Yves here. Richard Murphy highlights how housing is ever more unaffordable in the UK, portending yet another housing/financial crash. To add insult to injury, Brits are underhoused by advanced economy standards. From World Population Review:
The United Kingdom once had the most expansive houses by size in Europe with a former average size of 1,590 square feet. Nowadays, this area size has diminished to 818 square feet. This decrease is largely due to rising property prices and limited land availability, especially in densely populated urban areas. Many homeowners now prioritize maximizing functionality in smaller spaces, leading to an increase in the construction of compact, efficient homes. Additionally, a growing trend toward apartment living, particularly in cities, has also contributed to the reduction in average house size.
In the US, we like distributing the rentierism across more sectors, including housing, health care, higher education, and arms manufacture. But there is still a lot of well-founded worry here about investors reaching for return and leverage on leverage in private equity.
By Richard Murphy, part-time Professor of Accounting Practice at Sheffield University Management School, director of the Corporate Accountability Network, member of Finance for the Future LLP, and director of Tax Research LLP. Originally published at Fund the Future
As the FT has noted:
The UK statistics agency defines properties costing more than five years of income as “unaffordable”.
The affordability ratio in England hit a record 8.8 in the year to March 2021, before dipping to 8.4 in 2022. These moves and the latest increase reflect swings in house prices after interest rates rose rapidly from historical lows in 2020 and 2021.
The ratio rose to 8.6 in March 2023.
Prices are now higher.
As the FT added:
For the poorest households, the average house price in England was 18.2 times above average income in 2022-23, with the affordability threshold being met only by the richest 10 per cent of households, at a ratio of 4.3, the ONS said.
The consequences are already apparent. In a separate article the FT notes:
Poorer students are being priced out of going to university in London because spiralling rent costs are outstripping the value of maintenance loans.
An analysis of student housing costs in the UK capital found that average student rent of £13,595 in 2024-25 exceeded the maximum loan for students in London of £13,348 for the first time.
The knock on consequences for many London universities are enormous.
But, so too are they for the economy as a whole. The value of people’s labour is being sucked into paying either rents or interest to financial markets, denying them the chance to live well, whilst also sucking the life out of markets for the goods and services that actually create the prospect of employment and added value within the UK economy which cannot be created because so much income is being diverted into wealth extraction.
The consequence of the extreme financialisation of almost everything that exists within the economy is that the economy is no longer functioning as it should. Not only is it denying people the chance to live well, it is denying the opportunity for anything but further financialisation to flourish.
Nor are there signs of the dangers inherent in this madness is being understood. Far from identifying financialisation, rent extraction and excessive interest rates as the problems we face in our society, Rachel Reeves is instead describing the City of London, which is the architect of this madness, as the ‘jewel in the crown’ of the British economy and is in Brussels proselytising for it.
Where does this end? Ultimately, it can only create economic collapse if not addressed. The signs are all now present that this is unsustainable. The economy is in the doldrums. Poverty is rising. Real economic activity that seems to meet need is failing. Government services are becoming undeliverable because basic obligations, like housing people, are becoming unaffordable. Something has to give.
The City assumes people can bear the yoke of these financial burdens indefinitely. I think they are wrong. People’s anger at the exploitation they are suffering cannot be contained for that long, I suspect. Mainstream government’s either seek to manage the causes of that anger or extremists will sweep them aside – although they might well make matters worse.
Financialisation, rentierism, exploitation and greed can co-exist for a while. And then they can’t. There is always a tipping point. The next financial, crisis might be much bigger than the last two because of this, though. Asset price collapses – which seem likely – create banking collapses. I hope the Treasury has a plan for that happening. The likelihood is it is gong to need it.
NB: I am aware that the situation is not as grim in Scotland, Wales and Northern Ireland.
Thank you, Yves.
I agree with Richard and have long wondered when the unfinished business from 2008 would come back to haunt us, something that you have quoted from me once or twice. I thought covid might be the trigger, but QE kept the sinking ship that is Brexitannia afloat for a bit longer.
In addition to the personal financial distress, which means individuals have little or no buffer to absorb such distress, the failure to reform the financial system (breaking up banks to keep commercial banking separate from trading and avoiding the too big to fail moral hazard, more capital, stricter leverage ratios, a hard limit on balance sheet size, and jail for white collar crime) and policies that favour the masses, not the wealthy, means that the next crisis is going to be worse.
Something else, and something that gives me something in common with some, but not all, neocons: Another crisis, which will hit the west, not just the UK, will further cement the decline, if not fall, of the west and finance capitalism. Readers may be surprised to read that some, but not all, neocons oppose financialisation and see the danger to western dominance from such an economic system.
After the inaugural G20 in 2009, I was part of initiatives (City and UK government) to train Chinese and Russian officials, public and private sector, seconded to London to learn about financial services regulation. These youngsters, often very well qualified, learnt what not to do and were planning for a multipolar world.
I doubt the Treasury, which has few wise old heads left, and the Bank of England have a plan, other than more QE, I suppose.
Let me sound like a broken record: If you are able to leave the benighted kingdom, please do so. If you need convincing other than from NC, please read what opposition leader Neil Kinnock had to say in 1987 and add all the calamities since. From next month, further and firmer steps towards bailing out, but with heavy heart, a hint.
What I have and know are real residential property prices in the United States since 1890. Real prices have followed inflation remarkably closely. Why US residential property prices should be so high now, I do not understand:
https://fred.stlouisfed.org/graph/?g=YcwR
January 30, 2018
Case-Shiller Real Home Price Index, 1992-2024
(Indexed to 1992)
https://fred.stlouisfed.org/graph/?g=oSIJ
January 15, 2018
Real Residential Property Prices for United States and United Kingdom, 1992-2024
(Indexed to 1992)
There are private equity companies buying up entire neighborhoods, and large numbers of private investors using housing to store wealth, companies like Airbnb, and finally, many landlords using the same algorithms provided by a national company whose name I forgot to determine rents instead of flesh and blood people.
All of this is fairly new, but has been happening for the past decade. If the economy does crash as hard as it did in 2008, I wonder if enough pressure will be put on the landlords to have them reduce the rents by any significant amount.
