The Problem at the Core of the British Housing Market

Fig. 1: Clients queuing to withdraw their money from Northern Rock in September 2007 (McGrath, 2019)

Bear with me as we go through some of America’s recent economic history. Following the Second World War, there was a twenty-five-year period of (everyone’s buzzword) *unprecedented* economic growth. Whilst the US didn’t grow as quickly as its European counterparts (due to the US having no scope for catch-up growth as none of the fighting happened on its shores), its economy nearly tripled between 1948 and 1973 (Amadeo, 2020). Those born in the population boom after the war grew up in a strong economy and were the first generation that were genuinely optimistic about the future, and they were right to be. Baby Boomers were better educated, healthier, and far wealthier than their parents were. Towards the end of the 1990s, Baby Boomers that considered themselves to be entering the twilight of their careers wanted to make sensible investments to set them up well for retirement. These investments, above all, prioritised safety, as the recipients would likely be relying on the dividends (from their investments) and interest (from their savings) for their future primary income. Thus came the global savings glut. Demand for low-risk assets with solid returns exploded as the generation-wide transition to retirement began, both from individual investors and from pension funds. However, global supply for safe assets could not match global demand. So that they could offer relatively high returns on the savings of the forward-looking future retirees, banks needed a greater stream of income to fund the interest they’d be paying out to millions of people. To do this, banks plowed much of this new capital into mortgage-backed securities, but to carry this on, they needed to sell more and more mortgages. As a quick fix, banks worldwide loosened their requirements on which they’d give people these loans. Within a decade from this process starting, everyone and their dog had a mortgage, sometimes multiple, believing they would be able to pay off their loans by renting out their new houses. They just didn’t know any better. Banks viewed this as a win-win for them, as they would either have a steady stream of income from successful mortgage payments, which they could then pass on to their happy client or, if the debtor defaulted, the bank would just get the deed to the house. Demand for housing and the prices of housing in the US and Europe shot to the moon. To keep up with this demand for new houses (not from people wanting to live in them, just to keep as an asset), there was a boom in housebuilding across the United States and Europe. However, the inevitable happened. Noticeably starting in 2007, debtors started to default on their loans as they realised they couldn’t all rent out their new houses as there simply weren’t enough potential renters. If this sounds like a Pyramid Scheme, it’s because it was. Except, it wasn’t only one extortionate company, it was the housing markets of multiple countries and the wider global financial system. Defaults came thick and fast, flooding respective housing markets; laws of supply and demand dictated what happened next, and there was a sharp fall in the price of housing across the developed world; in only 16 months, the average price for a house in the UK fell by 20% (Ganatra, 2020). Debtors who were able to keep up with their payments were soon paying mortgages worth twice the value of their house, which was clearly not worth it, so they cut their losses and voluntarily defaulted on their overvalued mortgages, making the problem even worse. Banks were now being inundated with a supply of houses quickly losing value and if we go right back to the start of this chain, Baby Boomers effectively had their retirement savings and pensions tied up in a housing market that was plummeting in value. Indeed, losses weren’t limited to retirees in the US, but also in the UK as banks like Northern Rock had previously wanted to get in on the action. Much of the capital the banks controlled was tied up in assets that had depreciated greatly and was still in the process of depreciating in value. Once the perilous position of Northern Rock, RBS, Lloyd’s, and others were exposed, account holders took it upon themselves to go withdraw their money and prevent any further losses to their savings, initiating one of those fabled bank runs, the first on British soil in 150 years. Images of queues up and down high streets outside of Northern Rock branches were seared into the nation’s memory as, in an almost comical fashion to compound the sense of impending doom, it came out that many British banks hadn’t kept sufficient liquidity to survive a bank run. In essence, when account holders turned up outside branches of Northern Rock, the RBS, and Lloyds, they couldn’t return the savings to their rightful owner, because they had lost it. There was no Jimmy Stewart type from ‘It’s a Wonderful Life’ to swoop in and placate the customers with charm, a silver tongue, and an earnest belief in community, because in this situation, the banks weren’t George Bailey, they were Henry F. Potter.

At the centre of the Financial Crisis and subsequent recession over a decade ago, I think, comes two dire warnings for us in the UK. The first is more a reiteration of something we already intuitively knew. If the economic zeitgeist is that the price of something will rise forever (as with the price of housing in the UK, or with oil in Venezuela), it probably won’t. Constantly, we need to be reminded of this as even the most prestigious economists are lulled into this trap. Despite having a glittering academic career, Irving Fisher is still probably best remembered for his quote in early October, 1929, that the American stock market ‘had reached a permanently high plateau’. Venezuela (which is going through a torrid time at the moment), built its modern economy on crude petroleum exports, and wasn’t prepared when the price per barrel of oil plunged from $135 to $35 in less than two years. No innate stability exists in the Laissez-Faire Capitalism of the Roaring Twenties, nor in the state socialism of Venezuela, nor is there any reason why the housing market of the United Kingdom should provide endless returns.

