# Is UK house price spiral connected to debt based monetary system?

(cross-posted from Personal Finance & Money)

Is the monetary system's debt basis* driving government policy on housing and property, and how could this ultimately affect personal housing affordability?

The UK has an ongoing 'situation' with property. A recent topical example is the government's promise of a 'right to buy' for housing association properties, to acclaim and criticism. The government seem generally keen to get citizens mortgaged up, or are they just aiming to satisfy the public's home-owning aspirations?

UK housing crisis 'in breach of human rights'

UK has world's second-highest house prices beaten only by millionaire's playground Monaco

Is the monetary system's debt requirement driving this property bubble? And if so, what are the characteristics of it.

Edit

For example, the US subprime debacle, considered by some to be caused by pressurised lending, possibly driven by a monetary system that needs to grow by increasing the debt pool. If this is the case, it could be viewed that government would support the taking of mortgages and increasing debt, in order to keep the money pool growing and stave off recession.

The price of housesis determined by the supply and demand for housing. The consensus view is that house prices in the UK are so high because of low supply and buoyant demand. In particular, the UK is currently building houses at a rate of less than 150,000 per year, but is creating twice that many new households. This is a situation that has persisted for some time. If there are more buyers than sellers then sellers can increase their prices with little fear that they will be left without a buyer at the end of the day.

To understand the cause for high house prices, one therefore needs to understand the reason for supply being so low, and demand being so high. In the latter case, the availability and cost of credit is certainly an important factor. If banks are willing to lend (say, because the government provides guarantees or other subsidies for doing so--as in the Funding for Lending scheme), and if interest rates are low and stable then people will be very willing to take out a mortgage. This is an important precondition for strong demand because most people cannot afford to buy a house without a mortgage.

This, though, is only part of the picture. Note that many countries currently have low and stable interest rates, but have not experience the rapid inflation of house prices seen the in the UK. Here are some other factors that are important in the UK context:

Limiting supply:

• The UK has a restrictive planning regime that makes housebuilding (especially in high-demand areas) difficult. This has, for example prevented the expansion of towns into green belt land, or large increases in the density of housing in major cities.
• Much of the land best suited to development is so-called brown field'' land that was previously put to some other use. Cleaning and preparing this land for use in the housing sector is costly and represents a risk for developers.
• House builders earn essentially zero profit on affordable homes, making the development of such homes unattractive. This role was previously filled by the British government, but social house building has fallen dramatically since the 1980s.

Promoting strong demand:

• The UK government has introduced a number of policies that directly stimulate demand for housing (such as the Help to Buy scheme).
• The UK has a net inflow of migrants of around 200,000 per year--all of whom need to be housed.
• Demand is not evently spread across the country. The UK economy is unusually concentrated around London and the South East, which puts particular pressure on the housing market in this area. House prices elsewhere have seen more modest growth.
• The British are unusually attached to the concept of home ownership (unlike, for example, many continental Europeans who are perfectly happy to rent). This means that British buyers are less sensitive to prices and will continue to demand houses even as the prices increase--as we have seen.
• Related to the above, tennants have relatively few rights in Britain. This makes long-term renting less attractive, and pushes people to buy houses.
• Anecdotally, there appears to be strong demand for UK housing from foreign investors who treat the property as an asset, but do not occupy it.

Many of these things could be fixed with appropriate market interventions. However, there is a political economy dimension to the problem in that most of the British electorate lives in an owner-occupied house and therefore has a vested interest in maintaining the value of their house and preventing additional development in the area to the greatest extent possible. This possibly explains why candidates in the forthcoming election have focused mainly on proposals to subsidise demand (which would only exacerbate the problem!) or vague promises to build more houses, rather than on concrete plans (e.g. to reform planning) that would put-off a lot of middle-class voters.

• +1 for a thorough post. No mention of debt pool growth though, which may be another reason for promoting demand, e.g. "in the aftermath of a recession, when many resources are underutilized, an increase in the money supply can cause a sustained increase in real production" - (ref. Wiki link ). To elaborate, if lots of people take out mortgages, the banks can lend more due to the fractional reserve system. – Chris Degnen Apr 28 '15 at 19:17
• As you say, the politicians are probably focusing on the vested interests of the electorate. The money supply is still an underlying determinant of the economy though, and talk of 'encouraging banks to lend' speaks to this, with the intent of stimulating growth. Is the influence of the money supply too indirect, or just not obvious enough. I continue to wonder. – Chris Degnen Apr 28 '15 at 21:10
• If you take a look at the UK money supply, you'll notice it hasn't grown at all in the last 5 years, it actually shrunk for a couple of years around 2010. So for once, that feature of fractional reserve banking can't be blamed. If you want to find the additional factor in this, besides the supply problems, I would suggest looking at securitized lending, which has the effect of increasing total lending, while not affecting the money supply, in conjunction with buy to let. – Lumi Apr 29 '15 at 0:50

A fairly informative answer to this question cropped up in a BBC Newsnight interview in September 2017. Mervyn King, (Govenor of the Bank of England 2003-2013), replying to the question:-

Segment: 6 mins 8 secs to 7 mins 27 secs

One of the consequences ... of the financial crash is the rise of populist forces, on the left and the right. Do you see anything ... that will constructively address the anger and annoyance of the public at what happened a decade ago?

No, I think the problems are very much deeper, and I'm not sure that any one country will find it easy to find a route out of the problems that we face. I think we'll need more international cooperation. But the problems go back before the financial crisis, to the enormous influx of people working in manufacturing around the world, to the enormous amount of savings that were placed in the world economy, to the reduction of interest rates, which was the main factor pushing up the prices of houses and assets of all kinds, which led to the expansion of the banking system and its ultimate collapse. So I think these are deeper factors and I don't think any one country will find a simple solution and I don't think that the solutions we've seen are actually likely to bring about a resolution of these problems.

So taking a look at the interest rates.

"The highest period of interest rates was in the late 1970s, when the government were fighting high inflation caused by oil prices and rising wages."

And looking at the house prices rising from the 1970s.

And also taking a look at what was going on with the price of oil.

The 1973 embargo and 1978 Iranian export cuts hiked the price in the 1970s.

While no doubt it is a complex picture, not just oil and interest rates, the interest rate factor is revealing.

Finally another quote from Mervyn King:

There are broadly two types of explanation for the fall in long-term real rates around the world. The first explains low interest rates as the outcome of an increased propensity to save and lower willingness to invest in the world as a whole. The second explains them as the result of rapid growth in money and credit which, in a “search for yield”, drives asset prices up and interest rates down.

Perhaps this “search for yield” could also be linked back to the "monetary system's debt requirement" which I mentioned in the question.