“There are private equity companies buying up…”
This is very important. China began a policy of home being for living in rather than for speculating on, and never relented though adjustment took time. I think the Chinese policy was necessary, and continued strong and productive growth appears to support the policy:
https://fred.stlouisfed.org/graph/?g=oc5V
January 30, 2018
Real Residential Property Prices for China, United States, India, Japan and Germany, 2010-2023
(Indexed to 2010)
https://risk.lexisnexis.com/products/homestead-exemption-fraud-detection
And committing homestead exemption fraud.
“When the capital development of a country becomes a by-product of a casino, the job is likely to be ill-done,” declared Keynes in The General Theory of Employment, Interest, and Money.
And here we are …
Also, manufacturing productivity in the United States has simply stopped growing.
https://fred.stlouisfed.org/graph/?g=m2mB
January 30, 2018
Manufacturing Productivity, * 1988-2024
* Output per hour of all persons
(Indexed to 1988)
https://fred.stlouisfed.org/graph/?g=1C2ry
January 30, 2018
Manufacturing Multifactor Productivity, * 1988-2023
* Real value-added output divided by combined inputs.
(Indexed to 1988)
https://commonslibrary.parliament.uk/research-briefings/sn02791/
November 15, 2024
According to research from the Resolution Foundation, UK labor productivity has seen very slow growth since 2007, with an annual growth rate of only 0.4%, marking the lowest productivity growth rate over such a period in the last 200 years, significantly impacting average real wages compared to pre-financial crisis trends; essentially, productivity has remained largely stagnant since the 2008 financial crisis.
Thanks Col., I’ve been similarly wondering whats been keeping the UK going since the last crisis (which, it should be said, the UK did well to recover from, even if Labour at the time got little credit for what they did). Several times over the past 10 years I’ve been convinced that either a mortgage crisis, a private debt crisis (possibly car loans) or a sterling decline would set it off. But it hasn’t happened, so I’m loath to make predictions as I’ve been wrong every time so far.
It should be acknowledged that several parts of the UK economy are doing well – apart from the usual areas of finance, the UK is still strong in a range of services, is a world leader in some tech areas, and has a surprisingly vibrant start up scene, which I’ve commented on before. On my annual visit over the smaller pond, the places I’ve visited in the north Midlands and north seemed well cared for and prosperous, with shops packed.
But… there seems evidence every where of a gentle deflation of wide range of areas of strength. From the City to tourism to agriculture to education to what remains of its industry, nothing is thriving, and a lot seems to be, at best, just threading water, presumably hoping another Brexit or Ukraine linked problem doesn’t deliver a coup de grace (there are a few significant trading rule changes upcoming). So the constant strength of the property market seems to defy all logic. I assume that much of it is a constant flow of foreign buyers, all seeking a refuge of one form or another, is keeping things simmering, at least in London. I know personally of a few Asian investors who still see property in the UK as a good hedge against things going wrong elsewhere (not professional investors, but not fools either). Mind you, I lived in London in the mid 90’s, and at the time I thought property was crazily overvalued and it would be foolish to invest, which goes to show how little I know of such things.
The one thing I always keep an eye on is sterling. I think if trouble starts somewhere, it would be a steep decline, and this could expose a lot of problems, not least a massively overleveraged banking system. The BOE would then have a Hobsons Choice of either defending Sterling with high interest rates, and potentially collapse the housing/borrowing market, or letting sterling drop and enrage the City and outside investors. I’m not sure which is the worst option.
Here is a Twitter / X thread from and English business observer about attitudinal differences on either side of the Pond. Scroll down a little as he enumerates a few of those.
Britain was entrepreneurial back in the day. What happened? Someone we met while living in Asia went back to the UK after 30 years and said he found he was living in a historical museum, not a country.
When I was younger I marvelled at how ALL of the big tech companies were created in the US. Were there no European, Scandinavian or UK engineers or programmers?
Then I found out years later what the US spends a lot of its taxpayer money, namely throwing money at US startups, (eg Silicon Valley and DARPA and Big Pharma).
And also throwing money at any org/initiative putting sand in the gears of entrepreneurial non-US companies.
Sabotage is a great US skill, practiced widely around the world, in business, military, media and government arenas. Latest success? Syria. Such entrepreneurs.
Thanks Colonel.
Where would you go? EU is my other option, doesn’t look too rosy either
Thank you.
I’m going to the tropics.
I said in another comment to this post that I don’t fear a global crash. But to address your question, in my view the worst place to be is the periphery of the US Empire.
The Empire is a dying sun. But like a star, it swells and dims as it ages and then suddenly shrinks a bit and brightens (before blowing up or going cold entirely!) as it cannot sustain its full size, collapses inward and thus increases its temperature and pressure enough for a new fusion sequence of heavier elements to ignite.
It’s just a metaphor but that’s what the US is doing. It will use its cheap energy, financial sanctions and tariffs to strip its vassals of their industrial growth and run a high pressure economy at home. Europe is going to be plundered in order that heartland America shall gave both guns and butter. So, you may need to send your money to the US while choosing the vassal with the best terns of trade. Probably one with wealth based on services, especially digital or tourism or healthcare, and on commodities. Not one with a manufacturing base or one representing any kind of geopolitical threat.
My guesses are Singapore (hedges the bet with China, too), the Gulf States (but a volatile neighbourhood!) and maybe Costa Rica or Uruguay.
Maybe Switzerland but if the EU is in crisis, it is are to see how it remains aloof.
Maybe Ireland, too – outside of NATO – but Ireland is exposed to high energy costs and to rusk of US tax policy changes and the domestic economy is suffering from continual austerity economics to balance the rentier tax haven policy.
A leftfield choice would be a Caribbean island (tourist and tax dollars, no threat, Monroe doctrine).
I would like Japan to be an option for me personally but I worry they may not be able to survive trade war with China. They would need to reshore their own production to supply the USA again if China is contained. But the quality of life would be exceptional….
