One might well be forgiven for assuming that our current strategy for getting out of an economic crisis caused by an unsustainable housing bubble is to create an unsustainable housing bubble. But are we? And what is a housing bubble anyway? We asked Tony Greenham, who runs the financial reform programme at the New Economics Foundation and is also a trustee of Transition Network. “I always find the concept of “affordable housing” a really difficult one”, he tells us, “because it implies that the ones that aren’t ‘affordable’ houses must be unaffordable houses. How can you be in the business of an economic system that builds unaffordable houses?”
What are the characteristics of a housing bubble?
When a bubble is a bubble, as opposed to a genuine change in prices because of supply and demand, it really has to do with the availability of credit. It’s a phenomenon of banking systems as much as anything else. After all, if we take Russian oligarchs out of the equation, most people buy a house with a loan, with a mortgage, not with cash. They can’t bid on that house unless the mortgage company has decided they will lend them the money. In the past, and indeed now, whenever you see rapid increases in prices, what’s really at the root of that is an increase in the availability of credit from banks.
Of course the problem with that is that sooner or later bubbles end in a crash, we know that from history, and it’s very destabilising. You might get winners and losers – on the way up it seems everyone’s a winner because everyone’s making money out of their house, and the people who haven’t managed to buy a house yet obviously are left behind.
But then of course when there’s a crash, you might get lots of people who end up in negative equity and are damaged by a debt that’s worth more than their house. It’s just not a great thing to have these bubbles and busts in the housing market. A home is one of the fundamental needs that the economy should be satisfying.
We had the housing bubble in 2008 that burst. At the moment we’re seeing a massive expansion of house building across the UK and elsewhere. How does what’s happening now resemble or differ from what we saw in 2008, do you think?
There was an increase in house building that took place in and up to 2008 as well. It seems that the general price levels that house builders require to earn the sorts of profits that they’re seeking is now pretty high relative to income. In other words, the only way that the government seems to be willing to stimulate house building is to get prices high enough so that private house builders can make enough money by building more houses and selling them.
Now of course there are lots of alternatives to that, not least public funding of the building of council houses. But for seemingly ideological reasons that’s been ruled out. So almost the only way to get more houses built is to create a housing boom to ensure that prices rise fast enough for property speculators and house builders to make lots of money.
That was true both in the run up to 2008 and now. But there are a couple of differences. The two differences I suppose are that planning regulations have been loosened so it’s a bit unpredictable how that will pan out. The second difference is that whereas before the financial crisis banks were able to lend willy nilly almost to anyone by the end, they’re much more constrained by rules and their own more prudent approach about mortgage lending.
It’s much more difficult to get a mortgage. The government is itself pumping the sector up with subsidised mortgages for first time buyers. So the government’s more directly involved in pumping up the house price boom this time as a deliberate strategy, both to get re-elected (one might say cynically), but to prompt this new wave of house building. But the other difference is that compared to previously, there appears to be much less constraint on where that house building is going to happen.
Can the nation afford to buy all of these houses that are supposed to be built?
You have to distinguish between land and buildings pretty crucially. The thing that’s really fluctuating in value of course is the land, not the bricks and mortar. Can we afford to construct buildings to live in? Yes, of course we can. That’s just a question of allocating resources to the things that are important and in one of the wealthiest nations in the world, the idea that we can’t afford to house all our people in a decent level of comfort, if you step back and consider it, it’s a ludicrous idea. So if that’s not happening it’s because the market structures and the economy are set up for it.
But the more tricky part of it is land and can we afford the land element of these prices? When land values rise and fall that’s not creating new wealth. That’s just distributing it from one person to another, from the person buying the land to the people owning the land.
This is an entirely different question about social justice and inequality, and it’s really not sustainable to have a wealthier class of people benefiting from such a system and an ever increasing bunch of people in debt and missing out on that increase in value.
What are the characteristics of what we actually need to build, do you think? Certainly around here, most developments start out saying they’ll build 50, 60% affordable housing and as the process goes on they haggle it down to what seems to be the standard now, 17.5%. All the rest are full market value houses. What are the characteristics of what we actually need to build? How could house building be a boost for local economies without creating a housing bubble?
You’d have to change the whole approach to building new houses. There’s a couple of things: the phrase you just mentioned, “affordable houses”. I always find that a really difficult one, because it implies that the ones that aren’t ‘affordable’ houses must be unaffordable houses. How can you be in the business of an economic system that builds unaffordable houses?
The whole thing does point to a certain deep dysfunction within the housing market. The second point is the idea that it’s a market at all. When you think of markets, you think of something where there’s some functioning price system and people can choose to supply and people can choose to buy. The lovely image in Economics 101 textbooks of the market seller selling apples to describe supply and demand. Houses aren’t like that. It’s not really a market where people have a real choice about what they buy. You have what you can possibly get your hands on if you’re lucky most of the time. So the power is with the people who create the supply.
