Halifax reveals house price inflation running at 7.7pc as low interest rates and Government schemes trigger a £37-a-day jump over past year, according to the Telegraph, 6th December 2013
House prices are rising at nearly ten times the pace of average earnings after Britain’s biggest mortgage lender today that record low interest rates and the Government’s Help to Buy scheme were sending demand through the roof.
Halifax claimed prices in November hit £174,910, up 1.1 per cent on October and 7.7 per cent on the same month a year ago – the highest annual rate for six years.
The typical house is now swapping hands for £174,910, up £13,577 on a year ago, a rise of £37 a day. Average salaries are rising at just 0.8 per cent a year.
You can read the whole article here.
The Autumn Statement also reads that house prices in affluent London boroughs were already well above their 2007 levels. And the Office of Budget Responsibility says that house prices could jump by more than 20 per cent between 2013 and 2018, at least in London and south-east England.
It’s becoming more and more obvious that the problem is not just that there’s too many people and not enough houses…
House prices have been pushed up and out of reach already in the years before the financial crisis. They rose by over 300% in 10 years (1997-2007). A major cause of the rise was that banks have the ability to create money every time they make a loan. During the period in question the amount of money banks created through mortgage lending grew by over 450%! This lending was a major driver of the massive increase in house prices.
House prices have been pushed up by the hundreds of billions of pounds of new money created by banks.
This increase in prices led to a massive increase in the amount of money that first time buyers spent on mortgage repayments. For example, while in 1996 the amount of take home salary that a person on an average salary buying an average house would spend on their mortgage was 17.5%, by 2008 this had risen to 49.3%. (In London the figures are even more shocking, rising from 22.2% of take home pay spent on their mortgage in 1997 to 66.6% in 2008.) (more info)
The 2007-08 financial crisis showed how dangerous lending booms can be for an economy’s health, particularly when the lending finances the purchase of unproductive assets (such as property and financial assets). While the government’s policy actions in the wake of the financial crisis may have prevented a debt-deflation and a depression, they did not lead to a sustainable recovery.
A sustainable recovery requires a lower private sector debt-to-income ratio. Yet since the crisis government policies have encouraged further private sector borrowing for unproductive purposes. Meanwhile, the government is attempting to reduce its own debt, seemingly oblivious to the fact that the UK economy is currently suffering from a crisis of private debt, not public debt. Public debt in the UK is at around 74% of GDP, whereas (non-financial) private sector debt is at around 190% of GDP. The interest rates being paid on public debts are also far less onerous than those being paid on private debts. By focusing on reducing its smaller and less onerous debts, the government reduces private sector incomes and so makes a reduction in the private sector’s debt-to-income ratio harder to achieve. As a result, the government is making a future crisis and recession more – rather than less – likely.
Yet it needn’t be this way…
This paper outlines how it is possible to decrease the private sector’s debt and increase the private sector’s income at the same time. The government could finance a fiscal expansion through ‘Sovereign Money Creation’. This expansion could take the form of an increase in spending, a reduction in taxes, or a citizen’s dividend. Such steps would lead to an increase in private sector income, which would allow households and businesses to reduce their debt burden to a more sustainable level. Amongst other things it would increase GDP, employment, and bank liquidity, as well as making the economy more resilient to future shocks.
While the creation of money to fund a fiscal expansion has been described as a ‘taboo’, it should be noted that in the UK, until 2000 it was standard practice to finance a part of the government deficit with money creation. Furthermore, the question must be asked as to why it is acceptable for banks to create money for speculative purposes, but not acceptable for the government to create money when it is clearly in the interest of both the public and the wider economy for them to do so.
Martin Wolf, chief economics commentator at the Financial Times, expressed this contradiction clearly when he stated:
“It is impossible to justify the conventional view that fiat money should operate almost exclusively via today’s system of private borrowing and lending. Why should state-created currency be predominantly employed to back the money created by banks as a byproduct of often irresponsible lending? Why is it good to support the leveraging of private property, but not the supply of public infrastructure? I fail to see any moral force to the idea that fiat money should only promote private, not public, spending.”
Martin Wolf (2013)
Of course, there are concerns that the power to create money could be overused. However, the governance structure outlined in this paper ensures that there is clear separation between monetary and fiscal policy. Consequently, there would be far greater control over the use of Sovereign Money Creation than there currently is over the creation of money by the banking sector.
The current economic recovery is built on the same foundations that led to the financial crisis: rising private sector debt. The real risk is therefore not that Sovereign Money Creation will be abused, but rather that it won’t be considered in the first place.