I am looking at selling the farm, literally, and moving to Ireland or Guernsey for tax reasons (hardly the weather!) and to remain close to ageing parents, student children and within the European Anglosphere.
I am not dodging a global crash but I think the market is at the top in UK farmland and the future UK climate is very adverse to the haute bourgeois under any government. Land is immobile and all of the gains booked by the Boomers will be taxed off their Gen X beneficiaries to pay for Endless Real War, Endless Culture War, Public Private Partnerships and all the other ways parties keep the plutocrat donors’ troughs filled.
The new IHT rules are a case in point. If Labour was serious about taxing the wealth OF Britain, they would tax land values directly. Instead, the new rules will only hit family farms and businesses, which is the remaining wealth in Britain.
Vast amounts of UK property was exported tax-free to offshore trusts pre-1974 and is simply not taxed any more. There is an extremely narrow wealth tax base left – I wish somebody would commission a study, to show how narrow – and it’s people like me. Not the Murdochs or the Hindujas or Dysons or Swires or Guinnesses etc….
There is a liquidation of the kulaks coming and Reeves will have a shock that we will all leave….
Here in the North American Deep South I often pass a roadside billboard advertising a mobile home sales company. The latest ad touts a double wide “manufactured home” aka the higher priced “poor man’s castle,” for Sixty Thousand dollars. The customer supplies the land upon which said marvel of modern consumerism is sited.
Add this to Eighty Thousand dollar pick-up trucks, One Thousand dollar a month two bedroom apartments, Four Dollar a dozen eggs, and small businesses closing in record numbers this last year, and we have a society ambling towards disaster.
Also add in the ubiquity of card based social “assistance” programs, (everything is now delivered via a third party “managed” debit card,) and the chances of a system wide collapse bought on by almost any technical malfunction in the financial sector approaches certainty.
Pair this article with Mr. Corbishley’s post on the state of play in the UK “War on Cash” to get an overview of the calamity looming on the social horizon.
Prepping is looking more and more like the, as Bourdieu says about something else, “rational management of [actual] capital.”
Stay safe. Help your friends, family, and neighbours, and keep a close eye on everyone else.
Thank you, Ambrit. I hope you are ok.
My parents, 80 last month and here since May 1964, want to return. I want out of the City and may as well jump ship, but hope to return for the period from the royal meeting to Leger day. :-)
Do move carefully Colonel. Keep an eye on “local” as in island based anti-colonialist movements. We would not want you and yours to become “lightning rods” for unscrupulous politicos in the tropics.
Perhaps you could return to the Meets as an Owner Manager? If your cousin is successful in his equine pursuits, he will need a London savvy partner to get the most out of the racing “experience.”
As a very expatriate Englander, let me apologize on behalf of my fellow yobbos for the mean spiritedness now infusing the tang of bitterness in the society you are striving to survive.
Find your paradise.
Stay safe.
Thank you, Ambrit.
Both of my daughters bailed on SE1 in the last few months, Colonel, back home now phew …
Yet I am glad they got – the experience – now know what I bang on about sometimes. 24 yr old Daughter that was working as asst property mgr in the area is now working for the Qld state fisheries admin, been back a few months. Eldest just got back and looking, was a buyer for a big internet fashion house. Eldest son 27 is now an federal APS6 as a technical advisor on award wages, youngest son 20 yrs old is a few months away from finishing his Diesel mechanic/fitter apprenticeship and on 75 bucks an hour.
Everyone is home for the holidays with the added bonus of an incredibility sweet/creative/artistic new girlfriend some years my younger and two nutty dogs too boot. Sadly can’t do a thing about this mad Qld weather around the holidays. Cheers.
>>>One Thousand dollar a month two bedroom apartments
Two thousand dollar a month for a one bedroom apartment, if you are lucking, in the whole San Francisco Bay Area, which is true even in the rural areas of the Bay even seventy-five miles from the city of San Francisco, itself.
Yes, but your one bedroom apartment comes with indoor plumbing!
Ick!
We have a new addition to the Everest of debt caused by financialisation…at least it’s new to me. Credit Risk Transfer (CRT) transactions wherein banks offload their credit and interest rate risk to third party investors while simultaneously maintaining the debt instrument on their books. This allows banks to make new loans without exceeding their capital requirements. What could go wrong?
Here the Systemic Risk Institute of the Corporate Finance Institute informs Jerome Powell of the risk inherent in these financial instruments. And it would be the usual suspects, i.e. Too Big To Fails, front and center on this “innovation.” We can all be comforted by the fact that they will continue to prosper apres le deluge.
Are you kidding me?!!??
That’s new to me too. Just found this which describes how they work – https://resonanzcapital.com/insights/credit-risk-transfer-crt-transactions
” Essentially, CRT involves a financial arrangement where the credit risk of a portfolio of assets, such as mortgages or corporate loans, is transferred from the original holder of the assets, known as the protection buyer, to another party, known as the protection seller. This transfer of risk is particularly appealing to banks that are looking to manage the potential losses they might face if borrowers fail to repay their loans. The protection sellers, which can include other banks, insurance companies, or investment entities, accept this risk in exchange for potential returns, often received through premiums or fees paid by the protection buyer.
~snip~
The CRT (now also called Significant Risk Transfer, or ‘SRT’) market, meanwhile, refers to a form of securitized credit risk sharing (‘CRS’) of bank-retained exposures.
Credit Risk Sharing (CRS) emerged as a strategic response to the challenges faced by banks following the Global Financial Crisis (GFC) when regulatory pressures necessitated better balance sheet optimization.”
Not a ton of detail there, but it sure sounds a lot like those credit default swaps (CDS) that tanked AIG during the financial crisis, except that this time, you can use them for more than just mortgages. What could possibly go wrong?
A CDS by another name? That was my thought as well. Who’s the bag holder of these instruments these days? Pension funds? Who assigns a value to these instruments or rates them?
CRT sounds like what we did for Greece.
The X factor in the USA and elsewhere are short term rentals, which didn’t exist in the last crash.
Here, AirBnB’s took the average price of an average home from $225k to $450k in a decade. they were the driving force, bidding against one another for the goods.
