Britain is in the grip of a housing crisis. But contrary to some Daily Mail speculators, the bricks and mortar economy is not going the way of Japan, circa 1990. Economist Neil Wilson explains why the same economic and political forces suppressing Japanese property prices will keep British prices artificially inflated for the foreseeable future.
Take any given day, and there is at least a one in ten chance The Daily Mail will ask, “And What Does It Mean For House Prices?”. It’s a headline that sells papers, because for millions of Britons property is their pension, their nest egg, and even their sole income.
The 12-month price trend for UK housing remains at around 5% growth per year, outperforming most savings and many stocks. But with Brexit and economic uncertainty, could Britain’s bricks and mortar economy be facing disaster? After all, Japanese property values tanked by up to 90% in the early 1990s when their bubble finally burst.
Well, the answer is “No”. Japanese property prices may remain down by 40-60% on their early 1990s values, but this is not for the usual lame excuse that Japan is “special”. The same economic and political forces keeping Japanese prices suppressed will keep British prices artificially inflated for the foreseeable future.
Japan has a stable, but ageing population. By contrast, the UK population is adding around 500,000 extra people, or the population of Sheffield, every year.
The crushing pressure on the housing system is driven by the UK’s relentless population increase and social change. So, unless Britain can find a way to abruptly remove a few million people, the demand for housing in the UK is likely to remain very high.
That’s one side to the house price equation. The other is, of course, supply.
Homebuilding in Britain peaked at nearly 300,000 homes per year during the early 1930s – twice current levels – even though the population was then under 50 million. These homes were built by hand, block-on-block, using methods recognisable to most British construction workers today. Although factory-building technology is available, British homebuilders still doggedly rely on slow, inefficient and low quality manual construction. Japanese homes are renewed, typically every thirty years, with a brand new structure that can be completed in a matter of weeks. Britain’s crumbling 1930s homes are still endlessly patched and repaired.
As our population continues to swell, and our existing housing stock disintegrates, new home building in the UK has remained locked at pitifully inadequate levels, with around 150,000 new homes registered in 2015.
Why does the supply of housing remain at scandalously low levels?
The British building industry has heavily consolidated over the past twenty years, creating an Oligopoly, with the top three house building firms accounting for nearly 30% of the market.
Barratt, the largest, has recently posted a 20% increase in pre-tax profits for 2016, and purchased around £1bn of land assets. The company aims to have a “buffer stock” of around 4-5 years worth of land. How many businesses can run a stock inventory of 5 years, yet still return healthy profits? The market does not reward them for building as many houses as they can, despite spiralling need. The construction industry decides how many houses to build, based on profitability rather than current demand (Barratt has recently announced that they plan to scale back building in London for 2017).
Barratt may be the largest player, but this business model is the established norm for the industry.
Construction firms and land agencies own the land, and profit simply by ownership and ever-rising speculative values. Once planning permission is granted, the value of land can increase by a factor of several hundred, and the value will continue to rise irrespective of whether the land is ever developed.
Britain is in the grip of a housing crisis. Yet successive governments have allowed this land speculation to flourish. Industry press releases deflect the blame to local council “red tape”, while sitting on thousands of hectares lying undeveloped “until market conditions improve”.
Even when the builders get around to doing some building, Britain’s new homes are little more than pop-up slums of the future. The British building industry has the lowest environmental standards in Europe. Calls for better insulation and airtightness are met with threats to reduce homebuilding further; after all, the builders make a profit anyway just by owning the land. If “relationship building” with MPs doesn’t loosen regulations, they can always threaten to cut off the meagre ration of housing entirely.
In their latest wheeze, construction firms now offer financialised part-exchange deals where they can control the margins of the secondary market as well as the primary – crippling the estate agent business. And as land is the only truly valuable part of any British home, some builders have retained ownership to rent back to homeowners on onerous terms, and a new “Leasehold” scandal has begun to unfold.
The house builders have absolutely everybody exactly where they want them. Until the British government stops relying on the ‘discounted wealth effect’ to drive the economy, the building industry, their shareholders and land speculators can’t lose.
