The inequality of Britain’s housing market

inequality_graphic

A graphic from nef, who have been hosting a conference on inequality at the British Library this week. The 99% thing doesn’t apply to everything, but it’s visible in the property market. It’s also getting worse at the moment, as the percentage of people who own their own home has fallen since the financial crisis. Private renting fell from 20% in the 1970s to around 10% by the early 90s, and has now crept back up to 15% since 2008.

Making Britain a nation of homeowners was of course a key idea of Thatcher’s government, so doing something about that 30% of people who own no property at all ought to be right up our coalition government’s street.

19 Comments on “The inequality of Britain’s housing market”

  1. DevonChap March 15, 2013 at 1:41 pm #

    Sub-prime lending encouraged by the American government to get the poorest into home ownership. Now how did that turn out again?

    Sadly not everyone can own a house. Renting can be much better. It allows you to move around the country more easily to find work. It removes the risks associated with home-ownership. Germany and France have much lower levels of home-ownership.

    Also the heading “Does the Richest 1% need this much property?” is misleading (what a surprise from NEF). It implies they own much larger properties, when what they do is own properties in more expensive areas. My 4 bed house is worth £250k in South Wales, it would be worth £4,000k in Mayfair.

    • Jeremy March 17, 2013 at 11:23 am #

      Thatcher would disagree with you, there are ways to encourage home ownership without resorting to subprime lending.

      I don’t like nef’s choice of question, I think it smacks of ‘blame the rich’ and compromises the impact of the graphic. However, I don’t think it implies that they have bigger homes – to me it suggests having more than one property when others have none. The figures below, £15 million in property vs an average of £90k, clearly isn’t accounted for just by living in nicer areas.

  2. Jim March 15, 2013 at 2:22 pm #

    I must admit that headlines like these and also infographics that show how terrible the wold is do annoy me, well OK it’s more of a mild irritation I suppose. I mean what does it really say?

    That we live in a society where the system isn’t totally fair, or perhaps that we live in a society where a person and their familys hard work and effort are rewarded.

    A lot of my clients are wealthy, a recent one has a pool room (with a swimming pool not a snooker type game) that is bigger than my house, including my garden, and my neighbours house and garden too, and the rest of their house is on the same scale. The family have as far as I know about 4 houses of the same sort of size in the same town, not to mention lots of smaller houses occupied by the kids and other relatives. I dare say they are part of the 1% as they own and operate a huge property business both building and renting properties across the country as well as internationally.

    Do I think this is unfair, no! They own this because they are the third generation of the family that has been building a huge business for most of the last century, they have lots of employees and are the landlord to lots of people.

    Am I jealous – You bet, big time, I have dreams about sitting with my feet in that pool :-)

    Do I think that it is unfair, not at all, I haven’t worked as hard as them and neither has my family, we’ll we may have ‘worked’ as hard but certainly not as smart.

    If you wanted to get rid or the ‘inequality’, how would you do it, increase the taxes to the point where every rich person leaves the country, or how about just changing the law to only allow a certain amount of money to pass down when someone dies and tax all of the inter family gifts etc.

    We are of course assuming that there is inequality (of course there is to an extent), but I know several people who are part of the 30% who own no property, the thing is most of them are happy to rent, they don’t really want to own property, they feel that it gives less problems and responsibility and more freedoms, they can decide to move home and a month later they live somewhere else, and all without huge fees and hassle.

    Jim

    • Jeremy March 17, 2013 at 11:45 am #

      Interesting that your example is of a third generation wealthy family. If you inherit a huge amount of money, you don’t have to work at all. The link between hard work and being rich is no longer true.

      I know it’s a cherished part of the American dream, but there’s a whole lot more to making money than working hard. Ask a taxi driver, a cleaner or a sous chef, all of whom are likely to work far harder than your average billionaire. It’s about opportunity too, about where you start in life, the education that is available to you, the skills and abilities you’re born with, the example your parents and family set, and a thousand other things.

      Incidentally, I’m not all that interested in the rich. I’m more interested in the 30% at the bottom, and what can be done to make sure that those who do want to own a property can.

  3. Andrew Clark March 15, 2013 at 9:13 pm #

    Can you share the underlying statistics please and the source? I’m not at all convinced by these numbers, quite unbelievable.

    • Jeremy March 17, 2013 at 11:34 am #

      It’s from the Office of National Statistics’ Wealth and Assets survey, 2012.

  4. Henry Law March 18, 2013 at 6:41 pm #

    People do not “own their home” until they have paid off their mortage and have no debt secured on it. Effectively they are tenants of the banks and what is described as interest is in reality mostly rent. The banking system is a means of purchasing property using money created by the banks themselves at almost no cost.