Should there be a rush to the exits, every last one of them is essentially ‘staged’ to be shown and sold tomorrow, and there isn’t any quandaries over the kids going to a new school or missing their friends or your friends in the area, because there aren’t any.
Around here in the NADS, (takes a minute to scratch vigourously,) “short term rentals” generally means motels converted to “studio efficiency apartments.” There is another billboard fronting the Interstate that touts a motel that has “daily, weekly, and monthly rates.” These places are not simple conveniences for the mobile parts of the mobile vulgaris. They are debt traps for the poor and low paid denizens of our segment of the Southern Decadence.
There are several proper Air B-n-Bs in our immediate neighbourhood. They are empty more often than not and the locals wonder how the finances of those places works out. The general consensus at present is that such “Temporary Accommodations” are money laundering schemes.
Rumor has it that at least one lodging establishment around here is a money laundering operation. “Customers” pay for rooms and never show up.
While things have reached a seemingly untenable pass, and rational minds say ‘something’s got to give’, I don’t see what will be the trigger or mechanism for change. The piles of money at the top will keep the gears turning. Perhaps some firms and chains will liquidate and larger ones will take over their assets; so what, what’s the difference which private equity firm owns what?
Those cheated down at the bottom will economize even further, and suffer declining quality of life, in crappier, shared, expensive housing and rising fees for everything. Our quality of life will have to hit rock bottom before the pitchforks come out, and even then, with ubiquitous surveillance cameras, ‘the revolution’ will be snuffed out one hero at a time.
When monopolies and cartels have more power than the governments which regulate them, they will keep rocking on. People will work for them and buy from them rather than starve. And yes, on the fringes, some people will strive to do what they can for themselves whether prepping or gardening, but some can’t afford to do much.
I said some time ago that we are headed for some future of totalitarianism, authoritarianism, and neo-feudalism. This is now becoming obvious. Pitchforks are not going out because most people are hypnotized by a mind-control regime they cannot eve imagine let alone understand or notice. Bit by bit Brits who are even more passive and powerless than North Americans are being boiled like the proverbial frogs. Americans are suffering a bit less but have the same enemies, the finance oligarchs, big pharma, big insurance, big medicine, and comically corrupt politicians. We in the USA at least are beginning to understand these enemies thus the sympathy for the guy who killed the Insurance CEO. We in the US at least have Trump as a symbol of rebellion–I don’t think he’ll make a difference those of us on the bottom of the income scale but at least we in the US have elected a symbol while the UK elected a Monty Pythonesque character. My guess we Americans, who are, fortunately, well-armed, will manage to wiggle out of this crisis in the neo-liberal/conservative regime but I’m pretty sure the Brits will writhe in pain for some time and endure whatever tortures created for them by the City of London that jewel in the crown (because it manages to suck up most of the dark money from criminal enterprises now ubiquitous in the Empire).
I wonder at what point the following factor:
the financial market […] sucking the life out of markets for the goods and services that actually create the prospect of employment and added value within the UK economy
will undermine the economic system to a point where it simply implodes, or whether those rent-seeking giants from the FIRE are such superbly adapted parasites that they can keep bleeding their host just below a lethal level for ever (but wouldn’t this imply a self-imposed limitation in the growth rate of profit?)
Many of these stupid McMansions being built near center city will have to be converted awkwardly into duplexes post housing crash in the good ol’ US of A. They could be rented out by the bedroom. I really don’t want to go into that line of work as I heard it’s a pain the rump. They should of been built as townhouses in the first place but the incentives, income inequality, and craptastic regulations have broken real estate.
Many neighborhoods in my neck of the woods are now permanently unaffordable bar total revolution. It doesn’t matter if the market crashes 50% in the future. That 1.2 million dollar house is still a costly 600,000 piece of crap. Still have to pay that to tear it down and start building actual multi-family.
The multi-family projects built tend to be massive structures that dominate entire city blocks financed and funded by wall street and increasingly smaller numbers of elite development companies. Only they can hire the lawyers and support staff to build these behemoths. There’s no winning move.
I’m getting pretty damn sick of capitalism and rent seeking wealthy nimbys. There’s no free market anyway, it’s rigged for mansions. Socialism is looking awfully competitive these days. I want to see the pearl clutching wealthy bums screeching into the void as affordable housing gets approved next door. Cry me a river.
I hope it all comes crashing down.
I’m not sure there will be a “financial crisis” because that game has been gamed and controlled by a well-organized and highly networked international oligarchy. What we are having and will have even more of as time passes in the Empire (NATOstan and it’s associates) is a severe moral crisis as we all begin to understand that laws whether international law (now dead) or local and national laws no longer count unless you have power and money so why act in positive ways when the cards are stacked against you. Out of this we will have a form of feudalism as gangs, whether they are official or unofficial (including corporations) will provide us with some safety and rules for those inside and for those outside the gangs there will be ruthless exploitation and poverty and homelessness.
Huh? Nothing here is controlled. In fact it is less so than in 2007-2008. Private equity has found all sorts of different places to create leverage in its deals that no outside party has any idea.
And international law has squat to do with bank crises and bailouts. Those are national affairs.
Laws are supposed to be related to social morality are they not? At any rate, there are many instruments of control in the financial community that are networked. Banks, international organization (IMF, WB etc.) who have strong financial desks, major banks the Fed and equivalents around the world do meet often and network to avoid crisis. I’ve seen, since 2008, dire predictions of major financial crises that never happened and were nipped in the bud by, in my view, cooperation among many international players when it was in their interest to do so. Anyway, it would be logical for finance oligarchs to cooperate in this increasingly networked world. I think unofficial (and outside the law) networks and are ultimately going to be the PTB eventually.
Richard Murphy is speaking of a crisis in the UK. I am extending the notion to the US.
The IMF and World Bank have absolutely nothing to do with bank rescues in either country.
