National Delusions

Every society and cultural no matter how sophisticated or advanced seems to engage in magical hinking about certain issues. Evidence and reason will not shake that particular belief, which is woven into the body politic as defining myth. Take America, for example, where a majority of its citizens believe that owning guns is somehow part of citizenship. The fact that these guns result in high rates of homicide, suicide and accidental death, whilst preventing no crime at all will make no difference to a believer.

Citing the Second Amendment is a strange defence, because the American Constitution its is original form sanctioned slavery. It was then changed in the 15th Amendment, so there's no reason why a clause from the 18th century that related to breech loading muskets couldn't be altered in a world of semi-automatics with hollow point rounds, that can fire 17 shots in 2.5 seconds.

Australia used to have very liberal gun laws, but following the Port Arthur massacre in 1996, it changed the regime making it much harder to own a gun. There hasn't been a mass shooting since. But the American belief in the virtue in gun ownership, which seems so strange to the rest of the world, is not a rational idea that can be defeated by logic or evidence - it's a form of collective delusion.

In Britain, we can mock those crazy gun-toting Yanks, yet we too are in the grip of our own collective delusion which is just as powerful and viewed objectively may be more harmful and destructive to our lives and well-being. When it comes to housing, we Brits dearly cling to certain ideas that are simply mad. I'm not suggesting that we think houses should be built out of soluble aspirin or without doors; but the assumptions bear no relation to the real world - which is the definition of a mental illness.

Judging by the campaign manifestos of all the parties, it seems to be a collective madness which is unlikely to change whoever gets elected. Let's start with the first and most powerful housing myth:

1. High and rising property prices are a net positive 

In any other area of life, paying more for the same product is usually seen as a negative. When you go to the pub and the price of beer doubles, you'd be annoyed. Unless you hold shares in a brewery or a beer company, there's nothing good about a £10 pint, when it cost £4.20 three years ago. If petrol surges in price, nobody thinks that transferring more of our income to petrol-chemical companies and oil producing states is cause for celebration.

Yet when the cost of housing has quadrupled in real terms in the South East in the past decades, weirdly many of us think that makes us richer. In this instance, some of us do in a sense own shares in the brewery, continuing the pub analogy, if we owned property at the beginning of the process. So on paper, the net wealth of a certain percentage of the population goes up and via equity release, those lucky individuals can enjoy a better lifestyle than they otherwise would have donee. Taken overall, however, it should be blindingly obvious that society as as whole is no better off.

There's windfall gains for those who bought property in hot spots 20 or 30 years ago, true. Even if you are one of the lucky ones, the rise in the value of your assets is difficult to realise, unless you have high incomes. Sure you can sell your £1 million London house and buy a street in Wales, but then how do you get to work and how do your children, if they live in the capital, afford the rents which are averaging 40 to 50% of their net income or stand any chance of saving the deposit?

Windfalls are also not normally seen a positive and often attract special taxes. The clue is the name, money in effect falling from the sky into your hands, when you have run little or no risk and done nothing special to earn it. Plenty of people buy property in the UK, many have paid into mortgages for 25 years; you only the jackpot if you happen to live in areas of acute housing shortage.

Think of the alternative scenario, where property prices and rents were much lower. In this world, 20s somethings' disposable income would double, businesses would see in surge in demand and be able to expand more cheaply and the economy would grow much faster. Most people, unless they had borrowed against the inflated value of property would be delighted, so why do we persist in this delusion that high prices are positive?

2. The housing market is a working market 

The housing market does look like a functioning market: properties are bought and sold. But that's about as far it goes. When you look closer, it is a deeply dysfunctional and any other area of economic activity would be considered broken beyond repair. Normally when there is a shortage of supply, prices rise which encourages more production to meet that supply and then prices either stabilise or fall. If Sainsbury's kept running out of Dairylea Dunkers, it might raise the prices and then Dairylea would build a huge Dunker factory to meet the surge in processed cheese addicts. Other supermarkets and food producers could bring out clone products, Cheesey Dippers, at lower prices to attract those Dairylea consumers. Tesco might try to outbid Sainsburys for an exclusive Dunker license and so on.

In short term, prices rise, long term, supply increases to meet demand and prices should level off. Of course there might be a chronic shortage of cheese, so prices could stay high for a while and some consumers could switch to other snacks, like olives or those Nutella things with breadsticks. Overall, the market via the price mechanism would match supply and demand.

