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July 9, 2021 - 7:00am
The news that private equity firms are buying up residential property has angered a lot of people. In a bidding war with the money men, ordinary people aspiring to become home owners don’t stand a chance. It is a perfect example of how big corporations are allowed to distort markets, crushing individual interests under the weight of their immense purchasing power.
However, it’s not just the big investment companies they’re up against. Central banks — which are meant to act in the public interest — are also helping to drive-up property prices. Why?
The culprit here is ‘quantitative easing’ or QE. Essentially, central banks like the Federal Reserve in America and the Bank of England create money out of thin air and use it to buy up government bonds. Artificially increasing demand in this way lowers the cost of borrowing — thus enabling cash-strapped governments to borrow more.
However, in order to stimulate the wider economy, QE is also used to buy up corporate bonds and other private sector assets. Again, the idea is to reduce borrowing costs — in this case, for businesses. If employers can keep going through tough times then, hopefully, we’ll avoid a 1930s-style great depression.
All this comes at the cost of market distortion. A particular problem, noted by John Authors in a briefing for Bloomberg, is that central bank purchases include mortgage-backed securities:
It’s a really good point. While a crash in the housing market would be disastrous for the post-Covid recovery, there is not much chance of that happening right now. Not even Covid has been able to halt the inexorable rise in house prices, so why intervene to pump even more money into the system?
In the UK, the Bank of England also uses QE to purchase corporate bonds — and the list of eligible bonds includes those issued by a number companies in the “property and finance” sector.
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SubscribeI cannot understand, apart from vested interests why foreign buyers are allowed so easily to buy UK property and thereby increase demand. I think getting young people on the housing ladder should be the governments key priority and will ensure they have a stake in society, build stable communities and help them plan for a family.
Every day, theory after theory is churned out as to why house prices go up. Most are wrong. Peter is right, that it is a function of supply versus demand. Demand goes up because of cheap money from central banks, yes, and from numerous other things such as increased expectations and general rise in wealth; but it also, and primarily, goes up because we have more people in this country. We thought we had 3 million EU citizens here; turns out we have at least 6 million —and many more from the rest of the world. You can’t have lots of immigrants and not expect housing demand to shoot up.
The real problem is, however, supply, which is utterly constrained by regulation and societal attitude. Planning permission and NIMBYism is one thing, but it’s also very difficult to get permission for, say, Japanese-style tiny starter residences in city centres. Landlords are demonised so are put off from creating extra housing. Buy-to-rent is legislated against taxwise. Property developers are presented as greedy villains so cautious about a building more. All this as part of the narrrative against ‘capitalism’ . If you don’t recognise that those who supply housing are doing a societal good and should be praised not excoriated, encouraged not legislated against; and if you fail to find huge numbers of sites to give planning permission, so as to house the millions of new residents of this country, you come up against the inexorable fact of demand massively outstripping supply and the only certain thing about what happens then is that house prices go up, up, up, taking more and more of people’s income. The only thing that will stop that is a significant rise in interest rates leading to massive numbers of personal defaults as people fail to be able to pay for their giant mortgages. But meantime our politicians and pundits should take an elementary economics course teaching about demand, supply and the price mechanism.
Fair points as far as they go, but housing supply is also dominated by an oligopoly of big builders, who very often don’t build out the sites they have which DO have planning permission.
I don’t think any political party is brave enough to address this.
Too many people have taken on heavy debt on the assumption that either their house sale value will increase inexorably or that interest rates will stay low, or both.
The (younger) ones who can’t get on the housing ladder are inclined towards populist leftwing views of price controls or some other form of government coercion.
The (older) ones who were hoping their house would pay for their pension or old-age care don’t want prices to fall either.
This is happening in the UK too, and is what happens when governments capitulate to those who shout the loudest.
For as long as I can remember, there has always been a noisy minority insisting that house prices were about to crash, or needed to. This was the case even during the long slump of 1989 to 1996, when there were people insisting the market needed to fall more. In almost every case, the party who predicts a crash does so not because one is objectively likely, but because they want one. They failed to buy in earlier, and now need a crash in order to do so, at the previous cheaper price.
Who they blame for this situation changes over time – the Chinese, yer Tories, Jews, Bilderberg, oligarchs, Mark Carney, and so on – but buy-to-let landlords became a favoured target. If landlords could be forced to sell, the houses wouldn’t disappear – their tenants would simply be replaced by owner occupiers, went the argument.
