The Faustian Bargain that is the British Housing Market

When economic issues are discussed in parliament they are rarely those that matter. Issues that really matter are also almost absent from the media. There are economic issues that are not spoken of in polite society or parliament, One such problem that is continually swept under the carpet is the horrendous balance of payments deficit, the largest of any developed economy. This debt is subject to constant revision so it is hard to give accurate figures, but the for last quarter of this year it reached 7% of GDP. A figure a third of that caused a financial panic in 1967, whereas today far worse figures provoke no reaction.

Gordon Brown when questioned about this problem, said the world had changed and it was no longer a problem. What he meant was the government of the time could fund the enormous trade deficit from the large inflows of cash coming into the UK from abroad. To put it simply we were using the money invested in the UK to pay our debts to the rest of the world. This particular economist thinks that it is very poor policy to remain the perennial debtor nation that relying on the goodwill of others for the means to pay its debts.

The government has to take extraordinary measures to ensure that this money keeps flowing into the country. This is achieved by introducing policy measures to ensure that property prices keep on increasing so making commercial and more particularly residential property prices continue to rise. Falling property prices the week as a result of Brexit caused a panic in government. Action was taken immediately to slow or halt the fall in property prices. The government increased the amount of money banks would have available to lend to the property market. Simply by ensuring that there is plenty of cheap money around to buy property will tempt buyers into the market hoping to pick up bargains, which in turn keeps up property prices

However the government has made what is a Faustian deal with the property market. The deal is quite simple, the government will sacrifice the rights of the young, the low paid and those resident in London to accommodation in return for the massive inflow of cash from foreign investors into the property market. All these investors want is ever rising prices and the government is prepared to acquiesce even if it means denying the young, Londoners access to adequate housing. If large parts of London are subject to significant depopulation due to rising house costs that is acceptable to the government, as the alternative is much worse. The much worst alternative is admitting to the horrendous trade deficit and reducing the import bill through imposing strident cuts in the standard of living for the nation’s people, better to lie and fantasise about the strength of the economy than admit to some painful truths.

One of the most effective ways of pushing up house prices is to reduce the supply of housing relative to demand. This is perhaps the most objectionable part of the Faustian deal, that is deliberately pursuing a policy that will leave millions living in substandard accommodation. Governments no longer build social housing, the once thriving council house building programme has ceased. The consequence is house building has fallen to the low levels ever seen in modern Britain. House building is now left to private developers and the underfunded housing associations. The various right to buy schemes have resulted in the large scale transfer of local authority housing to private landlords. Consequently market power no resides with the private landlord they can constantly increase rents, often charging higher and higher rents for what is increasingly inadequate accommodation. This increasingly profitable private rental sector attracts foreign investors, the people whose money is needed to finance the balance of payments deficit.

Various denial of truth strategies are used by politicians to excuse their inaction in what is an increasingly worsening housing crisis. One of the worse is that if the government intervenes in the private sector it will worsen the crisis. They claim that if the government intervenes by increasing security of tenure or controlling rents, private landlords will leave the market in droves reducing the amount of accommodation available and making many more homeless. This is nonsense as too many landlords have invested too much money to withdraw from the market. Legislation could be introduced to ensure that existing landlords did not withdraw from the market, through the compulsory registration of landlords.

What our political classes are unaware is that Faustus had to pay a high price for the help of Mephistopheles, he had to surrender his soul. Similarly the new Mephistopheles in the guise of international finance requires a high price for its support, the surrender of the integrity of the political classes. To keep the cash following into our economy this new Mephistopheles demands that policy be structured meet to its needs. What it requires are two things the first is constantly rising property prices and the second that in the event of a price crash the government takes measures to stabilise prices, so ensuring that the investors do not suffer too big a hit. The governor of the Bank of England in fulfilling this promise, this week announced a whole series of policy measures to stabilise the property market. The fact that these measures would also protect the house owner  from the threat of increased mortgage costs and possible repossession was only of secondary importance. Even George Osborne (Chancellor) admitted that his new policy to support new house buyers was a measure whose primary importance was to keep up house prices.

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