    • Jeremy March 19, 2013 at 9:57 am #

      I think the challenge for us is to extend the benefits of home ownership as widely as we can, without the indentured service of mortgages. One of Hernando de Soto’s key insights for development is that houses have a parallel economic life. If you give poor people the rights to their homes, you give them access to capital and thus a way of participating economically in society.

      That’s an idea he suggests for developing countries, but the challenge is similar for us. Home ownership could be a way to ‘capitalise’ and include those on the margins economically, in theory at least. But we need to do that without leaving people in hock to the banks for the rest of their lives.

      • Henry Law March 19, 2013 at 10:52 am #

        There is something fundamentally wrong with a system which requires ownership of a home in order to give access to capital. A home is for living in. It takes about 2000 hours work to build quite a sophisticated western style house. That will cost around 100,000 UKP. Spread that over a 40 year working life and it is very affordable. The problem is the way that people are excluded from access to land.

        • DevonChap March 19, 2013 at 1:31 pm #

          Labour isn’t the major component in house prices. Don’t forget materials but even that is only part of it. In the UK about half the cost of a new house is planning, that is the difference between land with planning permission and that without. Agricultural land without planning permission costs £10k per hectare, with planning permission that is about £1million. So we could drastically cut planning rules and lower house prices by increasing supply, but the cost is urban sprawl.

          Even if we could bring the price of a new house down to £100k, you can’t just divide that by 40 years and say we should pay £2500 pa because to live in the house you need the £100k up front to pay for it to be built. Unless you expect people to save up before hand the £100k, someone else has to provide the money. That money in your new home is money your lender could be using for something else, so it is reasonable that they require some payment for lending the money to you. After all no only do that have to opportunity cost of not lending that money to something else that might make more, but they also are shouldering a risk they will lose some or all of that money. So whether via interest, profit share or rent you will have to and should expect to pay more than the initial cost.

          • DevonChap March 19, 2013 at 1:34 pm #

            Sorry for the typing errors in the line “After all no only do that have to opportunity cost of not lending that money to something else that might make more,”

            It should read “After all not only do they have the opportunity cost of not lending that money to something else that might make more money,

          • henry1941 March 19, 2013 at 1:55 pm #

            @DevonChap, yes so it seems as you say but is not so. Planning costs a few hundred pounds in fees. Nor is planning a bottleneck in supply since there are around 300,000 consents which have not resulted in development. There are sites which have been vacant with consent for three decades. Land has no cost of production so why do people have to pay a previous owner for it, who did not produce it either? And what is this sudden increase in value from planning consents really about? And so why is the price of a house and the land it stands on two or three times more than the cost of the building?

            The money that lenders use, and charge interest for, is money that they have themselves created at next to no cost. It is not money paid to depositors since that is, effectively, barely covering the loss in value due to inflation, if that.

            There is a racket going on here, indeed there are several rackets going on simultaneously. Some of this would properly go under the heading “Obtaining money by false pretences”. As for the legal part, what you have said calls for explanations.

          • DevonChap March 19, 2013 at 3:12 pm #

            Are you suggesting that we should ignore property rights of landowners? The previous owner may not have made the land but they did buy it. I didn’t build my car but I did buy it with money I earned for my labour. I own that car, someone takes it I’ll call the cops. Since property rights are at heart of successful economies for 300 years I would be loath to get rid of them.

            While it may only cost ‘a few hundred pounds’ to apply for planning, that consent is hard to get in many areas (try it on the South Downs) and nowhere near demand, hence the high price for land that does have it. Supply less than demand is the reason for the high consented land prices.

            Given that some figures suggest we need 300,000 new houses pa, 300,000 consents is one year. What about next year and the year after?

            Banks can’t create unlimited ‘free’ money, since lending that out they would create unlimited liabilities. The risk of default is one of the things they charge you for. It is real and hardly ‘money by false pretences’. Insisting that banks lending is fully backed by deposits (the alternative to the ‘free’ money of fractional banking) would increase costs of capital, since it would be harder to obtain. So interest rates would be higher, not lower and only professionals could get mortgages, like in the 1950s. Progress?

          • henry1941 March 19, 2013 at 8:35 pm #

            I am suggesting that property rights should be matched by corresponding duties, since land values are sustained mostly by the activities paid out of tax and without the government there would be no land rights. When you buy land you are buying the expectation that the taxpayer will continue to provide supporting services. Without them the land would be worthless. Property rights are essential to successful economies since secure occupation is a precondition. When they get mixed up with the financial system they are a recipe for catastrophic booms and busts – hardly a success story.

            It is no use reforming the planning system without getting Britain’s dysfunctional property market in order as well.

