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January 23, 2020


Ralph Musgrave

A possible explanation...

Housing is an ESSENTIAL, thus people will pay a large price to house themselves, including incurring a debt that will last DECADES and which involves paying interest for decades.

In contrast shares are a way of storing surplus wealth. Apart from those who think they are experts on share prices and who think they can make a profit on share speculation which will cover the interest they pay on debts incurred to buy shares, most people do not wish to incur debt to buy shares.

Dave Timoney

One contributory factor may be that the cost of housing services reflects working lifetime income expectation. Increasing longevity and the pushing-back of the state retirement age increases that future income and thus housing costs (this also explains the growth in mortgage terms).

Also, the cost of other necessities (i.e. social reproduction), such as food and clothing, has fallen in real terms since the 1970s, leaving more disposable income to be soaked up by housing. That it has been repositioned over this time from a necessity (shelter) to a vehicle of self-actualisation surely isn't coincidental.


Maybe that most of us cannot borrow money to buy equities, that the banks would never accept as collateral.

Simon Garrett

To what extent has the relative price of housing as an asset class risen because of constraints on supply? This is the conventional view suggested as the main explanation by The Economist last week (https://www.economist.com/special-report/2020/01/16/housing-is-at-the-root-of-many-of-the-rich-worlds-problems).

Roger Hart

I too was a bit puzzled by the BoE trotting this theory out. Something to do with being awash with capital and nothing to invest it in.

But from their text I got the suspicion that they were concerned about the effect on the populace of a drop in house prices. Successive HMGs have been glad to see house prices go up, but maybe there is a sinking feeling deep in the BoE that they might well go down again. Would that be due to interest rates going up or some other effect. We shall see.


Houses are not only assets, but also consumer goods, though expensive ones. They are also almost the only consumer goods that keep going up far faster than general inflation.

Probably that has as much to do with lack of supply as with interest rates. Government policy since after World War I, and doubled-down upon after World War II, is that houses should become more and more unaffordable with time, in part to keep the evil socialists at bay by forcing "a stake in society" upon what was the middle class.

So to enforce that, don't you ever dare build much of anything new no matter population growth - not in any area with available jobs, anyway. Especially California. Without that enforcement, houses would drift downwards in real-price terms like other consumer goods. Their asset-ness is entirely artificial, cartelized like medical goods and services. It has little to do with free-market economics.

The government policy is simple and it has worked for a century almost regardless of interest rates. Even the worst recessions don't dent it permanently. It's also obviously unsustainable, but it hasn't quite hit the wall yet.


I am disappointed by the usual misunderstanding of using aggregate and misleading concepts like "the interest rate" and *the* "housing marking" and *the* "equities market": there are many interest rates ranging from 0.5% to 1200%, there are many housing markets, and there are quite different equities markets and submarkets.

The rate of interest one pays depends also on the collateral, and as another commenter has pointed out, small speculators are allowed to borrow at 20 times leverage at 2-3% only by giving property as collateral; and yet house prices have been falling outside the magic areas of the Home Counties and London.

The fantasy that the price of debt and the prices of assets that are the result of what in effect is vendor financing are set by "markets" is shared not just by our blogger, but by most other neoclassical propagandists out there, with their ridiculous "loanable funds" delusion.

The prices of debt and of many assets are usually the result of institutional effects, and in particular how they are managed by governments in the interest of their constituencies, rather than by the invisible hand.


«but maybe there is a sinking feeling deep in the BoE that they might well go down again.»

The BoE I am sure have alert and capable political economists that understand well what is going on, but they also understand that their role is to support the system, so if they have reservations they express them obliquely. In 2011 the BoE did a survey of mortgages and a commenter wrote:

«The Bank of England estimates that as much as 14% of all UK home loans are either delinquent or in some sort of forbearance process. Nobody really talks about this because nobody wants property prices to fall out of bed. Can we handle the truth?»

