What was the root cause of the global recession? I think that we must all have been told the answer dozens, if not hundreds of times. Though some have (albeit unsuccessfully) attempted to respectively instil the myth that “unsustainable” government borrowing, we are all aware that the problem was in fact the securing of excessively large mortgages on overpriced housing (provided to risky borrowers). And yes, a lot of the blame falls on the irresponsible profit-hungry bank executives and the governments which failed to regulate them.
But the problem couldn’t have arisen in the first place had house prices not been allowed to rise to such artificially high levels. I can only write in detail for the UK, however my broad point applies in most countries. Over the past 30 years, UK house prices have tripled, whilst the social rental sector has been severely curtailed. Since rent controls were abolished in 1988, rents in the private sector have surged to the point that a household can expect to spend 40% of its net income on rent. Consider that figure: it’s more than the combined food, transport and energy budget of a typical family.
It gets worse. For those who’d like a bit of security (there is nothing to stop a landlord evicting a tenant and very short notice), and the freedom to maintain their own home, they will find that a 1 bedroom home in the south east of England can easily cost upwards of £150,000. And such a cost might be alright as a mortgage, but banks have so little capital to lend that they demand a 10% deposit (and even then at a significant premium). With living costs being what they are, it is rapidly becoming the norm for adults to live in their parents’ houses into their thirties.
The interesting aspect to this is that virtually everybody (though those old enough to have bought their homes early are fine) is paying so much for their housing, when the value of the bricks and mortar is so low. It costs £110,000 to build a carbon-neutral, quality 4 bedroom house. The market price would be at least three times this. The only economic phenomena that would cause such a disparity between cost and value are state intervention artificially increasing prices, or demand vastly outstripping supply. It’s obvious that the state isn’t taxing us to this ridiculous extent (we’d have no deficit problem then), and the latter is clearly the problem. There are therefore three solutions: reduce demand, reduce supply, or provide state assistance with the costs.
State subsidy would fail to tackle the root of the problem. It would distribute billions to landowners and landlords, ensuring that our economy is still linked to a bubble.
To be continued.
