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item0023E 538,539
538 25 November 2002
UK House Prices
Are they "too high"?
I have - I confess - been
putting off this moment.
This bound to be a "heavy"
piece, for dedicated LivePolitics
readers only.
But as the clamour from the
Bank of England gets louder, I must contribute my two ha'porth.
This is a subject which I really do know something
about. Having spent ten years of my life as a General Manager in the housebuilding industry
(Check biog) the subject of UK house prices is close to
my heart.
Five factors are behind the
remarkable value-gains that we have experienced in recent years. And in
influencing the longer-term, they each carry a different weight, with
different implications. The UK tradition of owner-occupation, while
fundamentally differing from most of continental Europe (certainly, France,
German and Italy), nevertheless accords to UK citizens a unique opportunity
to participate in the "market" redistribution of wealth on a huge scale.
All trade-generated "value" (however difficult that is to define, as a
matter of economic theory) ultimately filters through to the owners of
real property. That is why the
stinking-rich convert as much wealth
into property as they reasonably can. Like the Angler Fish,
property owners are the ultimate
bottom-feeders *
of society. And
in the UK, ordinary citizens have been admitted - thanks to the Building
society movement and Victorian support for it - to the world of
bottom-feeding. Widespread home-ownership (now at over two-thirds of
the population), is an effective way of redistributing wealth.
-
Having said that, by
democratising wealth it also makes the
economy a tad more difficult to manage. Auntie Bank of England is
currently in a tizz because the nephews and nieces of Britain are not being
as prudent as she would like them to be - they are actually using some of
their accrued wealth to finance consumption, and she (more specifically,
Mervyn King and Eddie George) would prefer them to refrain, and be more
responsible.
On balance, however,
home-ownership is a Good Thing.
It is politically and socially desirable, fuels a strong DIY sector, and
raises the level of personal contentment. And if the Bank of England
thinks that the natives are on occasion a bit unruly
(too many parties, too many holidays, too many new kitchens and DFS
cut-price sofas) - well, the game is probably worth the candle.
Much better to have those problems, than the consumer
strikes that are
crippling the German and Japanese economies, where pessimism is getting out
of hand...
At what value level
then, "should" owner-occupied houses be pitched? Please
note that the very question would send the venerable Professor Patrick
Minford of Cardiff University quite apoplectic - his position is that the
home-owners themselves are best placed to know "what they can afford", and
that it is impossible for either Government or professional economists to
double-guess them. Nevertheless, the question is a relevant one.
The Famous Five factors determining price-levels are
these.
-
First,
the very existence of the Building Societies, designated by Victorian statute as
specialist bankers dedicated to the investment of savings in the
first-mortgages of owner-occupied houses, has generated both a distinctive
housing sector and a distinctive UK housebuilding industry. At different
times over the past century, additional fiscal advantages have also been
accorded to the process, thus building up the foundation of a massive social
and proprietary phenomenon. While these systemic advantages have now
been gradually unwound, their residual influence remains strong, and
sustains prices.
-
Second,
historic social conventions about the ratio which "occupation payments"
(rent or mortgage) may properly bear to total household income. In
most European societies, this seems to hover around the 20%-mark, over the
long-term. This represents some broad (and probably unfathomable)
consensus about the relative importance of "the home" - as compared with
foreign holidays, the car, an extended social life, self-improvement, sports
and leisure pursuits. For a number of reasons, this threshold is
generally not being overstepped, in the current boom (but we will have to
re-visit that phenomenon, on some future date...)
-
Third,
parental contributions. Even in the early 1970s, when I used to rove
my Bovis sales-centres every weekend to eavesdrop on the discussions,
I was keenly aware of the scale of parental contributions to the deposits of
first-time buyers. And anecdotal evidence suggests that, as the
generations proceed, that parental "help with the deposit" has become more and more
significant. Wealth is cascading through the generations, by way of
enhanced parental deposit. This is a factor making for a permanent
rise in house-price levels, accelerating all the time.