After more than 20 years in the IT industry, Neil has learned the hard way that systems rarely follow the manual. Moving from network crashes to financial crashes, Neil was intrigued as to whether the economy could be fixed with a reboot - which lead him to Modern Monetary Theory (MMT).
Neil has become one of the UK’s leading writers on MMT and its implications. His blog “Modern Money Matters” challenges the high-priesthood of Important Grey Men who refer to people as “resources”, and who believe debt is bad for government and good for you. Neil dreams of a world where everyone who wants a living wage job can find one next to their home, friends and family.
Getting to know Neil:
- How do you spend your days?
Hopefully making a small part of the world run smoother than it did yesterday.
I do to business and information systems what Formula 1 mechanics do to the cars - continual improve them and fix them when they're broken.
- What in your answer to Q1 is especially important to you and why?
Doing more with what we have is vital to progress. I look to add to progress in my small way.
- What drove you to focus on economics? Was there a particular moment you can remember that led you to this field?
The 2008 Financial Collapse happened and it became clear that the economy was broken and ineffective.
- What drives you professionally?
I don't like to see things that are broken or ineffective. I want to sort them out.
- In your opinion what are the three biggest problems facing the developed and developing world?
Increasing income inequality, the breakdown of democracy and lack of accountability threaten the future peace and prosperity of all our societies.
- If you hadn’t become...not an economist, what would you have done?
Logically that would mean I would have to be an economist - which is an appalling thought. At that point I would have had to visit Japan, the place where economic theories go to die, and wandered into a forest with a sharp knife.
- If you look at recent history, can you identify a turning-point that explains how we come to face the peculiar challenges of today?
In 2008, billions of pounds were summoned up to save corrupt financial institutions, and yet now we are told there is no "magic money tree".
We all now know there is a man behind the curtain. We are no longer in fear of the Great and Powerful Wizard of Oz.
- What are the lessons we failed to learn during and since the 2008 crisis?
This is best answered by Michal Kalecki in his essay "Political Aspects of Full Employment" ... published in 1943.
"Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence.If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment).This gives
the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully
avoided because it would cause an economic crisis.
But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.
Hence budget deficits necessary to carry out government intervention must be regarded as perilous.
The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence."
There is a reason episodes of Yes Minister never seem to date...
- Name one measure we might implement immediately to improve the situation.
Stop lying to the public about the Magic Money Tree. It's about the allocation of resources, not money. Money is just a tool to move stuff
around. Nobody has ever had 'inflation' written down as their cause of death. Malnutrition and Exposure: yes, Inflation: no.
- If you were a President / Prime Minister what would your first three pieces of policy be?
Jobs for All
- What was your biggest & / or your most recent mistake?
Assuming that Macroeconomic textbooks were scientific works, not religious texts guarded by a loyal priesthood.
- You are stuck in a ski lift for twenty four hours and you can have one person (living or dead) with you. Who will it be?
The dead person - they're exceptionally good listeners and never interrupt.
- Name the book that changed you.
Full Employment in a Free Society by Beveridge.It was written in 1944 regarding the unemployment crisis of the 1930s and in response to
the full employment enjoyed in the Second World War.The questions raised in the book are still to be answered 70 years later.
- What would you do differently if you were to start all over again?
I think I'd answer these questions in pretty much the same way.
- Give our readers, members and subscribers a piece of advice that has served you well.
Very little in life is under oath. But the Wayback machine lives forever.
- What is your main anxiety where you and / or your family are concerned?
We now face a world where our children can expect poorer housing, education and health outcomes than their parents or grandparents.
No-one in good conscience can hand over the world to the next generation, knowing we have made their lives worse, taken away privileges and blocked the opportunities that we enjoyed.
- What gives you hope for humanity?
That there are people out there who have actually read this far.
Latest posts by Neil Wilson (see all)
- Is Britain’s housing bubble turning Japanese? - August 4, 2017
- The Great Student Loan Disappearing Trick: Fake News About Fake Loans - August 1, 2017
- Mark Carney and Whose Army? - July 11, 2017