Leaving this to this private market system is exactly asking for the sort of problem you’ve just described. They’re highly incentivised to make the most money by building a certain kind of house. But that’s not necessarily the kind of houses that we all need at all. That’s what happens if you leave it to this random decentralised market system. It’s not a functioning market. It’s not based around real human needs. And it certainly doesn’t take account of the environmental impacts in anything like a significant enough way.
You need a significantly different system that was based around understanding what people’s needs were and obviously building from much more locally sourced materials and craftspeople.
We’ve already got lots of homes as well which are in a pretty disastrous kind of a state, and the green new deal doesn’t really seem to be working in order to bring those houses up to the kind of levels of energy efficiency that we need to see. How could we do that, do you think?
The Green Deal, rather than the Green New Deal. The Green New Deal was a nef-produced report for transforming the economy. The Green Deal has been extraordinarily unsuccessful really. The idea that people can finance retrofitting of their houses, various retrofitting things could qualify, but they could finance them through borrowing money and then repaying it through the savings on their bills sounds good in theory because the idea is that householders don’t have to borrow a sum of money and then be worried about fixed repayments, they just pay as quickly as they save money.
The flaw in the plan is that the interest rate on the loan is 7%. If people have got a mortgage, the chances are it’s less than 7%. And you can get personal loans at the moment at 4 or 5 %. So why on earth borrow money at 7%? This whole scheme is set up a bit wrong. The interesting thing is to compare that with Germany who, as is so often the case, get this right.
They have funding available for householders to retrofit their houses, a whole house retrofit loan that will cost you an interest rate of around 1% from the German Development Bank. You’re going to do that, aren’t you? A long term loan at 1%, the chances are pretty high that you’re going to be saving more money than the loan repayments and they are currently retrofitting in the region of 1 million homes a year which is something like the pace we need in this country – turning pretty poor housing stock into something which is remotely delivering warm homes to people that don’t emit vast amounts of carbon. Again, this mechanism is hopelessly inadequate.
You did ask me what would make a difference. I think something that is rather out of vogue but I think – I’m trying to remember which council it was – had great success with a high degree of retrofitting but it was as intense effort of almost going door to door, street by street and signing people up to have this work done. You need to make sure that the finance for all of that is done in a way that people can benefit from it whatever their income and wealth position.
Again, it just requires a level of co-ordination by government. It can be done by other people, it can be done by community organisations, I’m thinking Transition Streets is not a million miles away from this, but it needs to be co-ordinated together, street by street and it needs to have the finance available on the right terms to allow this work to happen. The Green Deal is a million miles away from that.
So the dangers for you of trying to find a way out of the crisis caused by a housing bubble by taking the current approach would be what?
There’s a number of components of a housing crisis. One of them is that land has become unaffordable. Not the buildings, it’s the land in many areas of the country. And that’s just a dysfunction of wealth being transferred from one group to another. Land prices are higher than they need to be, and that’s quite a difficult thing to solve. Of course there are lots of proposals around that. At one extreme you could nationalise all the land I suppose, but land value tax is a proposal that is supposed to stop that huge increase in land prices. That’s the way I look at it.
The problem with trying to get houses built by inflating land values is that it’s pumping up another kind of debt bubble. And all debt bubbles burst. So it’s really not a very sustainable approach in the narrow, financial sense of that word to getting more houses built. It’s almost guaranteed that you’ll end up with unaffordable houses really, which isn’t exactly solving the problem we think we’ve got.
One of the other issues that won’t be addressed, it seems, under the current government and we’ll have to wait and see what happens under the next one, is the degree of empty homes. There have been some policy initiatives around this. There are a lot of homes which are empty because they are second homes or owned by overseas buyers who use them occasionally. Or they’re owned by developers who are letting them rot so they’ll get permission to build something else there. We do need to be much more rigorous in not allowing homes to lie empty. So that’s another part of the puzzle, and again not addressed at all by just pumping up a house price boom with subsidised credit.
We have to look at more publicly funded building of houses. Actually, the cheapest funding of all is money that can be borrowed by the government. They can borrow at much cheaper rates than property developers, private landowners, banks or anybody else. So I’d say we need to bring back council houses.
I’m all in favour of the idea of decentralised management. It’s great to have social landlords, housing associations, co-operatives. The finance perhaps needs to be provided at local authority and government level because they are also the important body for delivery of services; so that the schools are in the right places so that people can walk to them and the doctor’s surgeries and all the rest of it. There is a planning function which is held by the local authority.
But it would be great to see more co-operative ownership of land and co-operative ownership of the buildings on the land. But they could be privately owned and if the land is co-operatively owned it gets around some of the frothy boom and bust of land prices and land speculation. So there are some promising signs on this. The garden city concept is one that seems to have captured a little political attention recently, and maybe that will result in examples of co-operatively owned land and housing and that would be a really good thing. But we could do with that happening on a much bigger scale.
This is a slightly abridged version of our conversation. You can hear it in full below: