Background to the budget: What caused the UK’s housing crisis?

In Wednesday’s budget Philip Hammond announced a number of headline policies which aim to tackle the long-neglected housing crisis in the UK. The country faces acute shortages and a concomitant price bubble in the housing market. This article will look at how we ended up in this mess.

As with any such question, there are a myriad of interlocking social, economic and political factors at play. Therefore, the analysis cannot be exhaustive, but I will consider some of the more salient issues that arise.

As a result of the post-World War Two political settlement, a substantial programme of government housebuilding was undertaken. Inner-city slums were bulldozed and new social housing constructed in their place. Construction reached its height under Harold Wilson’s Labour government in the late-1960s, with local authority-built council houses accounting for up to half of the new homes constructed.

 

However, Margaret Thatcher’s election in 1979 and the social and economic changes that her Conservative government instituted in the 1980s marked a dramatic break with the policies of the preceding decades. Most pertinently, in 1980, the Right to Buy scheme was enshrined in law. Government owned housing stock, which had provided secure and affordable accommodation to those most in need, was sold off in large amounts. The result was a huge transfer of wealth from the state to private individuals.

To compound the issue this stock was not adequately replaced. As in many other areas, Thatcher placed faith in the private sector to build the homes the nation needed but, as is clear from the statistics, this faith was misplaced.

New council houses became a thing of the past as the ability of local authorities to build was constrained. The private sector had no incentive to make up the difference and keep prices stable. Therefore, affordable housing became increasingly scarce; in 2016, newly-completed affordable homes reached a 24-year low.

 

©The Guardian

This decades-long failure to build the 300,000 new homes per year that are needed to keep up with demand, combined with the selling-off of government-owned housing stock, greatly contributed to the lack of supply that we see today and has been one of the long-term causes of the steep inflation in the cost of homes that is now pricing first-time buyers out of the market.

It is not just the very youngest who are affected, home ownership across the board is at its lowest level in 30 years. Every age group below the retirement age has seen a decline in levels of home ownership over the past 25 years.

As the value of their houses soared, the generation for whom home ownership became the norm made money in their sleep. To compound the problem, these homeowners are now contributing to the increase in buy-to-let transactions as they spend their accumulated wealth on second houses to rent out. This creates further demand for residential property and partially explains the increasing prevalence of people living in the insecurity of privately rented accommodation; nearly half of those aged 25-34 are renting privately.

Unlike in other nations, where there is often regulation such as rent caps, the private rented sector in this country is relatively unregulated. This has compounded the misery of the current generation who are not only unable to buy a house, but are now struggling to pay the rent. Millennials now spend over a third of their income on rent, compared with the 5-10% of income spent by their grandparents’ generation.

Understanding the reshaping of the global economy which occurred in the 1980s also provides further insight into why property prices in this country, especially in London and the South-East, have risen so precipitously in the past few decades. The increased levels of inequality and greater concentration of wealth towards the top portion of society has produced a mass of savings accrued by a small percentage of the global population. Much of this idle cash has been spent on fixed assets like desirable London property, further contributing to the housing bubble.

This type of demand also means we see more and more of the unaffordable high-end new-builds that are coming to dominate Central London and its skyline, often acting only as part-time homes for their wealthy owners. These apartments and penthouses encased in soullessly imposing glass and steel structures change the city’s character, kill off communities and squeeze those who can’t afford them out of the city.

Vauxhall, London

It is no surprise that of the top 50 homeless ‘hotspots’ in Britain, London accounted for 18 of them. As ever, there is no attention paid to generating positive social outcomes when government abandons its responsibilities to the private sector.

If the creeping inevitability of gentrification is allowed to continue, the vibrancy and culture that is brought to London by its mix of inhabitants, thus making it such a desirable place to live, will be slowly eroded. The end result in this scenario will be the death of the very things that gave those properties their value in the first place.

Ultimately, it has been the failures of successive governments to build enough homes over the past 30 years that has caused today’s housing crisis. Reliance on private housebuilders has failed to produce adequate numbers of affordable housing. Right to Buy helped to transfer wealth to one generation at the expense of the next. Under-regulation of the private rented sector causes further misery for those unable to join the housing ladder. And, in London, the city has become littered with generic glass towers; gleaming symbols of the perverse outcomes that deregulated capitalism generates.

