When All Else Fails, Housing Bubble

Last month I asked:

So what’s Osborne’s plan to generate growth?

Today we seem to have an answer.

As Anatole Kaletsky sarcastically put it:

That’s right — aside from an underfunded infrastructure pledge, a duty cut on beer and cigarettes, and a tiny and delayed corporation tax and national insurance decrease, George Osborne’s plan is to throw money at housing and hope for the best. 

Sounds markedly similar to the American strategy following 2001 when Greenspan “created a housing bubble to replace the NASDAQ bubble”, and we all know how that ended.

I’d tend to argue that the opposite is a much better idea. Instead of propping up the housing market, Cameron and Osborne should deregulate construction and planning (getting planning permission can be a long, costly task in the UK, and planning restrictions are estimated to add up to £40,000 to house prices) so that housing prices fall (if not absolutely at least priced in median wages) and Generation Y can start getting on the housing ladder.

As Faisal Islam put it:

But alas no. Instead of using the ultra-low interest rate environment and idle resources to invest in a quality business infrastructure  — high speed broadband, roads, railways, energy — and lower unemployment, Osborne has chosen to throw his stock in with the malinvestment-loving property speculators.

Unfortunately, pumping up credit bubbles can win elections (as we saw with Bush in 2004), so this may have improved the Tory electoral chances for 2015. But in the long run, we will see this as a dire move.

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48 thoughts on “When All Else Fails, Housing Bubble

  1. Ironically, I think that “dubya’s double dip” is like “1984”. It was not really meant to be a field guide for government operations. But every politician reads it and thinks “hmmm… that’s actually a pretty good idea!”

    • I’m not really sure what Krugman meant. I think he did seem to think that “soaring household spending” could replace the NASDAQ bubble so long as politicians were careful and used the boom years to run low deficits, etc (unfortunately reality gave us the opposite). I certainly don’t think Krugman caused the housing bubble, but I do think it was an irresponsible discussion. I mean, 1984 was pretty clear that George Orwell (as I am here re:”soaring household spending”) thought that kind of thing would lead to dire consequences.

      • I’m loathe to be defending PK. But he gets this thing hung on him all the time. There are plenty holes to punch in his ideas but I don’t think he was endorsing or encouraging a housing bubble so much as mocking GW Bush and Greenspan.

        Towards the end he concludes:
        “The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble.”

        Saying that Greenspan needs to now create a housing bubble is a poke in the eye, not a hot tip.

        Just my interpretation. Regardless, Greenspan did create the housing bubble and had very awkward questions to deal with on that. Soon, Cameron and Osborne will have the same.

        • I didn’t mean this article as an attack on Paul Krugman; I meant it as an attack on George Osborne and Alan Greenspan.

          Of course, it’s possible that the economic fundamentals in the UK are so bad right now that even a Greenspan-style housing bubble may not inflate…

          Meanwhile, the BBC gets in on the act of encouraging a new trend of property flipping and speculation (needs UK-based proxy for non-UK viewers):

          http://www.bbc.co.uk/iplayer/episode/b019hbyl/Homes_Under_the_Hammer_Series_14_Episode_165/

        • Awkward! He should feel remorse! In jail, as I have no doubt he is either a buffoon or a criminal. It seems inconsistent that they raise and lower rates based on their interpretation of CPI. It is mostly subjective and prone to corruption.

  2. I’m not sure Kaletsky was being sarcastic. That tweet sounds it but the rest of his feed suggests he thinks govt-backed mortgages and subsidised speculation are a way to reignite the economy. Unless he’s gone deadpan for the day, he appears excited.

  3. From the post: “Instead of propping up the housing market, Cameron and Osborne should deregulate construction and planning (getting planning permission can be a long, costly task in the UK) so that housing prices fall (if not absolutely at least priced in median wages) and Generation Y can start getting on the housing ladder.”

    And allow developers to build estates WITHOUT road and infrastrucutre. Bring back the outside toilet, composting of course. Once everybody is on their feet, start to pave the roads and THEN raise local rates. That’s how they did it when I was growing up, and I treasure the memories of family holidays and lower financially stressed family budgets, than I do the paved roads.

    Today, everybody wants the big estate with token palm, tree, paved roads and lake (Which gets algae buildup after 5 years) This costs money young families DON’T have.

    Australia’s economy is mining or housing and when the housing market is slow, you see a big difference in Tradesmen’s disposable income, and any manufacturing (Mostly housing materials related)

    At the end of the day food clothing and shelter is an essential economic need, so stimulating housing is a big factor in economic growth.