Not so housing. In the ten years before the 2008 crash, when prices in many areas trebled, the total number of housing completion peaked at 220,00, still well below the numbers required. Currently, estimates are that the UK needs at least 300,000 new homes just to keep pace with demand, instead we are building 142,000. There's something very wrong here, yet we still describe this situation as a market.

In reality, housing is a highly regulated, quasi-state monopoly, because the two raw ingredients for homes are tightly rationed: land and planning permission. Thanks to Green Belt legislation and other regulations, there is a very little land available to build. There's plenty of land, it's just reserved for agricultural use, in some cases left fallow to benefit from EU subsidies. Land prices can often account for up to 60% of the cost of a new build, which is odd when you think about it, because a field is ...just a field. Go and stand in one, there's nothing there, maybe some grass, cows, wheat and various insects. There's no way it's worth £500,000. But as soon as you grant planning permission, the value surges by up to 1000%.

Another peculiar feature of the UK housing market is that despite paying enormous sums of money for our flats and houses, when it comes to the new build, the quality is often poor. The average size of the UK home is the smallest in Europe and it's getting smaller, which wouldn't matter as much if your shoebox was built properly in the first place. But with demand so far outstripping supply, developers can sell any old crap, so why incur unnecessary expense. Near where I work in Archway, they have converted an decrepit sixties office block into flats, the whole process took less than 18 months. As far I can tell, they put some plasterboard walls in an open plan office and installed kitchens - starting prices for these gems: £350,000.

All the evidence points to a market that is unable to meet demand and what supply is created is done on the cheap, with little thought to design or long term value. If you went to buy a new car and it was smaller, less reliable, uglier and at the same time, was twice as expensive than before you'd think you were being ripped off and you'd be right. But the TV schedules are still filled with shows celebrating UK housing.

This brings me to the third and most pernicious delusion.

3. Development is pain-free 

Britain went through the industrial revolution first and has collective amnesia about what the process involved. These days Victorian factories are listed buildings, tin mines are tourist attractions and the massive social upheaval is largely forgotten. Although we do still engage in major construction projects, such as Crossrail, it triggers a wave of public enquiries and local opposition, where the necessary clearance of certain buildings is equated to cultural vandalism on a par with ISIS in Mosul. To build Crossrail, some places had to, including the Astoria at Tottenham Court Road. Now I remember going there as a teenager and there's a twinge of nostalgia when I cycle past the site and realise that it's gone. Yet there will always be a trade-offs in development and it's unrealistic to suggest otherwise. In this case, the national interest of building Crossrail took precedence over a music venue that had seen better days.

Likewise, when talking about housing and current crisis, there's a collective blindness about what the trade-offs involve. Brownfield sites in London are not sufficient to meet demand, which means the only long term answer to expand housing into the Green Belt. Some people will not be happy about such changes, especially if you liked the view of fields from your back window, which is now earmarked for a major development. There is significant body of opinion, usually those over 50 who already own their own homes, who would rather Britain be kept in a state of permanent stasis, as if the whole country were run by the National Trust. You can see why they prefer it that way, they already have a house, in pleasant surroundings. They are the NIBMYS and they tend to shout loudest.

Politicians feed this myth, that there is a pain-free route to development, as if somehow the railways, roads, offices, power stations and houses that are the fabric of modern society built appeared overnight, without annoying any locals. The current situation favours those on higher incomes, with significant net assets at the expense of the younger generation who cannot afford decent accommodation. Something has to give and if we are all into together, the NIMBYS will have to feel the pain, along with the rest of the community.

Sadly though, these delusions are so strong and so widely held, the chances are Britain will continue to build too few homes, too slowly to make any difference. The price for society as a whole is immense: lower growth, lower job mobility and lower income for those under 30. It is a self-inflicted wound that costs us £10s of billions a year, the final tally may even be in the £100s of billions.

Despite the acute housing crisis in the South East, there have been only two major announcements about housing in the countdown to election night. Labour's proposal for a mansion tax will raise minimal revenue and will not cause a single new house to be built. The Tories want to extend right to buy, which is likely to reduce the availability of low-cost housing and again no new homes will be built as a result. Neither makes the slightest bit of sense, unless you consider the three housing myths which dominate public debate.

And we Brits think the Americans are odd for their views on gun control?