I do not recall any “dire predictions of financial crises” post 2008 that yours truly took seriously. I debunked quite a few. I did point out systemic risk in central counterparties, that they were presented as a risk reducer but when a crisis hit, they would be a risk concentrator and contra official claims, would be bailed out. We did cover a bit the repeated Eurobank wobbles and various last minute kick the cans. We do admit to getting a bit excited when Unicredit got sick but never predicted a crisis beyond Italy for that (admittedly that would be very nasty in terms of the Eurozone). We pointed out repeatedly how weak DeutscheBank was but clearly said it would be allowed to fail. We debunked the repo panic [of 2019?].
The Fed does not network, FFS, save as it always has via getting some (no where near enough) regional real economy intel via its member banks. Jackson Hole is a meeting for economists to present papers. The Fed can get other central banks’ attention when it needs to. It does not need to “network”. Honestly I have no idea where you get these ideas.
I do not know what you are talking about re finance oligarchs. The systemic actors are top bank execs who may be very powerful and well paid but are NOT oligarchs. The oligarchs are private equity, and they are leveraged owners of businesses, not financial intermediaries.
This is a very interesting point that I will need to think about – whether the lords of finance count as oligarchs? They certainly have a lot of power, but only as long as they keep their institutional seats.
My initial thought is that it seems like they would count in the immediate Turchin sense, but not in the multi-generational sense. They share many characteristics with the PMC.
The growth rates in the west are becoming as small as the growth experience by early agricultural societies. This rate of growth cannot overcome the higher “interest” associated with the cost of living. Prof Michel Hudson’s clarion call for “clean slates” is likely not going to be heeded and in the past, revolts and revolutions were started due to the issue of debt.
Technology and AI (hihihi) will not get us out of this coming avalance, especially with climate change/warming, destroying, dessicating, and overall reducing the food output.
The vibe is in the air, people refusing to have children, all over the world.
The rulers’ result is desolation and this picture encapsulates it perfectly:
https://x.com/tamerqdh/status/1863326565997719787?s=46
TAC had an article about America’s Axis of Misery that sounded more like something written by indi.ca, worth a read:
https://www.theamericanconservative.com/americas-axis-of-misery/
The affordability of UK housing has been a problem for this entire century. People have been saying that this cannot continue for nearly 25 years, yet it still continues. It’s survived a huge banking crisis and the near depression of the Tory years. At this point you have to wonder what it would take to bring it crashing down.
Also, due to the f***ed up politics of the UK, British governments will do almost anything to prop it up. And if I’ve learnt anything in the past 15 years – it’s never bet against the stupidity of the British political class.
It can’t continue. It’s unsustainable. And yet it persists. Baffling.
Here is the following rake’s progress, with profuse apologies for the length, but this history is practically unknown, and neglected almost completely by economic historians:
1776: Adam Smith notes that everyone is in a landlord and tenant relationship, but that the owner occupier is both landlord and tenant, in receipt of an imputed rental income as landlord from him/herself as tenant. That should be taxed (chapter 2 of book V of the ‘Wealth of Nations’).
1777: Lord North applies this principle to his finance bill to pay for the Revolutionary War.
1798: The Younger Pitt and his two leading economic advisers, George Pretyman (later Pretyman Tomline, and bishop of Lincoln and Winchester), and Henry Beeke (later dean of Bristol) develop the first income tax, following Smith’s precepts.
1799: The first income tax taxes the imputed rent.
1802: Income tax was scrapped because of the Peace of Amiens.
1803: Income tax is restored with the resumption of hostilities. Henry Addington develops the income tax schedules, and the levy on the imputed rent becomes Schedule A. Tax relief applies to interest payments.
1815: Income tax is abolished by Henry Vansittart.
1842: Income tax is restored by Henry Goulburn using Addington’s formula. Schedule A is the largest source of revenue for the Inland Revenue.
1915: Rents were controlled following the Glasgow rent strike. They were subsequently subject to various levels of de-control (1923-33/38 and 1957-65) and re-control (1920-23, 1939-54/57 and 1965/77-89).
1936-36: The last quinquennial valuations were undertaken. Every five years surveyors would assess what each owner occupier’s imputed rent would be by reference to the local leasehold market.
1940: Sir Kingsley Wood scraps the quiquennial valuations as surveyors are overwhelmed by war damage assessment claims.
Late 1940s: An uptick in house prices as large numbers of returned service personnel return to the UK where a sixth of the housing stock had been damaged or destroyed.
1950: Owner occupation accounts for 29% of the housing market.
1955: The Liberals (under Jo Grimond) campaign for the abolition of Schedule A in order to take votes from the Tories. Tory party conferences repeatedly appeal for abolition, but the Treasury does not want to surrender the tax. The surveyor’s lobby (RICS) also appeals for abolition, as the quinquennial valuations are low margin, high churn work.
1959: Labour (under Hugh Gaitskell) campaigns for the abolition of Schedule A. The chairman of the Inland Revenue, Sir Alexander Johnston, tells ministers that the government could probably get away with abolition because of the declining efficacy of Schedule A – the 1935 valuations now being seriously out of date.
1959: The Radcliffe report on the working of the monetary system recommends placing emphasis on bank rate to control credit.
1960: Owner occupation accounts for 41% of the housing market, owing chiefly to the steady growth of building society deposits.
1962: Orpington by-election results in the Liberals (Eric Lubbock) overturning a large Tory majority. Research by Tory Central Office reveals the primary factor as being fears about Schedule A revaluations.
1963: Reginald Maudling abolishes Schedule A as part of his ‘dash for growth’.
1964-65: Nicky Kaldor designs a new capital gains tax (Selwyn Lloyd had introduced a modest tax on speculation in 1962, but stopped short of a full-blown CGT). In committee the chief secretary, Jack Diamond, is persuaded by officials that it would be inequitable to impose CGT on the primary place of residence, as it would hit those wanting to leave London on retirement (i.e., themselves). This was a defeat for Kaldor, who had wanted to drive capital and credit from consumption towards industry in order to offset the increasing propensity of imports to exceed exports, which had become evident from the mid/late 1950s and was the cause of successive sterling crises and ‘stop-go’ (Kaldor’s selective employment tax of 1966 fulfilled a similar function).
1965: Jim Callaghan’s new CGT exempts the primary place of residence.