-
Fourth,
over the last seven or eight years the UK has experienced a once-for-all
fall in the price of money, i.e. in interest rates. The UK
has traditionally been a capitalist haven, paying interest rates some 3%
higher than either Continental Europe or the United States. Let me leave aside (for
the moment) the political explanation for that phenomenon:
suffice to say that the era of above-average UK interest rates has
disappeared for ever. If the UK enters the Eurozone, the probability
is that interest-rates will fall still further. These changes have
profoundly affected the calculation of
affordability, on the part of
homebuyers: with interest rates remaining low, and housing demand
remaining high, there were always bound to be rises in the prices that
buyers were willing to pay - and that is what has happened..
-
Fifth,
there is the end-of-Musical-Chairs effect, certainly at the top of the
market. Everyone now has the feeling that the market-peak is near, and
homeowners will take the view that they wish to be owning "the best
properties" when the music stops. It is widely understood that the end-game
could be painful, but better that pain suffered (so the reasoning goes) in the defence of a top-class
home than in financing a seedy terraced-house in need of refurbishment -
so let's jump onto the best available carriage on the slowing train.
Where does this analysis
lead? Well, the Bank of
England is right: the meteoric rise will end, probably over the Winter when the
propensity-to-buy is conventionally weaker anyway. But values will not
fall very far - and casualties will be many fewer than in the slump of the
early 1990s. There are many factors still capable of contributing to
the maintenance of a buoyant market - just consider -
-
If there is no Iraq war,
there will be a renewed burst of domestic consumption, and consumer
confidence will generally increase; a war would have a disastrous effect of
fragile Western consumer economies, and all bets would be off...
-
If the UK enters the Euro,
interest-rates will be pinned in to current "low" levels, thus sustaining
capital values in the housing and development-land markets;
-
If the financiers
(both Banks and Building Societies)
maintain their willingness to accept 50-year mortgages (and there is no
reason why they should not) prices will be powerfully supported;
-
If all women maintain
their keenness to remain in the labour market, their income will sustain
house-prices - and my sense is that their enthusiasm is not merely
finance-driven, it is social and psychological and likely to remain
powerful;
-
Many recent gains
have been experienced by adoring home-owning parents, who will be better
placed than ever to "help out";
-
There is a continuing
shortage, with too few houses being
built, with successive Governments (including my own
Labour Government)
having signally failed to get to grips with the improved supply of
development land.
These are compelling
reasons for believing that the recent dramatic rise in house-price
levels will stick. Certainly, Phillip Williamson was very
critical of the Bank of England's intervention, and he is Chief Executive of
the top building society Nationwide. For my part, I can imagine
price-levels falling to a new
plateau, before advancing further in later years - but I cannot imagine them
falling to a plateau-level more than 10% below mid-2002 levels.
Footnote
* Bottom-feeder
- a fish that feeds on the bed of the sea or lake, relying on food drifting
downwards.
back to text
What do you think? Drop me a line
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539
25 November 2002
Germany, Japan
Their weak economies threaten us
Inflexibility is
dangerous.
Institutional rigidities in both Germany and Japan are inhibiting consumer
confidence, thus blocking economic growth.
The institutional problems in the two countries are quite, quite different -
but they are having similar sclerotic effects.
Japan's problems
are the more deep-seated. As a social system, Japan has
made none of the advances of Western Europe - there is no "welfare state" to
speak of, so that citizens squirrel away a huge proportion of their personal
income into savings accounts to finance their own educational, medical and
pension requirements. Over 20% of household income is saved, not just
for rainy days but to meet the indispensable requirements of family life.
There is no "socialist movement" advocating change - in the Diet
(Parliament) there is no Socialist Party to speak of. Indeed, there is
only a tiny, and ramshackle, Opposition: the Liberal Democratic party has a
large and immovable majority.
