Jump to content
House Price Crash Forum
Tired of Waiting

Brilliant Article: Bubble's Political Causes, And Its Ruinous Economic And Social Consequences

Recommended Posts

One of the best summaries I have ever read about the house prices bubble. In just 5 short paragraphs they managed to explain very clearly the bubble's political and economic causes, and its "ruinous" economic and social consequences.

Brilliant. And very clear, perfect for our forum newbies, visitors, and also for our friends and relatives (+ our MPs?), that may be a bit "resistant" in understanding (or accepting?) this bubble.

http://www.adamsmith.org/blog/tax-and-economy/time-to-let-the-housing-bubble-burst/

(We had a small thread mentioning this article last month, but for some reason it passed mostly unnoticed.)

asilogo.jpg

Time to let the housing bubble burst

Written by Sam Bowman

Thursday, 12 May 2011 13:06

Screen%20shot%202011-05-11%20at%2016_15_09.png

The housing market is, almost certainly, a bubble. As the graph of inflation-adjusted house prices above (taken from http://www.housepricecrash.co.uk ) shows, there has been a steady rise in the real cost of a home over the past fifteen years. Like most other bubbles, it is a product of sustained government policies designed to privilege a special interest group – in this case, homeowners.

Government after government has tried to keep the bubble inflated to avoid their wrath. The more people throw their life’s savings into housing, the more the pressure on government grows to protect these investments. The consequences for the rest of the country have been ruinous: increased cost of rents, urban sprawl, inflation and a shortage of affordable homes. The poor – who are also the least electorally engaged, and so less important to politicians of all stripes –have been especially hard-hit.

In an ordinary industry, the huge demand for housing would provoke a big increase in homebuilding, including at the lower end of the market. But the supply side of the housing sector is tightly bound by the planning system. The planning laws in this country are a classic case of NIMBYism. Increasing the supply of homes in an area will reduce the cost and value of homes already there, so local authorities have no incentive to ease regulations to increase supply. Such is the flaw in democracy – established groups can use government to restrict competition and enrich themselves.

So, rather than tackling the supply side of housing and trying to create more homes, the government throws money at the demand side. But this only makes the problem worse. Shared equity schemes and artificially-cheap credit, created by the Bank of England, all lead to increasing prices without a corresponding increase in supply. Home buyers depend heavily on borrowed money, so the political pressure on the government to keep the price of money low is enormous. And the higher prices grow, the greater the pressure is to make borrowing cheap. This whole mechanism entirely divorces interest rates from their true function, which is to reflect the supply and demand of money – ie, savings and borrowing. This disrupts relative prices (and thus the structure of production) across the whole economy, and fuels the bidding war over houses.

If government’s protection of house prices was removed – most importantly, the planning system that depresses supply and the artificially cheap credit that inflates demand – the supply of houses that people want to live in would rise and house prices would fall. Homeowners should not be able to use government to protect their investments at everybody else’s expense. With a looming housing crisis and house prices at an all-time high, it's time to let the bubble burst.

Share this post


Link to post
Share on other sites

Brilliant. And very clear, perfect for our forum newbies, visitors, and also for our friends and relatives (+ our MPs?), that may be a bit "resistant" in understanding (or accepting?) this bubble.

What's really amazing is that it's not rocket-science - how on earth did politicians get away with this, and why on earth did we let them?

BTW what was AS.org's position during the height of the bubble?

A shame the article doesn't mention the impact that high housing costs have on our ability to compete.

Share this post


Link to post
Share on other sites

What's really amazing is that it's not rocket-science - how on earth did politicians get away with this, and why on earth did we let them?

Well, "we", as in a majority of voters, were in favour of ever increasing properties' prices, and pressing our politicians for it. I think 70% of UK households were owner occupied a few years back. (It is a little less now.) In 2005 Michael Howard's manifesto was economically more prudent than Labour's. Cameron gave it up in 2010 for electoral reasons = voters.

BTW what was AS.org's position during the height of the bubble?

I don't know. I am not familiar with that site.

A shame the article doesn't mention the impact that high housing costs have on our ability to compete.

True.

I hope next time they visit us they see my Forum sig., below. ;)

Share this post


Link to post
Share on other sites

can some helpful person please explain to me why high house prices cause urban sprawl? I get the rest of it, just not this bit.

I guess because it incentives new constructions? Not sure.

Though the article does have a little contradiction there. On one hand it uses this negative wording "urban sprawl", on the other hand it attacks NIMBYs.