1969: Roy Jenkins scraps tax relief on interest, but exempts house purchases and business loans.
1971: The Bank of England (Jasper Hollom and John fforde), following the recommendations of the Radcliffe Report, initiates its ‘Competition and Credit Control’ policy, which removes quantitative restrictions on credit managed by means of an informal agreement between the Bank of England and the ‘big five’ retail banks. The big five were worried about a progressive loss of market share to ‘secondary banks’ which were flourishing with the growth of the Eurocurrency markets after 1955-56.
1971-73: Competition and Credit Control, allied with Tony Barber’s dash for growth results in the UK’s first ever house price bubble, although the most serious effects become evident in the commercial leasehold sector once bank rate starts to rise rapidly following the multiple inflationary shocks of 1972-73.
1973: The secondary banking crisis and Bank of England ‘lifeboat’. The Bank of England also imposes a ‘supplementary special deposits scheme’ (or ‘corset’) to control credit growth in order to dampen inflation and prevent another banking crisis.
1979: Sir Geoffrey Howe abolishes exchange controls. This increases the flow of capital into the City and destroys the declining efficacy of the corset.
1980: On the advice of the financial secretary (Nigel Lawson) Howe abolishes the corset and allows the retail banks (which can create credit almost ex nihilo) to intrude upon the residential mortgage market (where the building societies – which could only lend what they had in deposits – had hitherto exercised an effective monopoly, with a 96% market share in 1977). House prices immediately start to rise steadily. The Heseltine/Rossi Housing Act 1980 instituted the ‘right to buy’, which greatly increased demand for mortgage finance.
1983: Howe increases the interest rate tax relief for home purchases (MIRAS), and allows unmarried couples to pool their reliefs, increasing the trajectory of house price inflation.
1986: Building societies are allowed to metamorphose into retail banks, increasing the scope of the credit boom.
1988: With house prices increasing at a parabolic rate, and with increasing anxieties about a rapidly overheating economy and the return of inflation, Lawson scraps the pooling of allowances. The prospect of this causes a blow-off phase to the house price bubble. The Housing Act 1988 also decontrolled rents completely.
1989-93: House prices decline significantly, especially as a consequence of Lawson shadowing the DM and John Major having the UK join the ERM at a high rate, intended to crush inflation. Interest rates, already high, continue to rise in order to defend sterling.
1994: MIRAS entitlements are reduced further by Kenneth Clarke, and house prices continue to stagnate after the shock of the interest rate spike in 1992 (Black Wednesday).
1996: House prices start to rise rapidly, and reach their 1988 levels within little more than 18 months.
2000: Gordon Brown abolishes MIRAS. However, house price inflation continues remorselessly as the banks expand credit, with 100% mortgages, self-certification (banned in 2014) and other ruses becoming commonplace.
2007-12/13: House prices fall slightly and then stagnate. However, they begin to rise rapidly thereafter, with a period of stagnation in 2022-23 in response to the Truss/Kwarteng gilts strike.
By 1983 residential mortgage lending accounted for about 80% of bank lending, and it remains in excess of 80% of aggregate bank lending. Productivity growth in the UK underwent a resurgence in the 1980s, but this was chiefly because of the shake-out in industrial employment, especially as a function of the monetarist experiment of 1976/79-82/83. By 1990/91 those productivity gains were spent, and – predictably – the transition to services was incapable of yielding material productivity gains. With credit being dominated by a non-productive asset class (housing) and industry being perforce starved of credit at a time when innovation had become more capital intensive, wages stagnated. This made owner occupiers that much more dependent upon untaxed capital gains on their own homes for their future security, underscored by the shift from defined benefit to defined contribution pension saving from the late 1990s.
In addition, the capital gain creates a ‘wealth effect’, allowing owner occupiers to live beyond their incomes (using growing housing equity as a hedge), or allowing them to extract equity. This is often spent on imported goods (cars, white goods, overseas holidays, etc.), which all weigh on the UK’s current account. The current account deficit has to be matched by a capital account surplus. More UK assets need to be sold to cover escalating deficits, which have been persistent for most of the time since the 1980s. Since the UK ceased to be self-sufficient in energy in 2004, and in food after the early 1980s, those current account deficits have tended to increase. Economic and political alienation has increased as more of the UK has been sold (ironically, in view of the UK’s history) to foreigners to generate the capital account surplus. The creation of a Marxian ‘reserve army of labour’ has perhaps been encouraged, albeit implicitly, in order to put a floor under house prices even as the birth rate declines (due to the prophylactic qualities of high house prices), perhaps increasing the sense of economic and political alienation. In addition, house price inflation is a zero sum game in which prospective owner occupiers and tenants must fund the gains of existing owner occupiers (plus interest) out of stagnating incomes, whilst they must also save much more than existing owner occupiers owing to the significantly inferior returns to defined contribution saving (which has just lost its IHT relief – DC saving lacking indexation protection – meaning that DC savings might well be transferred to housing, which is more likely to be protected against retail price inflation). An acute pensioner poverty crisis beckons as DC pensioners (who may not have been able to get onto the housing ladder or redeem large mortgages) approach retirement and risk running out of money.
So, in multiple ways, this malign system is self-reinforcing. Like the ‘fabulous upas tree’ which destroys everything for miles around the fiscal preference to owner occupation contaminates everything, whether health, social care, education, welfare, transport, etc.
Excellent, you should make it a Wikipedia page.
I attempted to enter the housing market in 1996 just as it was picking up. It got away from me and I never caught up.
This is a brilliant summary of all the mistakes and low-dealing that brought us to today.
So few people realise that the UK used to have a philosophical coherent taxation of economic rents with Schedule A taxation of unearned income and an elaborate if informal system of credit rationing, especially for zero-sum activity like the secondary market purchase of housing!
It is not just house prices but land prices. Farmland was £2k/acre for much of the past fifty years. Now it is £7k (and briefly hit £10k in 2010’s).
There’s more of course. The abolition of agricultural and industrial buildings allowances, which enabled the cost of productive investments (not land speculation) to be expensed. The failure to apply exit taxes to wealth (either capital gains to this day or inheritance tax pre-1974, so the smart money “left” generations ago for Jersey). The deductibility of interest but not dividends.