Theresa May’s strong and stable U-turns continue

Theresa May is rattled.

The Tories produced a pretty shocking manifesto. They took the over-60s vote for granted by proposing the so-called ‘dementia tax’ and included absolutely no costings. Had Labour produced such a manifesto the right-wing press would have been besides themselves with fury. As it is, May could have announced that everyone’s grandma was to be burnt at the stake and the Daily Mail would have championed the policy as a much needed boost for firewood sellers.

Today it got even better. Strong and stable May announced a screeching U-turn on the social care policy and then claimed that “nothing has changed”. She tells us there will be an “absolute limit” on the amount people have to pay for social care, but refuses to say what that limit might be. May seems to have taken herself completely by surprise when she announced the election – it’s been a shambles so far.

It got more surreal when she then accused Corbyn of playing politics in an election she called for short-term political gain based on the state of the polls. Corbyn was apparently making “fake claims” about her manifesto – a statement easily disproved. May is throwing her toys out the pram because it’s not been exactly how she imagined. It’s all very Trump-like.

Fake news

The day’s hypocrisy progressed apace as the Tories decided to just start lying about Labour’s manifesto promises. This tweet from the Tory press office declared that Corbyn was going to raise the basic rate of tax. Not true.

More fake news

They may want to try re-reading the Labour manifesto and double-check their own one given that they are the party that has failed to rule out income tax rises and extra National Insurance contributions. Although who knows what their manifesto says now. At one point today the Tories decided that their first effort wasn’t actually the real one. They were just testing us.

Wish the same applied to my dissertation

Today was her ninth U-turn in twelve months. Strong and stable May is going to need a new slogan.

 

Where is the wealth? At this election, we can choose.

 

One of the most important parts of the Labour Party manifesto, away from the screaming tabloid headlines about ‘Comrade Corbyn’, is their promise to create a National Investment Bank. The prevailing response to Labour’s manifesto is that the country cannot ‘afford’ it. Britain is the 5^th richest nation on the planet. So, where’s all the money?

In 2008, the government bailed out the banks. This huge transfer of wealth from public to private hands in the form of the bailout came with no strings attached and caused Britain’s public debt to balloon. There was no requirement that the banks should productively invest the money to get the economy back on its feet. This added to the huge concentration of wealth at the top of society which had been increasing since the neo-liberal deregulation of the financial sector after 1980. We all recognise that there is a large amount of public debt but often fail to take note of its logical twin; the huge amount of private surplus.

In 2010, the supine Liberal Democrats jumped into bed with the Conservatives, giving us a government ideologically wedded to reducing the size of the state. The narrative was that we must be frugal and recognise the tough times we faced; we were spending beyond our means. The public would pay for private excesses. Public services started to be cut and we arrive at today’s position where the NHS is in constant crisis, per-pupil funding is falling in our schools, the prisons are in a mess, recorded crime is up and the Post Office is in private hands.

Austerity never has and never will work at the national level. For the state, total expenditure is equal to total income and so as the government increasingly cuts its expenditure, the economy is ever more constricted; growth is poor and real wages are lower than they were ten years ago. To attempt to continue along this path and somehow achieve a surplus via more cuts to public services in order to start paying down the debt is economic illiteracy. The state would be decimated and the debt to GDP ratio will rise as a result.

One of the Conservatives’ bright ideas is that instead of the state spending any money, the private sector should be the drivers of investment and growth. So, we come back to that big pile of private wealth which is malingering in the accounts of wealth savers and corporations. However, now that the economy is failing and the consumption that exists is mostly based on unsustainable credit, the wealthy do not fancy investing their money within this climate.

This means asset prices rise enormously (London house prices for example) as the wealthy cram all their money into fixed assets instead of into productive capital. As a result, wealthy individuals watch the price of their assets grow and extract ever increasing rents. Corporations, too, engage in measures focused on short-term profits such as share buybacks to boost the company’s value. When these activities show up in the GDP figures it gives the illusion of growth but no real value has been created, nothing productive has been done. However, private wealth continues to increase and become more concentrated; a great success for the rich donors on which the Conservative Party relies.