- Differences of
political perspective can only be pursued by way of
competing factions within the LD Party: Prime Minister Junichiro Koizumi
seemed, last year, to offer some relief from these dismal disciplines, but
he has been beaten back by more conservative factions, each of which tends
to cluster around a "leader", in the manner of 19th century English
parliamentary politics. And the Liberal Democratic Party is the Party of
the corporate sector, of big business, and in particularly the banking and
construction sectors. Japanese politics is still rudimentary in
style, riddled with pork-barrel politics even more overt and cynical than
that of the United States.
- Although
post-WW1 Japan put the apparatus of democratic politics
into place, the Japanese have simply not learnt how to operate the system.
And there is nobody capable, from within the LD Party, of fighting a way
out of the bag. Japanese politicians continue to fight like ferrets
within their bag, fearful of conceding anything - for fear of collapsing
the entire fragile system. And it's been like that, for the last ten
years.
- I contend that
Japanese citizens sense the incompetence and corruption of their own
system, even if there are few public expressions of it. That is why
they continue to save privately and refuse to spend, thus heightening
Japan's economic problems still further. Prospects are grim - and I
cannot offer any solution.
Germany, of
course, is in quite a different case. The weakness of the
German economy is similarly to be ascribed to institutional rigidities, but
they are of quite a different character - they are (a) the Eastern
Provinces, formerly East Germany, (b) high-levels of welfare protection and
labour-market rigidities and (c) the legal difficulties of securing public
sector reform. Unlike the "traditional" rigidities of Japanese
society, the German gridlock is of relatively recent origin - in some ways,
making it even more difficult to resolve,
- The Eastern
Provinces, Lander: It was Helmut Kohl's proud boast to have
re-united Germany, and he made a strictly political decision to accord
parity between the East and West German currencies at the time. He
was confident that the power-house of the "West" German economy could draw
the Eastern provinces along with it, sustaining tthe Wastern economy until
it reached comparable standards of living. That optimism has not
proved justified: the incorporation of the Eastern
Lander has proved far more costly than anyone could have
anticipated, and continues to act as a drag upon the German economy
as a whole, keeping taxation high - and now the Schroder Government is
having to embark upon a further round of tax-increases. Germany is a
very expensive place in which to trade.
- Das
Wohlfahrtstaat - this German term may well have spawned its
English translation, the "Welfare State" - during the post-war boom years
of the German economy (1965-1990), the generosity of welfare benefits was
a source of unending pride to hardworking German citizens. But (perhaps
partly because of the advent of the Ossies
from the East) that burden has proved too heavy for the State to bear
- unemployment benefit and state pensions remain at levels far, far above
UK equivalents, without any capital funding and therefore absorbing huge
Treasury (Fiskus) tax resources. As in Italy and France,
changes in these basic support systems are politically hazardous to make,
particularly during an economic downturn. Schroder has no
alternative but to raise taxes.
- Das Beamtentum
- this is the German word for professional civil servants (Beamten)
- and under German law that have 100% security of tenure. Their
status is effectively protected by a separate body of law, and a separate
system of administrative courts (Verwaltunngsgerichte). Civil
service reform of all kinds is therefore extremely difficult
and extremely expensive. Germany has never had, and
never could have, its Margaret Thatcher - the compensation bills would be
inordinately high.
These problems
confirm
the wisdom of Labour's commitment to the cultivation
of flexible and responsive market-sensitive systems -
in this respect, I am a signed-up Blairite.
This has been one of the key perceptions of UK politics since 1985 -
initiated during Tory role and continued under Labour.
It is a correct systemic perception.
It is vital to maximise the responsiveness of each national economy, and to minimise restrictions
upon all trading
transactions,
including the hiring and firing of staff.
it is vital for us, as socialists, to develop
new and comparable flexible support
systems for all our citizens - better life-long learning and career advice
systems, proper financial support for all those facing job-loss, support
with self-employment, better support for children in families, far better
State old age pensions - that is the challenge to the socialists of the
future - not to contest the centrality of "trading" or business, but to
deliver a flexible framework of social justice within which all societies
and their economies can flourish. It is up to us to keep worrying
- about Japan and Germany...
What do you think? Drop me a line
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