…

House pricing causing major difficulties has very simple origins: irresponsible governments and banks who have in the past for popularity and financial reasons let house prices rise well above inflation rates.

In some parts of the world - for example in Spain and the USA - there is an additional reason: the oversupply of houses. This causes house prices to fall, but is (was) obviously foreseeable by any government who controlled in any way planning/building controls.

The other, seemingly opposite, reason, is that in the UK: a continued use of high interest rates which together with excessive house pricing (caused by governmental failure to control these) has meant that many house purchases have become unaffordable.

(There is a rather stupid and amoral/immoral argument that in the case of the UK interest rates should have been higher in the past to make the houses unaffordable earlier. But the discussion on interest rates is elsewhere in this site) .

The reason is that governments felt that it would have been unpopular to not allow house pricing to run ahead of inflation. Accordingly they failed to take preventative action (for example by putting high capital gains tax on excessive house sale gains).

Banks gave firm financial encouragement for their staff to lend high amounts without any thought that this might be in the long (or as it happens) medium term bad not only for their customers but also for the banks themselves.

All that was needed was simple ethical thought, a study of the past, and a little common sense.

Have we any short-term solutions? No. We do not simply because we are not seeking to be a short-term economic site. Historically there would not have been current problems if there had been a better interaction between ethics and economics. In the future, should ethics and economics interact in the actions of government and banks then this situation will not repeat.

The situation of Rented Private Houses

…

As a practical example of the interrelationship between ethics and economics in a none-too-obvious area one can consider the cost of home rents.

There are three core factors which determine these rents: the capital costs to the landlord; the costs of interest charged to him in funding such (or loss of interest should he self-fund): or the reasonable “return on capital” expectation; and the marketing factor: what one can expect to be paid as rent.

The first of these is very awkward and contains many political quandaries: but the basic point is that the price of land, which is a major determinant on house costing, is freely determined: whilst the supply of this land is strictly controlled by government. Now this simply makes very difficult and damaging sense in economic terms: either supply and pricing should be strictly controlled, or they should both be “free”.

This is not the place to go fully into the case for freeing the supply of land: though in truth this is seldom made, sometimes for selfish reasons (’not in my back yard’), sometimes because modern regulations make it very hard to built low density housing, sometimes because the desire for ‘pristine’ countryside outweighs the desire of people not to necessarily live in tight proximity with others.

All we would suggest is that we take a closer look at deserted villages in from the past. Because they have not had large concrete foundations etc they have become re-cyclable. Could it be that modern building regulations are taking a very wrong view of the longevity of houses? There is surely little in history which would suggest that most houses being built in the first quarter of the 21st century will still be standing in the 22nd. So why make them so difficult to demolish? Why not assume that perhaps those locations will be wanted for other purposes?

But when house rents (or capital costs) are too high just who benefits? Surely, yes, the one who sold the land or the building. But the one who has (or chooses to) rent? Is the net result that either he has too spend too much of disposable income on rent or demand too high income for the good of both the economy and of those who purchase his services. (to be continued..)