It’s the housing market, stupid

Thanks to @PeterBoettke on Twitter, I found these articles by Vernon Smith (an economics Nobel winner) and Steven Gjerstad arguing that the housing market has had a central role in the 2000s bubble and subsequent crash, because of its importance to household and lenders’ balance sheets. The first article (of 3) suggests that the Taxpayer Relief Act of 1997, which exempted homes from the capital gains tax up to $500,000, might have helped to trigger the bubble in house prices that ran from then up to 2006. The authors suggest:

Proposition 1. Severe economic recessions have their origin in joint household and bank balance sheet crises.

Proposition 2. The Great Recession is an example of a housing boom-and-bust that devastated the economy – as is (Proposition 3) the 1930s Depression.

Proposition 4. Monetary policy is ineffective in a balance-sheet crisis and so is government deficit spending for the same reason (which is that both operate on income flows at a time when households are repairing balance sheets).

Part 3 is still to come, but the articles are based on a recent book (which I’ve not read), .

[amazon_image id=”0521198097″ link=”true” target=”_blank” size=”medium” ]Rethinking Housing Bubbles: The Role of Household and Bank Balance Sheets in Modeling Economic Cycles[/amazon_image]

This struck a chord for two reasons. One is that Kate Barker’s new book in the Perspectives series, , also emphasises the way the housing market drives the economic cycle, and has as one of its central recommendations capital gains tax on primary dwellings. She, of course, was a long-serving member of the Bank of England’s Monetary Policy Committee and also authored two landmark reports on planning and the housing market for the Treasury.

The other reason has been my growing conviction (over the last two books,  and ) that economists and policymakers have paid far, far too little attention to assets in general. But perhaps people in general have become a bit less short-sighted? It would help explain the growing disillusion with politics by the next day’s or hour’s headlines.

[amazon_image id=”1907994114″ link=”true” target=”_blank” size=”medium” ]Housing: Where’s the Plan? (Perspectives)[/amazon_image]


Housing word association

The week between Christmas and New Year is always a wonderful time for reading, both books and catching up on the wealth of articles bookmarked in the busy weeks before the holidays. So I’ve had time to read a new London Review of Books essay by James Meek about housing in the UK. Or rather, the housing crisis, as the title has it, in what has become the automatic word association.

As the chart in the article makes perfectly plain, there is a crisis of inadequate supply, on a scale that in the past was addressed by some substantial policy interventions. I am absolutely not a political expert, but it does seem to me that housing is one of the basics that voters will care about – something Margaret Thatcher as well as Aneurin Bevan understood perfectly well.

The Meek article ends with a quote from Julia Unwin of the Joseph Rowntree Foundation: ‘At the turn of the 20th century, the free market had provided squalid slums. We undoubtedly face the re-creation of slums, the enrichment of bad landlords, the risk of people being destitute. Beveridge had soup kitchens. We have food banks. We’ve got something that does take us back full circle, a deep divide in way of life between people who are reasonably well off and those who are poor. There’s always been a difference, but the distinction seems to be more stark now.’

Julia is one of my Perspectives authors, and I highly commend her new book  It seems to me spot on in identifying the emotion of fear – fear of becoming poor, fear of poor people – as a barrier to doing anything about poverty.

As it happens, I’ve also commissioned Kate Barker to write a Perspective on the housing crisis, due out later this year. Kate was the author of two authoritative reports on planning and housing a few years ago, and her recommendations in the run up to a UK general election campaign will be essential reading.

[amazon_image id=”1907994165″ link=”true” target=”_blank” size=”medium” ]Why Fight Poverty? (Perspectives)[/amazon_image]

There are a few other books around about housing. I’ve read Neil Monnery’s Safe As Houses which gives a very useful historical and also cross-country overview. A bit old now, but excellent on the economic analysis, is David Miles’s . David is on the Monetary Policy Committee and no doubt paying close attention to the current house price surge and mortgage conditions.There are some excellent blogs too – Alex Marsh writes one, Jules Birch another.

