Unless you're downsizing inflation in property values is of no interest if you don't want to move (except as a depressing reminder that you couldn't afford the place now) and if you're upsizing or moving SE it's a disaster.

[dojuma]

Good work.