"There is no shortage of housing in the UK, I said, as there are more dwellings than households. There is however, a shortage of affordable housing - with housing values inflated by a global wall of money." I remember the Rt Hon (?) Nadhim Zahawi MP saying there was a 'wall of money' to invest in the UK after Brexit. Now we know where it's gone.
Over the years, I have often mentioned your view much to the surprise of people I speak to. It is so obvious how most house building is just for the benefit of 'builders' who profit. I don't mean the builders who do the actual building - they show the absurdity of what is going on; these are people who would struggle to buy what they build.
I recommend "The Ragged Trousered Philanthropists" by Robert Tressell, if you have not already read it. A parable for our times written in a different era. Plus ça change!
Rather than tip toe around it just say land value taxation. Collect 100% of the annual value increment and prices will go to zero, the way government leasing works. Even if the rate went from the current 0.5% to 5.5% you'd see a doubling of social welfare and wealth output.
No mention here of the role of the Banks in providing the Credit that fuels the speculation. When I bought my first house ( a very long time ago) the mortgage was provided by a Building Society which could only lend out the money its savers gave it. When Banks were allowed into the Mortgage Market in the 1980s there was no such limitation on the provision of Credit. House price inflation took off from that time on.
A combination of risks caused both savings and commercial banks to sell off and/or securitize most of the residential mortgage loans the originated. The mortgage-backed securities (as a form of bond) attracted investors globally.
What materially contributed to "house" (actually "land") price inflation was the large number of young people who became adults in the late 1960s and 1970s and began to leave the homes of parents. The experience differed country by country, but wherever investment occurred in new roadways and/or commuter rail systems, land prices skyrocketed.
My comments are based on four decades working in the financial services sector in the U.S., the last two decades as business manager and market analyst in the Housing & Community Development Group at Fannie Mae. Our charge was to prudently increase the rate of homeownership for minority households and those with low-to-moderate incomes. Earlier I managed the residential mortgage loan program for a mid-size commercial bank. It was during this early period that I came to appreciate the dysfunctional character of our nation's property markets, which are credit-fueled and speculation driven. And, in fact, the most consistent source of inflation is rising land prices.
A small number of economists have over the decades provided important insight into the relationship between cycles in land markets and general cycles of boom and bust. Early in the twentieth century the most important writing is found in the books and articles by Professor Harry Gunnison Brown. Why his work is so important is that he was a strong critic of mainstream macroeconomic theory and the policy recommendations derived therefrom. All one really needs is a general understanding of market capitalization to come to the right solution to land price inflation.
Every parcel of land has some potential annual rental value as determined by a combination of market forces and what, if any, restrictions are imposed on land use. This rental value is capitalized into a selling price (or, more specifically, the minimum price the owner would consider accepting to part with the land held). The argument that land's rental value is unearned by individuals goes back to Richard Cantillon and was affirmed by the likes of Adam Smith, A.R. Jacques Turgot, and even by Karl Marx. However, it was Henry George late in the 19th century who thoroughly analyzed both the moral and efficiency issues involved. Should the public sector impose an annual tax on the holder of land equal to its potential annual rental value, there is no income stream to be capitalized. Land prices could, hypothetically, fall close to zero.
There is the equally important argument against the annual taxation of property improvements. Buildings are depreciating assets requiring ongoing expenditure of funds for maintenance. And, about every decade, huge expenditures are required for systems replacement or upgrading. If it makes sense to impose an annual tax on the depreciated value of buildings, then all depreciating assets ought to be taxed similarly. After all, a housing unit is a necessity (although one can reasonably argue that huge residential properties should be subject to a form of luxury tax).
The likelihood of government following the above advice is, unfortunately, quite low. Here in the United States, Pennsylvania is the one state that grants a local option to most of its local governments to move in the direction of a property tax based on the value of land and not on what improvement exits. About 20 or 25 municipalities and school districts have taken advantage of this policy option.
The private sector is able to construct housing units offered for sale or lease affordable to lower income households only if the land is donated by government (or private owner) and construction financing is provided at a below-market rate of interest. These properties can be placed in a community land trust, with ground rents set to be affordable. Where the housing units are deeded to buyers, a covenant can be added to the deed requiring that the housing unit can only be resold to households with incomes no greater than some percentage of area median. If the addition to housing supply at the entry point is sufficiently large, it will shift the market equilibrium price in favor of those on the demand side. To be clear, however, these measures offer mitigation; changing the source of public revenue to unearned rents is the real solution.
CBs also pump in new reserves via high interest payments. All asset classes compete for those reserves. As choices for savings/speculating vehicles grow, demand for basic services, on balance, compels labor-seeking employers to compete with higher salaries and, unless offset by tax increases, an inflationary feed-back loop ensues. 52 years after jettisoning the gold standard, productivity, living standards, and both income and wealth inequality have skyrocketed. Fiat has now encompassed the globe but managing fiat monetary operations is too complex for CBs and will require AI to manage fairly.
"has bought into the conventional wisdom that the dysfunction that racks our housing market is a matter of demand and supply..." What we need is a larger supply --- of inexpensive housing. The demand is not for housing. It is a demand for increased return on investment. Everything becomes an investment, and nothing is valued for the practical everyday use vale it may have. The investors fail to comprehend there are people out there, and people need to have housing. The investors do not understand that houses are things to live in. That is completely incomprehensible to them. They think housing is to store value and increase value. Everything in their world is a way to get more money. And if there are poor persons who missed the boat, they just do not get it. To the rich, money comes first. People do not count.
