The Financialisation of the Land Economy and House Prices Inflation – Even So Releasing More Land will Decrease House Prices

‘The ‘housing crisis’ needs to be understood primarily as a product of the banking system.’ — Mick Peel (@Mick_Peel) October 15, 2018
No the financial crisis may be in terms of lending, but all speculative bubbles have origins in bottlenecks in the real economy and capitalists have always got their riches from these bottlenecks. Katie Allen in FT alphaville picks up on an excellent book by the look of it
With great flourish, Theresa May last week announced that she was lifting the borrowing cap which constrains local councils’ ability to finance new housebuilding.
“We will only fix this broken market by building more homes,” the prime minister said. “Solving the housing crisis is the biggest domestic policy challenge of our generation. It doesn’t make sense to stop councils from playing their part in solving it. So today I can announce that we are scrapping that cap.”
In reality, councils – or anyone else for that matter – building more homes will do very little to address the fundamental problem in the housing market, and if you want to understand why, there’s a new book which explains it.
‘Why Can’t You Afford To Buy A Home?’ by Josh Ryan-Collins – a researcher at University College London’s Institute for Innovation and Public Purpose – is about the phenomenon which he dubs ‘residential capitalism’.
It follows on from his less snappily-titled volume ‘Rethinking The Economics of Land and Housing’, which was written jointly with fellow economist Laurie Macfarlane and policy wonk Toby Lloyd and published last year.
Both books address the question of why a growing number of people are being priced out of the property market, with rising house prices accelerating away from household incomes.
The answer is financialisation – and it is not an aberration, according to Ryan-Collins. The ‘housing crisis’ needs to be understood primarily as a product of the banking system.
For starters it’s not just a British problem; this is a trend which has gripped developed economies across the world over the past three decades.
“Two of the key ingredients of contemporary capitalist societies, private home ownership and a lightly regulated commercial banking system, are not mutually compatible,” he writes. Instead they “create a self-reinforcing feedback cycle”.
The post-War popularisation of home ownership put pressure on governments to reduce property taxation, which made it more attractive for banks to lend, with the result that mortgage lending replaced corporate lending as banks’ main area of business.
In the early 1980s, business lending equated to around 40 per cent of GDP on average in advanced economies, while mortgage lending was around 25 per cent. By the time of the financial crisis, mortgage lending had grown to 75 per cent of GDP while business lending had only grown slightly, to 45 per cent.
Much of the reason why policymakers have failed to tackle the ‘housing crisis’ is because they have not grasped that land is fundamentally different to other economic inputs, Ryan-Collins argues: “Land is immobile, irreproducible and appreciates in value over time.”
Lending to business supports capital investment and wages, fuelling growth, but lending on existing property and land is by comparison unproductive. Land is unusual in economic terms, in that it exists in fixed quantity; increased lending against it serves therefore only to drive up its value. And the banking sector’s health has become dangerously intertwined with property prices.
Breaking this cycle means radical banking reform, partly by changing their ownership structure – a shift from shareholder-driven banks to stakeholder-driven banks (though Alphaville hates the woolly word ‘stakeholder’).
State investment banks, co-operative and regional banks are some examples of alternative ownership structures and relationship banking models put forward by Ryan-Collins, though the under-scrutinised investment activities of the German Landesbanks suggest that this on its own would not be a panacea. They were some of the biggest holders of Carillion, to use just one recent example which led Alphaville’s colleagues to dub them ‘dumb German money‘.
Ryan-Collins also argues that central banks need to guide credit away from property and into productive areas of the economy. Policymakers could be given an explicit mandate to steer credit more proactively, while restricting property lending through capital and liquidity requirements. It’s about creating an incentive system that more closely aligns the interests of banks with those of their business customers.
In short, the ‘housing crisis’ needs to be understood primarily as a product of the banking system, not a function of construction volumes – it represents a market failure, not a supply/demand imbalance.
And no, Mrs May, more borrowing by councils will do little and probably nothing to address any of that.
‘Why Can’t You Afford To Buy A Home?’ by Josh Ryan-Collins, published by Polity Books
I agreed with every last line of that until you got to the point
In short, the ‘housing crisis’ needs to be understood primarily as a product of the banking system, not a function of construction volumes – it represents a market failure, not a supply/demand imbalance.
Which is fundamentally wrong. Consider a real market failure where prices do not reflect fundamental supply demand conditions.  Where for example only one ice cream seller on a beach is licensed or all beach goers are forced to be ice cream sellers.  In a capitalist monetary production economy the price of ice cream unhindered by (in the above cases regulation enforced) market failure the price of ice cream will reflect market conditions  so that the profit of ice cream selling is the same as everything else. However if you cant freely sell ice cream on that beach someone owns it, and good beaches and hot summer days are in short supply then the owner of the beach will be able to charge a rent and the ice cream seller will have to charge a monopoly price to pay the rent.  However if the beach were not owned they could still charge a monopoly price, they simply keep more of the economic surplus.    The problems many on the left grapple with is there is a triple market failure in the housing market and many in this space- such as the author of this article, the otherwise always spot on Anne Pettifor , and Ian Mulheirn confuse the three, delightfully picked up by Nimbys everywhere who want to stop housing for oiks near their countryside homes which might devalue their house prices and their future stream of rentier income, oh the irony.
  1. Is monopoloy ownership of land to be able to taken runtier income a bad thing – yes
  2. Does financialisation enable banks to cream off some of this income and fuel land speculation – yes
  3. Is the planning system overly influenced by those protecting their house prices restricting new land for housing coming on the market – yes
Yes and ALL THREE AT ONCE in a system.  No good can be financialised unless it’s rentier income is predicted to rise in the future.  No rentier income arises in any good unless there is some restriction, physical or regulatory, on its production, and the production of land zone for housing is restricted both by space and regulation. Indeed I would go so far as to say that there is increasing evidence and theory  to suggest we are tentatively understanding the interrelated roles that space and regulation play in the capitalist space economy and the production of space.  You really need to understand this to understand the housing market.  At heart its an issue of economic geography, needing to be combined with a sound understanding of capitalist land and growth  economics.  The ‘New Economic Geography’ has attempted this (and got Krugman his Noble – deservedly), but there is no financial system (or money) anywhere in the writings of the ‘Market urbanists’ in their arguments that regulation is the sole cause of house price rises.  Now on the left in Britain we have precisely the opposite flaw from the ‘financialists’. We see in the history of capitalism it is the interrelationship of these factors that often lead to financial crisis, whether it be the Florida land boom of the 20s (and many similar in following years in many us cities) triggering a chain of events which led to the crash of 1929, of the collapse of the fastest growing land market market in the worlds fastest growing city Mekkah – at the same time as an oil price collapse creating instability in KSA, both here and every house price boom when you examine them were built on the backs of people profiting from the fact that consumers had their rights to housing services monoplised and restricted in complex ways, and capitalists quite litterally running out of money and land as physical constraints kicked in. In a future series of posts ill be examining the relationship between ‘filtering theory’ as it is known, planning regulation and financialisation, and backed by empirical evidence to show: A) We really do have a housing shortage and B) Building more homes can reduce house prices C) But this requires new ways of capturing land values and financing building of cities to work and not trigger a new financial crisis. Note:  In this article i’ve kept it simple and not looked at the interrelating rates of changes (elasticities) of various factors such as house prices, credit for mortgages, rate at which land comes on the market and households form and are suppressed from forming. They are all crucial and will be picked apart later.