    Perhaps a shanty town on the edge of London, for the Hippies and artists. Austerity Chic.

    • Excellent, excellent information Ralph. Thank you very much for this. WIll add to post, and will probably do my own post on this. This is a great offence against the youth who cannot get on the housing ladder to protect vested interests.

      • http://www.nahb.org › HousingEconomics.com Home › Special Studies John
        If you decide to do your own post… here is breakdown of costs and profit as reported by Building Trade Association US for new home construction for 10 years

      • One of my clients had a construction cost (Built town houses by subdividing existing houses on blocks. it works out to $10,000 a square to build. Guess what the biggest headache, and cost over run. Council Planning. Having to amend construction, contribute to land development (excessive infrastrucuture) all add up.

        But the biggest cost is land. Land banking is rife. If land is not developed after rezoning from farmland, it should suffer huge land taxes.

        The Land Between Melbourne and Geelong is undeveloped and people drive 1 hour on marginal farmland (No rain falls in this are) but the land is not released to give younger people a start. At least cut up the blocks into 1 acre blocks and subdivide and pave in the future.

        VESTED INTERESTS. ITS DISGUSTING.

  4. All economies must look for a point(s) of growth. One great point of growth is people always must have to have a place to live a roof over their head and a space of their own. What’s life? Asides some of the might reasons of meaningful life, life is very simple that’s to eat and a home to live in it.

    Home is the most important part of people’s lives. In fact Japan can totally blow their own housing bubble too if they want their economy to grow. Consider how pitiful the Japanese’ living condition and the tinny space they are living in it for such a rich developed country. It said that if you have Japanese friend(s) they most likely will not invite you to their home because their homes are tiny tiny and they are ashamed of showing it to you. Japan can start to revitalize their economy by starting some housing projects to increase the Japanese people’s living space.

    China’s housing bubble does blown a bit too big now but Chinese housing market indeed greatly helped to keep China’s economy strong for the last 30 years. Yah they may end up with many empty paid apartments/condos/houses but over all it’s still better then to live in some run down slumps or run down dirty apartments of 600 sqf shared by a family of 4 or 5.

    Middle class dream is including to eat and to live well. What do we work hard and make money for? To live a decent comfortable life that’s all.

  5. I can not think of broader based stimulus than housing… Your observations regarding planning, permitting, development fees charged to offset infrastructure costs are valid.
    Housing is infrastructure… Housing could have been an immediate focus of the Regional Banking System with the servicing of the loans kept local with government picking up a larger share of upfront fees.
    Socially determined geographic areas could be targeted for varying levels of support to satisfy needs of lower income, first-time buyers and address deteriorating existing housing stock . Considering the level of support government has afforded your traditional banking system a new way to finance that limits the role of traditional banking and its bubble mentality is needed to address the Kaletsky concerns. As Kaletsky points out American models are not the place to look.

    • Housing could be a stimulus… if the “stimulus” was relaxing planning laws, and allowing lots and lots of new units to be built so that prices could fall closer to cost and more people could get on the property ladder. All this will do is create a new housing bubble. Flip that CDO!

        • The US Association of home builders released a report stating that currently only 34% of home sales are purchased by first time buyers… Also that 50% of existing homes change owners within 15 years. Even with soft sales of new and existing homes past several years, the changing demographics (home owners, baby boomers dying off, more existing houses on market) the 15 year cycle has been interrupted. Without a large increase in first time buyers the market for newly constructed housing in US will be weak for the next 10 to 15 years.. Another bubble will not be driven by demand.

      • But cheaper husing equals lower rent, equals unhappy voters who bought into the property bubble. It is a merry go round with no way of getting off. HOUSING SHOULD NEVER BE AN INVESTMENT.

        IT IS NOT A HOUSE IT IS A HOME

        http://en.wikipedia.org/wiki/The_Castle_(film)

        Watch this movie, a taste of real Australia. Reminds me of my childhood home LOL :)

        • Cheaper housing lower rents unhappy voters…
          I was thinking the same thing…. more affordable housing would indeed leave those who purchased during bubble with a bad investment… That is why I doubt governments goal is affordable housing but to inflate prices at about 5 percent above reported inflation rate each year.

  6. My observations of the failed US housing market would indicate the bubble was created more from the availability of unsound funding vehicles (like near zero equity, ability to refinance with money out at 125% of value ) and the social concern regarding making housing affordable. (redlining, fair lending, sub-prime) creating an artificial demand. Nothing was done to make the actual product more affordable (stick built vs manufactured)…. to the contrary, high development fee’s, high costs of capital to cover builders finance needs and the focus on new development with out a large redevelopment component drove up costs that were passed onto the buyers. Your point is my point… Capital for housing construction could be supported from the sale of non-trading fixed term vehicles that provided a reasonable rate of return. (peoples savings) Retail funding by your yet to be created regional banking system. The whole process could be decentralized creating a more inclusive/understandable system that would create confidence.

