3 April 2007

House price boom: who benefits?

As with the public debt, private debts also enable those who lend money for interest to extract money from those who are forced to borrow it because they control an unfairly small amount of material wealth. The mania with ever-increasing house prices conceals the fact that, since most of this value will end up being paid for out of mortgage-based debt, it will increase costs for those buying homes in the future. Unto those who have shall be given, and from those who have not shall be taken even that little that they do have. This is the real message of the boom in house prices that is drowned out by the voices raised in celebration of the nominally inflated value of housing stock. If you have already bought your home then what you own is still a home, and unless you are prepared to trade down its financial value is of little interest to you. However, if you are either intending to buy or seeking to meet your need for housing through renting, the house price boom is a disaster.

It is the lenders who benefit from the increasing value of houses, since the increased level of loans allow them to create ever greater amounts of money and then to charge interest when they lend that money to struggling home-‘owners’. The banks incur no cost on creating this money but receive its full value as well as vast sums in interest, hence record bank profits. HSBC reported a 37% rise in pre-tax profit in 2004 to £9.6bn ($17.6bn) for 2004, the biggest ever profit for a UK bank. This followed on from Barclays profit of £4.6bn. (up 20%) for the same year, and that of the Royal Bank of Scotland, which was £7bn. (up 14%).

The focus on the house-price boom has also deflected attention from the most vulnerable in the housing ‘market’, those who rent their homes. For economists ‘rent’ is always a dirty word, since it means gaining value for nothing and in the case of housing the landlord always appears to be using his excess of assets to exploit another’s need for a home. But the rush by those on middle incomes to move their money from the unreliable stock-market and into property has made their situation much worse. The concept of a buy-to-let mortgage automatically implies that the mortgagee of an extra property will set the rent at a level high enough to cover his or her mortgage and other expenses, which means charging a higher rent than a genuine owner would need to. This, combined with the annihilation via government fiat of the public housing sector and the abolition of rent controls, has caused a massive increase in the cost of rented accommodation. Again the most vulnerable are paying for the increasing wealth of the rich.


  1. Has the change from Mutual Building Societies into Banks had an effect?

  2. I don't have data on this, but it is my experience that mutuals were more concerned about borrowers' ability to repay and so stuck long to the three-times-income rule, which must have slowed the boom in debt.