[amazon_image id=”B00FOU4GLA” link=”true” target=”_blank” size=”medium” ]Safe as Houses: A Historical Analysis of Property Prices (Paperback) – Common[/amazon_image]


Class, housing and the economy

Lynsey Hanley, author of , was one of the speakers at the Festival of Economics in November. I just read her book, which is terrific. It restores to centre stage the key issue of class in understanding British society and the economy – and in thinking about the challenge of tackling embedded poverty, which is almost always located in these specific areas of housing we call estates. (Funny to think their name must have originally meant to evoke the arcadian idyll of country estates.)

[amazon_image id=”1847087027″ link=”true” target=”_blank” size=”medium” ]Estates: An Intimate History[/amazon_image]

I’ve long thought we talk too little about class in the policy debate. Take schooling, for example. Children at London’s schools on average now have higher attainment than the English average; but I’ve lost count of the number of middle-class London friends who claim to have opted for private schools for their children because they’re worried about their education. Nonsense (I think) – they’re actually more worried about the social contagion of mixing with working class children. Nobody is entitled to call themselves left-wing or progressive, in my view, if they opt out of their local state schools, that is opt out of their community. As Estates points out, they key failure of the education system has been the low expectations, on the part of teachers and politicians alike, of what children from low income families can achieve.

Lynsey is brilliant in writing about the effect of the physical environment of post-war council estates on their inhabitants. “It has insanity designed into it,” she writes of the example of the Wood estate in Birmingham, where she grew up. Estate inhabitants have worse health, including mental health, lower life-expectancy, higher risk of drug abuse and unemployment. The book describes the interaction of the dreadful design of the housing, using poor quality materials and not maintained, with the evolution of housing policy. In particular, the Thatcher era sale of council housing, with local authorities forbidden from using the proceeds to build new homes for rent, meant the rump of unattractive estates were quickly filled with the ‘problem’ families. They became isolated locations for one class only, the underclass. Their downward spiral was then inevitable – from the inner city slums of the Industrial Revolution to the ‘slums in the sky’ tower blocks, whose inhabitants above the 5th floor are likely to be on benefits and members of an ethnic minority.

As she notes, Thomas Sharp in his 1949 book  was clear about the danger of one-class communities – he described them as “social concentration camps: places in which one social class is concentrated to the exclusion of all others.” Add in the absence of amenities – shops, pubs, parks, buses – and they became the exact opposite of the Jane Jacobs ideal of a vibrant urban community (in ).

Of course, one challenge in post-war housing policy was the shortage of housing, given strong demand and planning restrictions. (I think that Lynsey en passant assumes too readily that all of the green belt has to stay sacrosanct – only 1.5% of the UK’s land area is built on, only 2.3% in England – see also Kate Barker’s excellent Review of Housing Supply and , and  by Paul Farley and Michael Symmons Roberts.) In the immediate post-war years the shortage was so acute that many returning servicemen had to live in prefabs – as my parents and aunties did for some years.

My auntie and uncle, cousin and big brother, outside the family prefab

The UK’s housing crisis is still acute, although now middle-class young people too cannot easily afford to buy a first home, and many middle-class as well as working-class families will struggle to pay their mortgage if interest rates ever go up. Despite the sluggish economy house prices in some areas have continued to rise, so pronounced is the shortage, while other areas have a surfeit of homes to buy and unmet demand to rent. This market does not work at all well. It also destabilizes the economy as a whole. One day, one of the political parties will see an opportunity in this. But it is a huge challenge too.

I highly recommend . Good reading alongside Owen Hatherley’s (I’ve not yet read his latest, ), as well as the other books referred to above. And I just bought  by Owen Jones, another book about the neglected and disparaged working class.

[amazon_image id=”1844678644″ link=”true” target=”_blank” size=”medium” ]Chavs: The Demonization of the Working Class[/amazon_image]