In the current situation, what we cannot afford is to have a government ideologically wedded to low public spending. As we have seen, the private sector will not invest, despite interest rates remaining at extremely low levels. It is the role of the government to drive investment into new innovative areas of the economy that will provide long-term productive growth and create new well-paid jobs.

The technological revolution of the twentieth century is one of the best examples of this. The early innovations were driven by the investment of (mainly) the US government. All the technologies in an iPhone, for example, can be traced to government funding, from transistors to touchscreens to Siri. The internet itself emerged from a project funded by the US government. Further examples can be found in countries like Germany and China, where their public investment banks do similar work.

 

Wavy

There are lessons to learn too. The US government now receives very little return for its investment, given companies like Apple and Microsoft, who built their fortunes on the back of public investment, pay almost no corporation tax. In the 1980s, when these technologies became small and cheap enough to be marketable, the US government should have formed a closer partnership with these companies in order that the public was fairly paid back for the billions of dollars that were spent in the early, financially high-risk stages of development. The government could, for example, have retained the intellectual property rights or obtained shares in the companies. As with the bailouts, the public took on the risks and the private sector reaped the rewards.

In today’s world, the technological revolution of the twenty-first century must be in green energy and biotechnology. It is a necessity we cannot ignore.

Here we see a stark division between Labour and the Tories. The Conservatives have just this month sold off the publicly-owned Green Investment Bank to Macquarie, a bank known for its asset stripping (as evidenced by the state of Thames Water after a decade in their hands). Labour, on the other hand, have promised to create a National Investment Bank aimed at providing exactly the type of long-term productive investment we need. A national bank, because it is backed by the government, is able to borrow at extremely low rates and so returns on investment can be hugely beneficial for the public in the long-run.

Of course, as the economy starts to grow, and the new innovations become commercially viable for private companies, we will see that huge pile of private surplus emerge from the shadows – investment in the real, productive economy will increase. Consequently, that private wealth will be put to mutually beneficial use; better jobs are created and wages rise, thus government receipts rise and so the level of public debt also starts to fall. Prosperity is shared.

This is not utopian, pie-in-the-sky stuff. The fastest growing, most innovative economies have always had forms of government intervention and investment to provide the framework for further private innovation.

To say we cannot afford a Labour government is not true. On the contrary, we cannot afford another five years of stale Tory economics, not just for the health of the economy and a more equitable society,  but also for the health of the planet.

Corbyn loses plot, again

Today we heard that Jeremy Corbyn would like implement a maximum wage if elected. Or not. In this tidiest of political U-turns, lasting just hours, we then heard that actually it was just going to be a pay ratio. Oh, and only for companies awarded government contracts. But private companies can ‘opt-in’ if they want to, so no prizes for guessing how many actually will.

Coming alongside a so-called reboot of his image in the new year this feels desperate. It’s as if they’ve resorted to hurling policies they heard people might like at the political dartboard to see if any of it sticks.

It’s not that it’s a bad idea. It has the makings of a very good idea. Pay inequality is enormous and this should resonate with a lot of people. But not like this. Not some half-baked garbage announced in the morning and half-rescinded by tea time. Policies need to be well thought through, as watertight as possible and advanced in the media coherently by Labour politicians.

It’s not like this is hard work. He’s Leader of the Opposition to one of the most incompetent governments the country has ever seen. We’ve got a control freak Prime Minister with the human touch of a corpse, supported by a front bench of amateur-hour politicians who couldn’t organise a cake sale let alone a government department. What’s more, they’re in control of the most important political event in the UK for decades – Brexit – which they are demonstrably ill-equipped to deal with. As if we needed proof there are civil servants resigning left, right and centre desperate to let us all know of the fecal-hurricane which is coming our way.

So, this should be easy. Just point out to everyone what an awful job the other lot are doing in a vaguely coherent manner. It doesn’t even have to be that brilliant. Appearing to be more capable than the current government doesn’t strike me as hard work.

I do genuinely hope, for the good of the Labour Party, that Corbyn can turn things around, but small issues like this consistently undermine credibility – a currency which is in short supply in today’s politics.