IMO we need some nice suburbs around our current towns and cities. Nothing wrong with a nice green suburb. They even have much more bio-diversity than mono-agricultural fields.

EDIT: Let's turn these current fake, ugly and useless "green-belts" into actually green suburbs!

Edited by Tired of Waiting

Share this post


Link to post
Share on other sites

:lol:

I know! It's liek talking about a river full of dead fish without mentioning the water is full of mercury or something.

Most useless analysis. Ever.

Share this post


Link to post
Share on other sites

"The housing market is, almost certainly, a bubble. As the graph of inflation-adjusted house prices above"

Is that graph pointing to HPC now? The last bubble was 2007 but it's gone. At the end of it house prices are below inflation adjusted. If anything the largest exception to the trend is how far the market overshot down around 1996

Share this post


Link to post
Share on other sites

What's really amazing is that it's not rocket-science - how on earth did politicians get away with this, and why on earth did we let them?

BTW what was AS.org's position during the height of the bubble?

A shame the article doesn't mention the impact that high housing costs have on our ability to compete.

A large number of voters have been psuedo-rich, they wanted to believe they where rich and so allowed the politicians to get away with. Plus I think a lot of the elites really did believe that they had beaten the system, they have ego's too.

Share this post


Link to post
Share on other sites

can some helpful person please explain to me why high house prices cause urban sprawl? I get the rest of it, just not this bit.

In some cases it encourages speculative construction around cities and towns - this was a problem in Ireland, where there were vast estates built, but with relatively low occupancy. Not only that, but bubble economics often encouraged the size of houses and plots to be far larger than appropriate, e.g. in the US - leading to McMansions, and the construction of neighbourhoods totally dependent on private car ownership - where the distances are simply too large to permit walking to the shops, and the population density is too sparse to permit bus routes/trains.

This hasn't happened to a relevant extent in the UK, as draconian planning laws are in place specifically to prevent 'urban sprawl'.

Share this post


Link to post
Share on other sites

A large number of voters have been psuedo-rich, they wanted to believe they where rich and so allowed the politicians to get away with. Plus I think a lot of the elites really did believe that they had beaten the system, they have ego's too.

Yep. Collective delusion, from top to bottom.

However... the specialised minority that could read charts knew we were in a credit/debt/property bubble. The FT and The Economist had loads of warnings about it. My main ... anger really is with the likes of Stephanie Flanders, at the BBC, whose main job is precisely this "translation", from technical publications/data, to the general population/voters. The BBC failed miserably here. A democracy can not function properly without a competent media.

Share this post


Link to post
Share on other sites

In some cases it encourages speculative construction around cities and towns - this was a problem in Ireland, where there were vast estates built, but with relatively low occupancy. Not only that, but bubble economics often encouraged the size of houses and plots to be far larger than appropriate, e.g. in the US - leading to McMansions, and the construction of neighbourhoods totally dependent on private car ownership - where the distances are simply too large to permit walking to the shops, and the population density is too sparse to permit bus routes/trains.

This hasn't happened to a relevant extent in the UK, as draconian planning laws are in place specifically to prevent 'urban sprawl'.

I would very much welcome these new suburbs here. if we had built them we would be having a much faster and deeper correction downwards of housing costs, and with better, and bigger houses! What is not to like?!

Share this post


Link to post
Share on other sites

In some cases it encourages speculative construction around cities and towns - this was a problem in Ireland, where there were vast estates built, but with relatively low occupancy. Not only that, but bubble economics often encouraged the size of houses and plots to be far larger than appropriate, e.g. in the US - leading to McMansions, and the construction of neighbourhoods totally dependent on private car ownership - where the distances are simply too large to permit walking to the shops, and the population density is too sparse to permit bus routes/trains.

This hasn't happened to a relevant extent in the UK, as draconian planning laws are in place specifically to prevent 'urban sprawl'.

I see, thanks ChumpusRex & Tiredofwaiting.

Share this post


Link to post
Share on other sites

I have an even simpler way of putting it.

Nougties house price "boom" = hyperinflation.

That is what it was. A phenomenal rise in price caused by the extraordinary growth in supply of the medium used to purchase said thing -- in this case, mortgages/debt.

The only reason why this hyperinflation did not affect much else outside of property is that China can't make British houses or land. Plus you also can't outsource the development of British land or building housing to India, though you can "outsource" the labour through importing cheap migrant workers for a short time, but even then costs are higher because they have to live in a stupidly expensive country while they build/develop.

The excesses of the housing "boom" were not about supply or demand or planning, they were about the expansion of fiat/debt available to purchase property.