3 thoughts on “The Financialisation of the Land Economy and House Prices Inflation – Even So Releasing More Land will Decrease House Prices

  1. I agree with your line, Andrew, almost… Financialisation would not have swamped land and real estate as it has without the conditions being there for the capture of this huge share of the social product. But I consider that the conditions are created by private land ownership combined with the form and dominance of our cities —especially London— and that planning restrictions are not the essential ingredient. Planning does, certainly, get mobilised by real estate interests to protect scarcities and to plan and pay for transport infrastructure. You’ll find my version in full at & I think it’s better than Josh and co’s. You’ll detect a Marxist strand in the way rent and land are viewed. Michael Edwards

  2. Since your post is an argument for building more (and Twitter is treating it as such) I should add: (i) building a lot more, in a sustained way for many years would probably bring prices down, other things being equal (ii) who are these capitalist builders who will continue to build as prices fall? (iii) key is to build for non-commodity (non-market) sector, at least in London & SE, to meet most severe needs (iv) changes to demand side crucial if it’s a crisis needing urgent action. Michael Edwards

  3. The late Martin Pawley was onto this back in the 1980s. In his 1983(?) book ‘Home Ownership’ he described how the Chancellor of the Exchequer Anthony Barber, in his 1972 budget – the one that became known as the ‘Barber Boom’ of 1974-75 – facilitated increased bank-lending. But rather than this increased lending going to support industry – which is what the government had expected – it went into housing and mortgage lending.

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