            There is no necessity for banks to charge interest. A credit risk can be insured, a subtle difference, and administration can be charged for directly in the same way as any other professional service. And credit should absolutely not be given for land purchase, nor should it be permissible to use land or the land value element of real estate, as security for loans. The contemporary banking model is a curse.

          • DevonChap March 21, 2013 at 10:27 am #

            While land values are under pinned by property rights enforced by government via police and courts, I don’t think that you can say that the value is ‘mainly’ down to the state. Do farmers not improve their land, or industry create demand? Land in the South East is so expensive because people want to live near the successful private businesses around London. Given that tax is paid on stamp duty, capital gains and inheritance on non agricultural land I think we are paying Leviathan enough.

            How can property rights not get mixed up with a financial system, since capital comes from ownership of an asset. Land is a fundamental asset, they don’t make it any more and you can’t spirit it away. A financial system without land as an asset is even more disconnected from realities than the current one.

            All successful economies have booms and busts, it is inherent in the capitalist system, but it is better than the alternative which is no or very slow growth.

            If banks can’t charge interest why would they lend is they don’t make a profit. They could invest it elsewhere and get a return. Not to mention that while with the current financial system you can insure risk, if you abolish interest most of the current financial system disappears including the insurance companies. hence no protection against default or inflation. Remember you want me to lend you £100,000 for 40 years. So that is half my life I don’t get the use of that money. If I have to defer my consumption you need to reward me as well as protecting me from the risk I won’t get it back.

          • henry1941 March 21, 2013 at 10:41 am #

            Improvements to land are most definitely not land value – whether they are drainage works to farmland or industrial or residential developments. You can not increase the value of your own land. If, however, you improve your land, you might increase the value of that around you, and conversely.

            Land in the South East is expensive because of the presence and activities of the community at large, primarily because of the infrastructure that supports it, provided at taxpayers’ expense. Take the infrastructure away and people would be forced to wander off, leaving the land worth little more than its value for agriculture. Land is not wealth, nor even a store of wealth, whatever that means.

            When you say that “capital comes from the ownership of an asset”, what do you mean by “capital”, “asset”, and the associated terms “credit” and “wealth”? There is a huge range of interpretation of these terms, to the point that they are meaningless without explanation. They need to be tightly defined – otherwise it is impossible to conduct an effective debate around the subject. Unfortunately, they are not normally defined but used loosely, which is one of the reasons for the present travails, since rigorous analysis of the problems is thereby precluded.

          • DevonChap March 21, 2013 at 11:05 am #

            I disagree that you can not increase the value of your own land. As and example assume I have a farm with half the land waterlogged and half that is not well irrigated so that on average I get 6 tonnes per hectare of wheat. Assuming a price of wheat of £100 per tonne I make £600 per hectare. My land is worth £30k per hectare as is the land of my neighbours who get a similar yield. I dig a drainage channel so that I reduce my water logged land and irrigate the dry fields such that I get 9 tonnes per hectare. I have increased the value the land produces by £300 per hectare. All other things being equal my land would definitely be worth more because it earns more. It would have a higher price than my neighbours unless they also improved theirs.

            While infrastructure is presently provided by taxpayers, it was not always such. Brighton is a commuter town because of the London Brighton and South Coast Railway, built with private money. For various reasons we have decided to pay and run these things via the government but we don’t have to.

          • henry1941 March 21, 2013 at 1:45 pm #

            It is important to define what is meant by “land”. In economics it is normally taken to mean the surface of the earth, and all natural materials, forces, and opportunities ie the whole material universe outside of humans themselves. So your example of the farm is an excellent illustration of the difference between land and capital. The land value is what it is worth in its natural unimproved condition. Works like drainage and irrigation are capital ie improvements to the land, in principle no different from factories and houses – they constitute development. You can tell this by looking at the value of land which has been improved and land which is naturally of the same productivity. The improved land will be worth less because of the cost of maintaining the improvements, as without them, the value will go back to that of waterlogged unproductive land. The additional return to your drained land is the reward for your capital investment.

            Your example of Brighton is also a good one. The development of seaside resorts was a consequence of the fact that, amongst other things, people started to have more time. The south coast was dangerous until the end of the seventeenth century, when Royal Navy gained control of the English Channel. It was vulnerable to raids from the French, and, worse, from slavers from the Barbary coast of North Africa. Brighton, being the nearest coast to London, then became popular following the construction of turnpikes. However, it could still not be developed until the coast had been secured against erosion, again at public expense and an ongoing cost to this day. Against this background the railway was an afterthought. Whether public or private, infrastructure gives rise to externalities which end up as enhanced land values. The value of the land will go up even if the owner does nothing apart from put a fence round it.

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