Share this post


Link to post
Share on other sites

(...)

The excesses of the housing "boom" were not about supply or demand or planning, they were about the expansion of fiat/debt available to purchase property.

You do need both to have such a long running (10 years?) price boom. As you say, too much cheap credit boosted demand. But if the supply side were not blocked here in Britain (like it wasn't blocked in Ireland. USA and Spain for instance), we would have had a construction boom, and prices would have crashed sooner and harder, like they did in those countries.

And the article goes further, saying that prices and NIMBYism have a strong local component. I agree with it, in the medium term. In the south of England NIMBYism is much much stronger than in the north, creating housing shortages and higher prices down here. We had very little new builds in some parts (whole counties!) of the south.

Share this post


Link to post
Share on other sites

You do need both to have such a long running (10 years?) price boom. As you say, too much cheap credit boosted demand. But if the supply side were not blocked here in Britain (like it wasn't blocked in Ireland. USA and Spain for instance), we would have had a construction boom, and prices would have crashed sooner and harder, like they did in those countries.

And the article goes further, saying that prices and NIMBYism have a strong local component. I agree with it, in the medium term. In the south of England NIMBYism is much much stronger than in the north, creating housing shortages and higher prices down here. We had very little new builds in some parts (whole counties!) of the south.

Yeah but mostly it's fiat money and comedy fantasy banking that caused it.

When money is ifinitely creatable simply by the method of legal lies, prices can get quite high.

Share this post


Link to post
Share on other sites

Not a single mention of fiat money or fractional reserve banking!

Germany has this and doesnt have house prices anywhere near as high as here. In fact prices in many areas are below replacement cost.

Pretty much every country in the world has fiat and fractional practices, yet we are near the top of the pile for unaffordable housing. Something is different here.

There is more to it than banksters alone.

Share this post


Link to post
Share on other sites

Germany has this and doesnt have house prices anywhere near as high as here. In fact prices in many areas are below replacement cost.

Pretty much every country in the world has fiat and fractional practices, yet we are near the top of the pile for unaffordable housing. Something is different here.

There is more to it than banksters alone.

+ 1

Share this post


Link to post
Share on other sites

Germany has this and doesnt have house prices anywhere near as high as here. In fact prices in many areas are below replacement cost.

Pretty much every country in the world has fiat and fractional practices, yet we are near the top of the pile for unaffordable housing. Something is different here.

There is more to it than banksters alone.

Germany? No longer exists as a discrete fiat system.

You mean the eurozone, no?

Stupid argument, like saying because housing is still cheaper in the north of england the UK had no bubble.

Share this post


Link to post
Share on other sites

Homeowners should not be able to use government to protect their investments at everybody else’s expense

Need to get rid of democracy then.

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship

Share this post


Link to post
Share on other sites

Germany? No longer exists as a discrete fiat system.

You mean the eurozone, no?

Stupid argument, like saying because housing is still cheaper in the north of england the UK had no bubble.

Eurozone then.

Why did Spain had a boom and crash whilst Germany remained stable throughout?

Both using the same "fiat" money. B)

Share this post


Link to post
Share on other sites

There were lots of causes.

Another one to add to the list:

Pure relentless media propaganda, and I don't believe it was some dark conspiracy just that it is dirt cheap TV to make, filled the airwaves for about 10 years.

You only had to turn the TV on to see some hapless muppet buying some shoddy terrace in a Welsh pit valley, failing to get a survey, painting it white and putting a vase of twigs in the corner and walking away with a £70k tax free profit.

People who owned a small house outright could suddenly MEW and put down deposits on 5 houses with interest only mortgages and suddenly become a "millionaire with a portfolio", far more glamorous than being a prudent saver living mortgage free.

Share this post


Link to post
Share on other sites

There were lots of causes.

Another one to add to the list:

Pure relentless media propaganda, and I don't believe it was some dark conspiracy just that it is dirt cheap TV to make, filled the airwaves for about 10 years.

You only had to turn the TV on to see some hapless muppet buying some shoddy terrace in a Welsh pit valley, failing to get a survey, painting it white and putting a vase of twigs in the corner and walking away with a £70k tax free profit.

People who owned a small house outright could suddenly MEW and put down deposits on 5 houses with interest only mortgages and suddenly become a "millionaire with a portfolio", far more glamorous than being a prudent saver living mortgage free.

Yes, it was a crazy decade.

Millions of people getting drank on credit.

Collective delusion. On a national scale.

And where was the BBC in all that, with its duty to inform!? :angry:

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.