    • I’m beginning to think that housing and various other “messes” will never recover as long as — after each socialistic failure — politicians, profiteers, do-gooders etc. insist on finding new ways to give* a daily fish rather than to teach/motivate each family how to fish!

      * Giving: it would be good to devise a basi-level safety net — an extension of person-to-person charity. What is NOT good is forcefully “robbing Peter to pay Paul”!

    • Tell me about it. Australia has a huge land mass, small population, and the highest house costs per income in the world. We have half of Melbourne undeveloped. Right next to a major highway and sewerage facility, electric transmission line. Madness. See Geelong to Melbourne corridor. Google Earth Lara or Werribee Australia.

      Land bankers and Banks making a fortune off loan volume

      • Canada too. Both Australian and Canadian governments done a great job to inflate and sustain housing bubbles, even in the face of massively contrary fundamentals.

        • And because so many baby boomers and Gen x have money in investment properties it is a political hot potato. Unfortunately the poor do not have a voice. Our dumbed down State education system and Facebook preoccupation does not encourage radical thought.

          Now I know why Hitler used beer halls. It was the only way to encourage attendees. he offered free beer and brainwashed them while they boozed.

    • Ben Bernanke says.. Until the funding made available by the fed is used, It is not real money. Ben agrees with you. Rich people borrowing at near zero rates to manipulate the stock market works pretty good as well…

  7. But shrinking house prices – at all, let alone to affordable levels – wouldn’t help banks out of the hole they dropped us into, and they’re too big (contributors to and corruptors of all political parties) to be allowed to fail.

  8. In Australia, the lowest weekly rent that can be found is around $270 for a 2 bedroom apartment in outer suburbia. Welfare is around 250 a week. If you lose your job, you must either share a room with others (Boarding House) or live with parents.

    I don’t see a street homeless problem in this country, so I can only assume the destitute are living in boarding houses or with parents. It is impossible to survive at these rents.

    Minimum wage is $606 a week

    http://www.fairwork.gov.au/pay/national-minimum-wage/pages/default.aspx

    That’s for a full 38 week. Some people would be lucky to get a full 38 hours, some may have overtime and some may be lucky to be paid $20 and hour so assuming your lucky $800 before tax wage $41,600 p.a.. Our threshold for zero tax is $18,200, and after various progressive tax rates

    http://www.ato.gov.au/individuals/content.aspx?doc=/content/12333.htm

    you are looking at around $702 a week. Take out rent of around $135 and that leaves $567 a week to pay food, vehicle and other bills. Not much left over to save for retirement or a home (Try moving when 70 plus because your landlord wants to sell or kick you out)

    And that is th elucky worker with a generous boss paying over the award wage. Try being a part timer or have children to feed.

    I hope the housing investors feel good about their investments. A house is not an investment it is a home. A place people feel safe and secure, not at the mercy of the decision of a Landlord. A person’s character is formed in their formative years in a secure safe and stable HOME.

  9. This is what happens when you allow labor-value to be transformed into money. The best results are always had when you keep things as simple as is possible.

    If you take notice, corruption is directly proportional to complexity.

      • I did get a dozen mixed bottles of boutique brand “Oak Farm” organic home made cordial for helping a neighbour round up sheep once. It can work to some degree when everybody is self sufficient and specialises in a variety of tasks. The Baker, The Butcher, the Miller and the LED Light maker.

  10. The last sentence of your article says it all. The housing measures are a desperate attempt to retain the support of the core Tory vote, the relatively affluent home owners, to avoid a Tory rout in the 2015 election. Look out for more nonsense in 2014

    • Australia gets your “lifesyle” property and renovation shows, so I get your point.

      We give you “Neighbours” BTW a very Brady Bunch inspired view of Australian life, even in the affluent areas. “Home and Away” is more realistic.

  11. When the average person reads these headlines, no wonder they rush in to property, even at these levels. It is a debt wagon with Australia at these property price levels. You and your wife better not lose their jobs. Perhaps ask your parents who have multiple properties to sell one and lend a hand. Bad luck if you are a African migrant. No manual factory jobs these days like previous migrant waves. Off to housing projects and generational povery for you.

    http://www.theage.com.au/business/property/index-points-to-affordable-housing-20130321-2gigw.html

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