Very many thanks, and too true about agricultural and industrial reliefs (some of which go back to the days of Lord Salisbury and Stanley Baldwin). I should add, by way of correction, that initial steps were taken to relax capital/exchange controls by Denis Healey in 1977-78, so essentially Howe was finishing a job which Healey had started. Healey’s move accelerated the declining effectiveness of the corset. As with Jimmy Carter, some forms of ‘de-regulation’ began before the advent of Thatcher or Reagan.
Howe abolished exchange controls in two stages – July and October 1979 – and the final abolition gave him (so he claimed) his only sleepless night as chancellor of the exchequer.
The best recent account of the termination of exchange controls (at least for me) is chapter 5 of Jack Copley’s excellent ‘Governing Financialization’ (2022), which has been frustratingly little reviewed in the main economic history journals.
Essentially, all the ‘low dealing’ has been about buying votes from owner occupiers and using capital gains to keep them in clover (i.e., having the untaxed capital gain plug the gap between public expectations of improving living standards and the faltering ability of the productive sectors of the British economy to deliver upon those expectations). The involvement of Labour in this process demonstrates that they have been just as much in the market for owner occupier votes as any other party, though they do need to throw the occasional bone to that part of their core vote which is comprised of tenants. It’s a latter-day form of electoral ‘Eatandswill’.
Out of interest, Froghole (you don’t have to reply, the code of conduct here seems to be like prison, don’t ask what somebody’s in for!) but how do you know all of this? I thought I was the only amateur UK economic policy history nerd because nobody ever mentions this stuff, in the MSM or even in media-friendly macro/micro circles or in political / think tank press. Richard Murphy very rarely tries to locate his criticism or remedies in historical context (indeed, he’s quire allergic to it on, for example, land taxation). Only Martin Wolf and William Keegan ever take the long view, occasionally.
Are you an economic historian? Or some sort of writer on policy. You write well too! Praise where praise is due for content and form and for making me feel less alone railing at the ignorance of our times.
Thank you so much! I am definitely not an economic historian, although I have accumulated a stupidly large collection of books – mostly monographs and reference works from the university presses (plus the likes of Brill, Brepols, Peeters, etc.) – devoted chiefly to all aspects of history in all periods and parts of the world.
The first time I came across Schedule A was in the early 2000s when I saw a stray reference to it was indeed in an FT article by Martin Wolf. I found this intriguing in the context of the rapidly rising house prices of the time, and tried to follow up on it, but kept turning up blanks, though Wynne Godley’s essays on credit for the Levy Institute made a great impression on me at the time. Digging in the British Library and London Library was also largely futile. At length, I have to burrow further back into the older historiography. Thus, the information above comes from some quite venerable works on the history of taxation (by the likes of Stephen Dowell, William Kennedy, Josiah Stamp, etc.), as well as reading Historic Hansard and blue books in the London Library. There are incidental references, often tantalising, in a number of monographs. The remarks about CGT are from David Collison’s essay ‘The UK Capital Gains Tax: the Conception of the 1965 Act’, which is in v. 9 of ‘Studies in the History of Tax Law’ (2021), which is one of the very few items which is more directly on point, although sadly it does not recall Kaldor’s reaction to the gutting of his CGT scheme (and Kaldor’s pre-eminent biographer, Tony Thirlwall, is no longer around to ask).
The only major references I have found to Schedule A are in essays by Avner Offer, some of which are reproduced in his seminal, but little reviewed, ‘Understanding the Public-Private Divide: Markets, Governments and Time Horizons’ (2022), as well as the Chick volume referenced, and that of the civil servant A. E. Holman, ‘Housing Policy in Britain: a History’ (1987). Even these are inadequate. Incidentally, Chick’s work is part of the Oxford history of the economy of the British isles series, the general editor of which is Martin Daunton. Daunton himself wrote two excellent histories of British taxation up to 1979 (2001-02), as well as a 1987 volume ‘A Property-Owning Democracy?’, none of which made any useful references to Schedule A or the consequences of its abolition. I was perplexed by these omissions, so about 18 years’ ago I wrote to Daunton, chiefly to thank him for his presidential addresses to the Royal Historical Society, but I also asked if Schedule A could be addressed in the final and then-unpublished volume on the post-war British economy. Whether Daunton instructed Chick to do so, I cannot say, but Chick did pay attention to the issue in his book, and he also noted the effects of Schedule A abolition in his inaugural lecture at Edinburgh (which is available on Youtube). I should also add that Daunton expanded on his presidential addresses in his 2023 volume ‘The Economic Government of the World, 1933-2023’; when writing to him all those years ago, I asked if he would expand his RHS lectures into book form, but whether he did that because of me is moot, and highly improbable.
So, given the extremely consequential impact of the fiscal preference to owner occupation for every aspect of public policy, the failure of economic historians to get to the root cause must rate as a distressing failure. It is therefore little surprise that the mainstream commentariat knows nothing about it, and people assume that high prices are all a matter of supply and demand, which is precisely what the vampiric volume developers and their hirelings want people to believe. This want of knowledge becomes more serious when even serious and influential students of the housing problem – John Mueullbauer, for example – write as if they know nothing of the history. They repeat the mantra of supply and demand as if mere repetition will prove to be a substitute for truth. This reminds me of Lewis Carroll:
“Just the place for a Snark! I have said it twice:
That alone should encourage the crew.
Just the place for a Snark! I have said it thrice:
What I tell you three times is true.”
In my view the UK will keep going down because the problem is insoluble. The only way in which escape may prove possible might be in a slow and gradual diversion of credit from residential mortgages to productive capacity, with the Bank of England having the power to force lenders to divert credit in that fashion – legislative suasion which they lacked in the postwar era (incidentally to the chagrin of Peter Thorneycroft, who wanted to sack Cameron Cobbold, at least partly for failing the exert sufficient control over credit issuance by the retail banks; the Treasury solicitor had to inform Thorneycroft that he did not have the power to do so under the Catto/Dalton bargain enshrined in the 1946 Act nationalising the Bank).
