Mike Phipps reviews Why can’t you afford a home? by Josh Ryan-Collins, published by Polity
Around the world in big cities with a strong home ownership culture, median house prices have risen over seven times median incomes. Millennials have been hardest hit: in 1996, two-thirds of UK 25-35 year olds had a mortgage, by 2016 just over a quarter. The basic promise of liberal capitalist economies that if you work hard enough you can own your own home no longer holds true.
Rent is also eating up an increasing share of household income – up from 10% of income in the 1970s to 36% by 2016. The social consequences are that cities are becoming increasingly unaffordable for key workers, and a social cleavage is opening between them and those homeowners who have seen the value of their assets soar. Wealth accumulation is now driven more by rising property prices than increased profits in goods and services, with worrying implications for financial stability.
In terms of how we got here, most explanations focus on a lack of supply. It’s true that Thatcher’s “right to buy” programme, with the revenue generated not given back to councils to spend on social housing, had a big impact in creating a lack of affordable homes. Three-quarters of the cuts in public spending in Thatcher’s first term came from the housing budget. But cuts in affordable housing and rising prices also turned housing into a significant financial asset, ideal for speculation.
Unlike other goods, housing does not conform to the rules of supply and demand. Bank credit – the willingness of banks to lend money for mortgages – is so elastic as to be infinite, whereas land for housing is the opposite. The result is a cycle of rising prices. Spain and Ireland illustrate this. Both counties saw a huge construction boom yet between 1997 and 2007 house prices doubled, until the crisis hit and property values collapsed. “However fast you can build, banks can create credit faster,” observes Ryan-Collins.
Fooled by apparent economic stability, policymakers missed the warning signs ahead of the financial crash. While low inflation remained a central goal, it didn’t help that house prices and land values were not included in the standard measure of inflation. Meanwhile, the increase in these values led banks to lend more money in this lucrative market, moving away from business investment in the ‘real’ economy.
There’s little evidence that lessons have been learned from the great crash. A new mortgage credit bubble has seen debt-to-income ratios soar beyond those of 2008 in a number of major economies. The growth in property values is partly explained by quantitative easing. This did little to promote investment in the risky ‘real economy’, but instead created a wall of liquidity looking for a really safe investment – landed property.
If building our way out of this crisis is not feasible, what options are there? Credit controls are one. In post-war East Asian economies, the central bank determined a desired rate of growth, calculated the necessary amount of credit to achieve this and set credit limits accordingly. Credit for the purchase of land was suppressed as it led to price inflation and banking crises.
Secondly, structural reform is necessary. Studies show that bank-lending behaviour is strongly influenced by ownership type. A shift away from traditional shareholder models, and the priorities they set, is needed.
Thirdly, a national investment bank is required to direct investment into productive areas of the economy.
Fourthly, we should end what the author calls the “hugely favourable taxation treatment” that home ownership enjoys, starting with a land value tax. Moving away from the preferred model of home ownership and opening up alternative investment opportunities also need prioritising.
Conscious steps must be taken to separate the value of land from the cost of housing, keeping land out of the market economy and the financial system. The simplest way to do this is public ownership of land.
In Singapore, for example, a city-state island of nearly 4 million residents, with nowhere to expand, 90% of the land is owned by the state. A Labour government here could establish a public land bank to acquire land: alongside the advantages of rational planning and removing the land acquired from speculation, it could also be a useful source of government revenue.
Reading this useful book brought to mind a few other ideas that the author does not mention. There’s no doubt that in the UK, Tory welfare reforms such as the benefit cap and bedroom tax have exacerbated housing insecurity. These need to be scrapped.
Labour’s 2017 election manifesto was a lot more progressive on these issues than previous platforms. But at its heart lay the contradiction between the need for bold measures to tackle the crisis and Labour’s reluctance to break from a market-led model of individual home ownership. As Stuart Hodkinson noted in my recent book For the Many: Preparing Labour for Power, “the manifesto’s commitments on council housing were a pale imitation of Corbyn’s 2016 leadership pitch to build half a million council homes and end RTB [right to buy].” Ultimately, a much more interventionist line, with public ownership at its centre, will be necessary to make real progress on this front.
Are these solutions politically acceptable? We have to make them so. Otherwise, lazy narratives about too many immigrants, not enough houses or planning laws being too restrictive will dominate the debate – and people will be no closer to being able to afford a home.
Mike Phipps’ For the Many: Preparing Labour for Power, is published by OR Books, available here.