Property Prices

The English saying goes 'What's that got to do with price of fish?', which is strange as you'll almost never hear Brits discuss the relative prices of freshly landed mackerel, sea bass or Atlantic salmon. Yet you will hear them debate in forensic detail how much a three bedroom house went for in the next street which wasn't even that nice and the garden was much smaller than the others. In fact, there appears to be an unwritten, binding law in the UK that states when a social gathering of three or more people lasts longer than twenty minutes, the price of housing must be discussed by the group.

True, the mania has abated somewhat since the worst excesses of the property boom, when the TV schedules were filled with programmes suggesting that an easy way to get rich was to quit your job and spend six months renovating a house to then sell at an inflated mark-up to gullible buyers. Apparently, all you had to do add value to any home was put in plastic-looking wood veneer floors, paint everything beige and furnish each room in darker shades of mushroom and fawn. Prospective homebuyers in 2006 all dreamt of living in a home decorated in the style of a Best Western conference suite.

Beigeland

Of course what the programme never showed you was the couple who did not quit their jobs, bought an identical property, did absolutely nothing to it and then sold it six months later for 5% more than the original purchase price, which is what anyone can do in a rising market.

We're now into the fourth year of recession, yet the fixation with property remains strong, which is odd when you consider the following three factors.

1. Who benefits from high prices?

There's one only group of people who benefit from high property prices: those who already own property in a high price area and have little or no mortgage. At the extreme end of the spectrum, The Duke of Westminster and other major land owners get wealthier every year without lifting a finger. But property owners are not all billionaire Dukes; there are plenty of rich retirees with final salary pension schemes, who hit the jackpot by purchasing a house thirty years ago and watching its value treble in real terms.

Kerching!!!!

This unearned windfall gives these gold-plated oldies plenty of free to time in between golf, cruises and visits to their holiday homes, to complain about the state of modern Britain, lecture the rest of the population about the virtues of thrift and sink some of their cash surplus into buy-to-let flats to soak their fellow citizens.

2. Less homes are being built

You would think if the property market worked in any way efficiently, that the chronic undersupply of housing in the South East might lead to... I don't know... more houses? In fact the rate of new build is at its lowest ever, because developers realise that the market prices have far outstripped the average earner's ability to pay for them.

Let's take an example: Upper Holloway, hardly a glamorous neighbourhood, the average price of a four bedroom house is £865,000. So if you were a couple with children looking to buy that house, you would need £86,000 as deposit and a joint income of £250,000 (assuming you didn't already have equity). That's three times the London average, it puts you in the top 1% of earners and your reward for your stellar pay packet, is a house in...Upper Holloway. I'll repeat that for emphasis: UPPER....HOLLOWAY. I'm not singling out that area as being particularly shabby: if you are a fan of fried chicken outlets, Irish pubs filled with elderly alcoholics and plumbing merchants, then the N19 postcode is a veritable idyll.

Street drinkers' choice

If you want somewhere classier, for example Kentish Town (trust me it is in comparison to the Holloway Road), then your house will set you back a further £300,000. Even then you are still in what estate agents like to call 'an upcoming area', which means you are more likely to see Special Brew being drunk at ten in the morning than in a genuinely posh area, such as Barnes.

As far as I can tell London property prices have decoupled from all local economic factors; now the only new homes worth building are luxury flats aimed at the super-rich. And in the midst of the housing shortage, many of these properties stay empty for much of the year. Walk down a ultra-rich ghetto such as Hamilton Terrace, in St John's Wood, nobody's home, ever. Apart from the maid, but she's Filippino and they've confiscated her passport.

3. Prices are supposed to fall during a recession

There is normally one upside in a recession:  house prices, commercial rents and residential rents come down, which eases the pressure on people's disposable income. But in London, prices stay in the stratosphere and then people wonder why the economy is failing to respond, even after £375 billion of quantitive easing (that may of course have made things worse). Many are paying 50% of their net income in rent.

Imagine if the apocalypse came to pass and prices came down by say 20%. A lot of paper wealth disappears; plenty more real economic activity becomes possible. Renters have more money to purchase boutique London gin cocktails served by mixologists in secret bars, complicated hair cuts, skinny trousers or whatever it is young people fritter their wages on these days.  Homebuyers wouldn't have to load themselves with crazy amounts of debt and might have something left over each month to spend on nights out rather than stare at their beige walls and vases filled with twigs, wondering if all the sacrifices were really worth it. (Answer probably not).

   Overvalued property prices suck money from the young and give to the old, they extract wealth from those in employment and give it those who do not need to work: retirees, landlords and investors. They are making us poorer, not richer and the recession goes on...and on...and on....