Very many thanks again, and I am grateful to have learnt much from you!
“I am definitely not an economic historian…”
Your thinking and writing are superb. I always follow each of your comments.
What choice do they have besides cannibalism? They don’t make anything.
In ’14 they made 12 million tons of steel. In ’22 they made 6 million tons.
In ’22 the US made 80 million tons.
China made over 1,000 million tons.
I don’t know what else you need to know.
You can build pyramids with dollars but nearly everything else takes steel.
In U.S. –
Progress Residential – Aldolfo Villagomez purchased 90,000 single family homes.
Invitation Homes – Dallas Tanner purchased 90,000 single family homes.
American Homes 4 Rent – David P. purchased 59,343 single family homes.
Tricon Residential – Gary Berman purchased 38,000 single family homes.
Black Rock is on track to own 60% of all homes in United States by 2030.
Best government money can buy.
I can solve this in one move: no federal tax writeoff for interest, depreciation and local property taxes.
Like other markets, the price in the housing market is mostly a function of supply and demand. Demand is a function of births, deaths, immigration, emmigration, and shifts in household formation / housing preferences. Supply is how many houses get built or destroyed.
Who owns the houses (financialisation, rentierism, whatever word you want to use) doesn’t matter much, as long as houses aren’t kept empty (if there is an excessive rate of empty homes, than an empty homes tax can be applied, but these haven’t changed much in Canada).
If the housing data from the OECD is to be believed, then prices and rents in the UK are fairly reasonable as compared to many developed countries.
If you want lower prices / bigger houses, then the best thing to do is simply to make it easier/cheaper to build more housing. Alternatively, improved transit can, in effect, create more land around existing cities.
Honestly, if you make it almost impossible to build more housing, it is not surprising that the existing housing becomes expensive! If you had to spend 6 years in planning to make a 100 TV’s, they would still be expensive too.
I think it is better to target supply than demand, but if you did want to reduce demand then reducing immigration / increasing emmigration would be the most obvious step. Alternatively, letting deadly virusses run wild will also free up housing of course. But like I said, the best thing is just to give people the freedom to build the housing that people need.
Unlike Canada, the UK has limited cultivatable land, and a large proportion of the UK – including England – is uncultivatable upland waste or fertile lowlands vulnerable to flooding. I have visited almost every parish in Great Britain (many multiple times), and there have been very rapid increases in development in practically every part of the country over the last decade as well as a rash of mammoth distribution sheds at almost every nodal point. The country has quickly become very much uglier as a result. Few policymakers, ensconced within London, seem to realise what has happened, and how rapidly it has happened.
If ‘supply-and-demand’ were ‘mostly’ the issue, then the US and Ireland would have enjoyed rapidly decreasing house prices during the decade prior to the GFC when there was a massive construction boom in both countries. Conversely, during the 1980s, the UK ought to have enjoyed falling house prices when the population was either stagnant or falling.
Whilst it is almost certainly true that the erratic but often rapid advance of interwar sprawl and the Macmillan/Marples construction drive of 1952-55, etc., satisfied much demand and so moderated prices (which had been high relative to incomes prior to 1914), the tax on the imputed rent described in a post above effectively eliminated any incentive to speculate. In a very rare commentary on the imputed rent, Martin Chick noted that had the tax on it been retained prices would likely still have risen, but not at anything like the trajectory at which they have since Schedule A of the income tax was abolished in 1963 and the primary place of residence was exempted from CGT in 1965 (see ‘Changing Times: Economics, Policies and Resource Allocation in Britain since 1951’ (2019)).
A more credible reason for the rapid rise in prices in the US and Ireland in the period 1997-2007 is that, whilst residential mortgage credit had been liberalised in the US in 1982 and in Ireland in 1986-92, the primary place of residence was partially exempted from CGT in 1997 in the US, and wholly exempted from it in Ireland in the same year.
So, ‘supply-and-demand’ is, of course, a factor but it is likely that the combination of the fiscal preference to owner occupation (i.e., buying owner occupier votes) and easy credit are perhaps even greater factors. If practically everything bar housing is taxed, credit will inevitably flow naturally into housing, just as water flows into any downhill course laid for it. The more prices rise as a result of the ensuing speculation, and the more credit increases in lockstep, the more prices will rise in symbiotic fashion, as if pushing on a string. What killed the house price bubbles in the US and Ireland in 2007-08 was not the fact that a massively increased supply of housing had sated demand, but that the expansion of credit had reached its limits: a critical mass of debtors were unable to finance their mortgages, and creditors began to panic – and to restrict credit on their own motion – when defaults compromised the credibility of their asset-backed securities.
Thus the brake on the price/credit spiral was not the construction boom sating demand, but a profound and sudden loss of faith within the credit markets in the solvency of their debtors (i.e., in the value of their collateral) which had a cascade effect upon the wider economy.
Froghole, 10/10.
Some guy, 0/10
The problem is not building houses, the problem is allowing them to have wealth value divorced from their shelter function.
The value of people’s labour is being sucked into paying either rents or interest to financial markets Seems like “housing” can be swapped with “labour” here.
The value of people’s labour is being sucked via a straw called housing.
And like the three little pigs, one day the wolf will blow the straw house down!
Yes, thank you. There’s a “wolves at the door” feeling these days
I beg to differ. The political class is perfectly intelligent. They are serving their masters (and it’s not the public). More validation of the Upton Sinclair observation that it’s impossible to get someone to understand something when their paycheck depends on them not understanding it.
been reading with interest this topic and have learned a bit from the commentary –
ran across this today in a daily brief i get from NAR – thought it might contribute –
“Wall Street Is Betting Billions on Rental Homes as Ownership Slips Out of Reach” – WSJ –
https://archive.ph/NaB7t
remember my first mortgage rate at 17% in the early 80’s – when folks say the rates are too high now i scratch my head – but the home prices i see as a realtor are disconnected from reality as CA points out with the St Louis Fed info – and the ability to qualify for a mortgage is a bar too high for many –