Cat’s credit crunching: why are house prices so high?

cat-credit

Serious Sherrl asks:

Interest rates have been at a record low for many years. But nobody in London can afford to buy even a tiny flat. Why are house prices and rents rocketing in London? What are banks and building societies doing with all that money? Who is benefitting from all this?

Dear Sherrl

Keeping interest rates low is a way of making it easier to lend money.

Interest rates are set by central banks. For them, it is one tool to control the money supply in an economy. Central Banks are therefore also called ‘bankers’ banks’.

If the Bank of England reduces the interest rate from 1% to 0.5%, commercial banks such as Barclays or HSBC can borrow money from the Central Bank at a cheaper rate. Because banks should compete to attract savers, it is expected that they pass cheaper interest rates on. This should then translate into making it easier for consumers to borrow money.

Borrowing has got cheaper for almost six years; interest rates are now at the lowest level since the Bank of England was founded in 1694. Household debt has quadrupled since the 1990s. The growth of debt has been a key driver of the recovery, but it is also an obstacle to economic recovery because it reduces our future income.

The Tory government, like so many governments in the Eurozone, has attempted to overcome the crisis by allocating money to financial markets whilst implementing ruthless austerity measures for ordinary people. They believed that if the Central Banks and governments would just give enough money to ordinary people, it would trickle down.

Pic: Matt Brown/Flickr

Pic: Matt Brown/Flickr

 

This hasn’t worked, it has just increased inequality and the housing market in London is a good example to illustrate this.

This started with Margaret Thatcher’s decision to reduce the availability of council housing by encouraging tenants to buy their council houses, with the 1980 Housing Act. Combined with restrictive planning permissions and a rising population this has led to a shortage of housing in London with a dramatic effect on prices. In 2014 alone, house prices in London rose by more than 25%.

But it is not just lack of housing that is driving the prices up. Especially in Central London, buying property has become an investment for the super-rich who look to increase their wealth by investing. Average investment returns in the stock market tend to be below 7%, and it is risky. Because property prices are rising at a much higher rate, many rich people amass houses instead. Consequently, the population in the richest boroughs of London such as Chelsea and Kensington has actually declined. Rich people don’t buy houses to live in them; they buy to stockpile even more wealth.

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This is reinforced by the buy to let legislation, incentivising relatively wealthy people to become landlords. Within 20 years, Britain has turned from a nation where the majority between 35 and 60 were homeowners, to a nation where only 36% can afford a mortgage.

What is the role of banks and building societies in this? To start with the banks, they have really profited from low interest rates and quantitative easing: while their old debt has been bought up by the central banks, it has become cheaper to make new debt due to low interest rates.As of 2012, the four biggest banks in the UK, RBS, Lloyds, HSBC, Barclays and Santander, amassed more than £4 trillion in assets.

Nevertheless, lending to consumers increased only very slowly. The five biggest banks in the UK lent £800 billion to consumers in the form of mortgages and other credit, while more than £1600 billion was invested in the stock market, double the amount lent to households! Less than 25% of their total assets are with households or businesses.

Building societies were historically set up based on a cooperative model to counter the problems with banks, and to make buying a house easier. However, since the 1980s they have increasingly been turned into limited companies, with members’ rights replaced by shareholder rights.

Overall, with the majority of banks’ assets invested in the stock market and lent to other financial institutions, they have failed in passing the benefits of low interest rates and quantitative easing on to consumers. But the problem isn’t access to credit. If we just keep borrowing more, we still end up being worse off. The real key of inequality is the growth in housing prices as a result of scarcity and speculation.

There are plenty of solutions to these problems. For example, the government could introduce rent caps in order to prevent landlords from exploiting tenants. The UK used to have rent controls up until the 1980s and many countries such as Germany and Canada still have them. The government could also decide to tax property investments much higher. They could even make it illegal to own houses without living in them, or make it legal for residents to claim empty houses.

To answer your questions, the banks and the ultra-rich have benefited from these monetary policies and rising house prices. The number of millionaires has increased by 30% over the past year. The government could have stopped this by making the housing market more equal. They decided not to do so because they all own several properties themselves and decided to take care of them and their rich mates, rather than us. A good reason to get rid of them isn’t it?

This article originally appeared in the Spring 2015 issue of the rs21 magazine

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