Given that 80-90% of all private lending in the UK is for property price speculation, that 14% of "forbearance" meant that the whole UK financial system was (and still is) bankrupt several times over. The BoE had been trying to recapitalize the system by any means necessary, but the problem is unfixable without several years of rampant wage inflation, which "cannot happen".
The BoE also probably know very well that there cannot be a stabilization of high property prices into a "permanent plateau", because a lot money goes into the property market only because of the expectation of massive, fast capital gains, and if these merely stop all those positions will be liquidated, nobody want to keep their money into something that is going nowhere.

The problem that the BoE has is that fast rising property prices are an absolute political necessity to keep the middle class voting Conservative, but having the largest asset class returning profits at 3-4 times the GDP growth rate, that is at at a leveraged compound real rate of return of 50%-70% per year is unsustainable. I guess that they just don't want to be the ones who pop the illusion.


«To what extent has the relative price of housing as an asset class risen because of constraints on supply? This is the conventional view suggested as the main explanation by The Economist last week»

The Economist has become largely a propaganda organ since their circulation rose from 50,000 to 1,000,000 and especially in the USA, and their housing survey seems to me an example.

Their housing survey argues that there is a supply constraint *only* in major cities where the high value added (that is an euphemism for "higher paid") jobs are, a thesis that a conservative blogger called Kevin Erdmann has documented extensively for the USA.

The consequent solution recommended is massively increased housing density in high price property markets, for a one-time large increase of those voting for fast property price rises, and thus supporting conservative parties for the next several decades; basically a repeat of the rentierization of a large segment of the boomer generation.

Both the diagnosis and the solution seem to me "motivated reasoning" because it is not the too-small supply of housing that is the problem, it is the too-small supply of good jobs outside "headquarters" cities like London or San Francisco,
and the solution to that is to spread the good jobs, because many countries actually have an oversupply of housing in the aggregate; in the UK this manifests as falling prices outside the areas (Home Counties and London) where the good jobs have been concentrated by government policy.

Roger Hart

Apologies for being a bit OT and presenting a poorly formed idea but.

Is it possible for a small country to paint itself into an economic corner from which it is difficult to escape? I am thinking of an over-developed society with a liking for consumption but not much investment in learning. Along with a past aversion to industry leading to a shoulder-shrug 'not worth making stuff here'.


Given that 80-90% of all private lending in the UK is for property price speculation, that 14% of "forbearance" meant that the whole UK financial system was (and still is) bankrupt several times over.

The quote is from 2011. I do hope for your own sake you didn't trade on this insight.

Also, this only makes sense if any and all mortgages that received any degree of forbearance (which could just be a few days' grace!) should be marked down to zero, none of them ever recover, and the underlying collateral is strictly worthless. This would have been silly at the very peak of the panic in 2009 but it's frankly stark staring bonkers ten years on.

[this is also an institutional difference between the UK and the US. British banks, for all their faults, learned from the experience of the early 90s that foreclosing ASAP was terrible business, being an expensive way to sell at the bottom of the market, and significant numbers of late payers would self-cure given time. This is why the UK didn't develop foreclosure ghettos, rocket dockets, and all...that...jazz we remember so fondly from the early 2010s.]


Here's a demonstration of just how bad a take this is. The underlying assets were so terrible that a bunch of HBOS employees...could buy them for cheap with their redundancy money, knowing quite rightly they were good for the face value.



Hi Chris,

I hope you are well.

Could this situation happen because the UK has supply constraints on the housing market, but not on the equity market?

Kind regards,


A couple of points to consider.
One, equities might be underpriced. People keep talking about PEs as if they were static and fretting that they are high relative to history. But if interest rates are low, PEs should go up. That’s anchoring biais in full swing. Eventually it might adjust but can take time. Notice how low vol stocks are doing so well: the simple explanation to me is that they are catching up with the new low rates reality first among stocks.
Second, investment restrictions: the biggest investors, namely pension funds and insurance companies are restricted by law as to how much they can invest in stocks relative to bonds. So bonds would ted to be overvalued relative to stocks as market efficiencies are prevented by regulation to operate.
Third real estate benefit from artificial scarcity through zoning and other restrictions. So it gets too expensive relative to other asset classes.

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