We hear a lot about the housing crisis and following on from a discussion on Richard Murphy’s blog I thought I would have a look at the data. Ideally all discussion should begin with data—in data there is truth—but we should remember that data-ists have enormous freedom as to what data to choose and how to present it.
House affordability is given by the ratio of house price to income, so below I plot average house prices (data from Nationwide), average* weekly incomes (data from ONS) and the ratio of house price to annual income between 1960 and 2015.
This post shows the ratio going back to 1945 which a significant post-war peak in 1948. There is a theory arising in the US market in the nineteenth century that property follows an 18-year cycle (the time to grow-up and leave home) which roughly works until 2008 when the affordability ratio failed to revert to the long term average. Looking at the data, I was surprised that the affordability ratio was the same in 2000 as in 1960, and that the great divergence all happened between 2000 and 2007.
Now, houses are unlike any other commodity for many reasons. In particular, most people buy houses on credit so the effective cost of credit or real interest rates matters in addition to income, supply and demand. When credit is too cheap – like in the Barber boom in 1972-74 and the Lawson boom of the late 80s, house prices increase faster than income. Boom is followed by bust because the real economy need time to catch up with the credit overgrowth. In 1997, New Labour made the Bank of England independent to prevent a repeat of the politically influenced booms of Barber and Lawson. Unfortunately, what happened next—let’s call it the Brown/King boom—was an even larger boom. We could and should ask what was the Governor of the Bank of England thinking between 2001 and 2004 when rates were being lowered from 6% to 3.5% even though house prices where rising rapidly above their long term average. Why was he not reading this years Sveriges Riksbank (aka `Nobel’) prize winner – Richard Thaler? In 2003, Thaler wrote that:
buyers in most of these markets perceive little risk in their housing investment, have unrealistic expectations about future price increases, and hold economically implausible beliefs about home price behavior—findings consistent with a bubble.
He was talking about the US, but the same signs were there in the UK market too. By 2008 it became clear that the technocrats had made a far bigger mess of monetary policy than all the politicians before them. Even worse they were not democratically accountable (a point discussed by Bill Mitchell here). Later, it was Gordon Brown and New Labour that took the hit rather than the monetary policy committee. The Brown/King boom was also different in that afterwards house prices did not return to their long-term affordability ratio. This was also the fault of the technocrats with the support of the next generation of politicians. Quantitative easing injected new money in search of a home, and the price of homes did not fall.
The trouble with rising high house prices is that it drives a further wedge between the haves and the have-nots. A better strategy for life becomes to marry into inherited wealth rather than work hard—something to ponder as we look at the new ten pound note. The solution is obvious of course – we the collective—the state—should build more homes and share the wealth.
*Averages are not a good representation of a skewed distribution like income – the average may rise even though median income (what the average person is experiencing) is falling.