The second warning is more general, exposing the cracks in our housing system and the policy surrounding it. There is an unhealthy fetishizing of buying houses in the UK. From a young age, we are constantly told that our house will be the most valuable thing we will ever own, and renters are looked down upon as if they are throwing their money away. In this way, housing is viewed as akin to gold, purely as an investment in an asset that is hoped to appreciate in value, which we can then pass on to our children. However, this comparison doesn’t hold, because gold’s value is purely fiat – derived from market forces and the remnants of metallic currency standards, and a rise in the price of gold (or many other assets) will not have too many real-world ramifications. This is not true with housing, as it does have inherent value to the person living there. Value in this sense does not need to be measured with a monetary amount, but through the personal utility one can derive from having a roof over one’s head, clean water coming out of the tap, and a place to build your life. If you allow such a crucial part of our standard of living to be commodified in this fashion, the markets shall reap what they sow. Compare us to Switzerland, for example. Since the 1970s, house prices there have increased just 70% across the board, compared to 346% in the UK (The Economist, 2020). This also coincides with a home ownership rate in Switzerland of just 41%, compared with 63% in the UK, much higher than the average in Western Europe (The Economist, 2020). Having a culture where homeownership is not just encouraged but impressed upon us, as if to aspire to anything else would be madness, has priced mine and future generations out of the possibility of ever owning a house, dragging rent prices up along with it. Don’t let me leave you with the impression that homeownership is an inherently bad thing – of course it isn’t – but this uniquely (amongst Western Europe) British frenzy around it is. The more houses are treated primarily as assets, the more the housing market is subject to market forces and large fluctuations, resulting in real-world consequences for the British public. As you might expect, politicians have played a large part in the cultivation of this attitude. Homeownership, whatever the cost to wider society, has been at the core of Conservative housing policy since the end of the Second World War. This was no better exemplified by Thatcher’s privatising of Council Houses, the original point of which was for a powerful agent (the state) to offer low rents to the tenants that needed them, whilst also bringing down the rent prices of other local housing. Due in large part to this, the limited evidence (due to the difficulty of recording homelessness) suggests there was a sharp rise in homelessness during the 1980s and 1990s, and contemporary papers already put this increase down to a dearth of affordable rented housing (Fitzpatrick, Kemp and Klinker, 2000).

This article is only supposed to shine a light on some problems in the British housing market, and I shall upload two subsequent articles exploring more deeply, (1) what policy could be taken to stop pricing future generations out of affordable housing, and (2), how council housing can be reformed, not just through the ownership status of these homes, but architecturally (damn the 1960s and its brutalism).

Just a last thing, one of the many moral crimes that led to the Financial Crisis that isn’t paid enough attention to is the sheer laziness of the bankers. When presented with the opportunity to demonstrate their knowledge of the financial system in order to provide their clients with a safe investment offering solid returns, they shunted this new capital into housing, because of the belief at the time that the housing market would increase forever. Never mind the FBI, warning of an ‘epidemic of mortgage fraud’ as early as 2004 (Galbraith, 2009), animal spirits ruled the day. Fault the banks for their greed, their stupidity, but above all, fault the banks for their laziness, and fault housing policy that has, over the past 50 years, priced hundreds of thousands of people out of a place to live.

Written by Fred Alldridge

Sources:

  1. Amadeo, K., 2020. An Annual Review of the U.S. Economy Since 1929. [online] thebalance.com. Available at: <https://www.thebalance.com/us-gdp-by-year-3305543&gt; [Accessed 2 April 2021].
  2. Fitzpatrick, S., Kemp, P. and Klinker, S., 2000. Single homelessness – An overview of research in Britain. [online] jrf.org.uk. Available at: <https://www.jrf.org.uk/report/single-homelessness-overview-research-britain&gt; [Accessed 2 April 2021].
  3. Galbraith, J., 2009. The great crash, 1929. Boston: Penguin, p.v.
  4. Ganatra, H., 2020. How 2020’s property market compares to the 2008 house price crash. [online] whatmortgage.com. Available at: <https://www.whatmortgage.co.uk/feature/how-2020s-property-market-compares-to-the-2008-house-price-crash/&gt; [Accessed 2 April 2021].
  5. McGrath, J., 2017. Bank runs of the future: facing up to digital dangers. [online] raconteur.net. Available at: <https://www.raconteur.net/finance/fintech/digital-bank-runs/&gt; [Accessed 2 April 2021].
  6. The Economist, 2020. How an obsession with home ownership can ruin the economy | The Economist. Available at: <https://www.youtube.com/watch?v=kkVEt5tC2xU&gt; [Accessed 2 April 2021].

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