"There is no shortage of housing in the UK, I said, as there are more dwellings than households. There is however, a shortage of affordable housing - with housing values inflated by a global wall of money." I remember the Rt Hon (?) Nadhim Zahawi MP saying there was a 'wall of money' to invest in the UK after Brexit. Now we know where it's gone.
Over the years, I have often mentioned your view much to the surprise of people I speak to. It is so obvious how most house building is just for the benefit of 'builders' who profit. I don't mean the builders who do the actual building - they show the absurdity of what is going on; these are people who would struggle to buy what they build.
I recommend "The Ragged Trousered Philanthropists" by Robert Tressell, if you have not already read it. A parable for our times written in a different era. Plus ça change!
I read it in my youth Caroline...and it was so extraordinarily modern even then..
I read it decades ago, indeed people realised the truth a 100 years ago, even longer of course.
Rather than tip toe around it just say land value taxation. Collect 100% of the annual value increment and prices will go to zero, the way government leasing works. Even if the rate went from the current 0.5% to 5.5% you'd see a doubling of social welfare and wealth output.
No mention here of the role of the Banks in providing the Credit that fuels the speculation. When I bought my first house ( a very long time ago) the mortgage was provided by a Building Society which could only lend out the money its savers gave it. When Banks were allowed into the Mortgage Market in the 1980s there was no such limitation on the provision of Credit. House price inflation took off from that time on.
Quite. Bank money is part of the ‘wall’.....
A combination of risks caused both savings and commercial banks to sell off and/or securitize most of the residential mortgage loans the originated. The mortgage-backed securities (as a form of bond) attracted investors globally.
What materially contributed to "house" (actually "land") price inflation was the large number of young people who became adults in the late 1960s and 1970s and began to leave the homes of parents. The experience differed country by country, but wherever investment occurred in new roadways and/or commuter rail systems, land prices skyrocketed.
My comments are based on four decades working in the financial services sector in the U.S., the last two decades as business manager and market analyst in the Housing & Community Development Group at Fannie Mae. Our charge was to prudently increase the rate of homeownership for minority households and those with low-to-moderate incomes. Earlier I managed the residential mortgage loan program for a mid-size commercial bank. It was during this early period that I came to appreciate the dysfunctional character of our nation's property markets, which are credit-fueled and speculation driven. And, in fact, the most consistent source of inflation is rising land prices.
A small number of economists have over the decades provided important insight into the relationship between cycles in land markets and general cycles of boom and bust. Early in the twentieth century the most important writing is found in the books and articles by Professor Harry Gunnison Brown. Why his work is so important is that he was a strong critic of mainstream macroeconomic theory and the policy recommendations derived therefrom. All one really needs is a general understanding of market capitalization to come to the right solution to land price inflation.
Every parcel of land has some potential annual rental value as determined by a combination of market forces and what, if any, restrictions are imposed on land use. This rental value is capitalized into a selling price (or, more specifically, the minimum price the owner would consider accepting to part with the land held). The argument that land's rental value is unearned by individuals goes back to Richard Cantillon and was affirmed by the likes of Adam Smith, A.R. Jacques Turgot, and even by Karl Marx. However, it was Henry George late in the 19th century who thoroughly analyzed both the moral and efficiency issues involved. Should the public sector impose an annual tax on the holder of land equal to its potential annual rental value, there is no income stream to be capitalized. Land prices could, hypothetically, fall close to zero.
There is the equally important argument against the annual taxation of property improvements. Buildings are depreciating assets requiring ongoing expenditure of funds for maintenance. And, about every decade, huge expenditures are required for systems replacement or upgrading. If it makes sense to impose an annual tax on the depreciated value of buildings, then all depreciating assets ought to be taxed similarly. After all, a housing unit is a necessity (although one can reasonably argue that huge residential properties should be subject to a form of luxury tax).
The likelihood of government following the above advice is, unfortunately, quite low. Here in the United States, Pennsylvania is the one state that grants a local option to most of its local governments to move in the direction of a property tax based on the value of land and not on what improvement exits. About 20 or 25 municipalities and school districts have taken advantage of this policy option.
The private sector is able to construct housing units offered for sale or lease affordable to lower income households only if the land is donated by government (or private owner) and construction financing is provided at a below-market rate of interest. These properties can be placed in a community land trust, with ground rents set to be affordable. Where the housing units are deeded to buyers, a covenant can be added to the deed requiring that the housing unit can only be resold to households with incomes no greater than some percentage of area median. If the addition to housing supply at the entry point is sufficiently large, it will shift the market equilibrium price in favor of those on the demand side. To be clear, however, these measures offer mitigation; changing the source of public revenue to unearned rents is the real solution.
CBs also pump in new reserves via high interest payments. All asset classes compete for those reserves. As choices for savings/speculating vehicles grow, demand for basic services, on balance, compels labor-seeking employers to compete with higher salaries and, unless offset by tax increases, an inflationary feed-back loop ensues. 52 years after jettisoning the gold standard, productivity, living standards, and both income and wealth inequality have skyrocketed. Fiat has now encompassed the globe but managing fiat monetary operations is too complex for CBs and will require AI to manage fairly.
Great article.
"has bought into the conventional wisdom that the dysfunction that racks our housing market is a matter of demand and supply..." What we need is a larger supply --- of inexpensive housing. The demand is not for housing. It is a demand for increased return on investment. Everything becomes an investment, and nothing is valued for the practical everyday use vale it may have. The investors fail to comprehend there are people out there, and people need to have housing. The investors do not understand that houses are things to live in. That is completely incomprehensible to them. They think housing is to store value and increase value. Everything in their world is a way to get more money. And if there are poor persons who missed the boat, they just do not get it. To the rich, money comes first. People do not count.