Why property prices go up and what to do - Steve Keens take on the issue

Steve Keen the renowned Australian economist has analysed house price data for the United Kingdom.

 

The problem

“House prices rose on average just 0.25% pre year faster than consumer prices between 1845 and 1979, but all of the increase came between 1960 and 1979, when prices rose by 1.75% per year. But after Thatcher came to power, the annual rate of increase in real house prices increased to 3%.”

 

The cause

Steve Keen identified deregulation of the mortgage market as a factor pushing house prices up. The Thatcher government deregulated the mortgage market resulting in a shift away from Building societies to Banks for mortgage lending. The critical difference here being that when banks make loans, the assets (loans) and liabilities (household deposits) rise by the same amount.  “This causes the money supply to expand, and particularly the amount of money used to buy houses. This expands both aggregate demand and incomes, but most of it drives up house prices.”  Since the policy change house prices have increased 3.5 times more than consumer prices.

 

Deregulation set off a vicious cycle with increases in mortgage debt pushing house prices up, “which encourages more mortgage debt, which causes house prices to rise. Higher prices mean higher collateral for more lending, and rising house prices encourage speculators to buy houses, rather than people who actually want to live in them.”

 

Proposed solutions

Property Income Limited Leverage  (The PILL)

The idea here is to limit the amount that could be borrowed on properties over time to put downward pressure on house prices.  Mortgages would be limited “to some multiple of the rental income that the property being purchased can be expected to earn (whether that’s the actual rental income for a property, or the imputed rental income… it would be reduced gradually over time, until it reached about 10 to one. This would drastically reduce the leverage currently applied to house prices, and houses would cease being an attractive speculative investment.”

 

An Affordable Housing Authority (AHA)

The AHA “would put upward pressure on house prices, while simultaneously making it easier for low income households to buy a home.”  Steve Keen makes the point that many people cannot borrow because their incomes are too low such that banks will not lend them money for a mortgage.  A significant part of the cost of buying a home arises from the interest, which has to be paid.  This makes a substantial element of the total cost of purchase.

 

His solution is the creation of an Affordable Housing Authority.  This would provide funding to borrowers using government created funds, which is where the government gets all of its funds anyway.  Borrowers would repay the principle of the loan over a 25 year period.  The AHA would then sell bonds to the private banks that would get interest on them. 

 

The net result would be that everyone would gain – buyers, sellers and the banks. 

 

Conclusion

Steve Keen has provided a useful insight into why house prices have risen faster than consumer prices and provided a means by which over time house prices would moderate while at the same time buyers on low incomes would be able to afford purchasing. 

 

These policies could be considered as part of a range of actions to address housing problems.  Other elements would consist of changes to the Use classes to control the use of dwellings for second homes or holiday lets; restricting the types of dwellings that developers could build, namely reducing luxury properties; and, increasing the share within the current house building level of social housing.

 

[For a full explanation of this why not go to the link below and also look at all the other papers that have been produced on economics]. 

 

Source

https://profstevekeen.substack.com/