So the government swallowed this and has been attacking landlords for about 10 years now, with the result that they are exiting the sector and reducing the rental supply. This is exactly what the “crash trolls” and landlord-haters were looking for, but has it brought about the desired price reduction? Have tenants seamlessly become owners?
Reader, of course not. And here’s the rub. You can get fourteen tenants into a five-bedroom house, but when the landlord sells it, it will be to a family of probably only five. So there is one fewer property to rent, hence a net nine evicted tenants looking for a new rental in a rental market that has just shrunk. The occupation density “exchange rate” between renters and owner occupiers is not one for one. It’s more like four for three, meaning the rental sector, if somehow sold to private buyers, would house 25% fewer people than it does now. Not only do tenants not get to become owners, but their rent goes up, thanks to policies they thought they wanted.
What now seems likely to happen is increasing corporatization of renting, and its domination by major corporate landlords as they move in to grab a juicy opportunity created by successive government mistakes. So in future, if you miss your rent, not only will your corporate landlord evict you, but you will also never be able to rent privately again. You will find that you agreed, at the outset of your tenancy, that your payment history can be shared as a reference among all such landlords; and none will have you.
I don’t know what the solution is, but it certainly isn’t more state interference; meanwhile, I am very glad I am long property.
Interesting point, Jon:
“14 people in a 5 bedroom house” doesn’t sound good if it’s accurate …
5 bedrooms plus 2 receptions = 7 lettable rooms. If let to couples, that’s how you get to 14 people.
There are almost no circumstances in which that house will be occupied by more people as owner occupiers than as tenants. The maximum number of owner occupiers is probably 6, i.e. parents in one room and 4 kids in the other 4 bedrooms. The minimum number of tenants would be 7 people.
BTL actually staved off and mitigated a housing crisis by increasing occupation density and using the existing stock more efficiently. Post-BTL we either get the crisis after all in the end, or someone with the social conscience and compassion of Amazon or Google comes along and fixes it their way. Facebook Homes, anyone?
I get the maths – but it’s seems shocking that we have got to a place where reception rooms disappear and bathrooms have become multi-family.
I see it as a reality of creating a demand (via immigration) that can never be met with a civilised solution.
The piece you are responding to was about house prices not rents. If landlords were selling up then rents would increase and house prices fall as supply increased.
My point is that landlords were accused of having caused house prices to rise by buying up the stock, supposedly. In fact the stock did not change and they just filled it more efficiently. Drive out smalltime landlords and you get what we’re now starting to see, which is corporate landlords. If anyone thinks they’ll be better off renting from Amazon Housing (or wheover) than from Mrs. Miggins, they’re in for a rude bloody shock.
Why does this work so much better in Germany and other countries? They do indeed have big institutional landlords.
Landlords aren’t villains, but there is too much of a culture of gaining the benefits while not being too willing about the obligations.
An example of someone close to me, she was complaining about her tenant wanting his boiler fixed quickly. This was in the winter. She, the landlord, was on a foreign holiday at the time! How nice for her
This sort of thing has to be expeditiously sorted by the landlord, employing agents if necessary.
Great summary thanks Jon.
Cheap and too abundant credit is the cause of property booms. When building societies had a near monopoly of lending for domestic property they applied strict income to borrowing criteria. They were also funded by their investors savings. Both of these acted to dampen any exorbitance in house prices. When I bought my first property I asked the building society I had saved my deposit with for a mortgage. The sum I wanted was well within the multiples of my income however the building society had to inform me they had run out of money. My mortgage could be granted but I would have to wait about six weeks while the society’s investors deposited they spare fivers. It was a fairly common experience in those days characterised as a mortgage famine. Nowadays money is created by some witchcraft on a computer screen and there is no restraint on the money available to fuel an overheated market.
The increase in equities and hard assets is much about money depreciation. This is never mentioned really. The fiat currencies are dropping value as creating more happens.
Houses are not that high in ‘REAL’ terms, the $ and currencies just worth less. The huge gains in the Stock Market, the huge rise in the high cost of Bonds (cost of bonds is inverse to interest – even though that is counterintuitive), the increased shipping, energy, commodity prices
THIS IS BECAUSE THE CURRENCIES ARE DEPRECIATING.
Say you live on an island and there is about $100,000 in money circulation. This is enough the fishermen get paid for their fish, the farmer for his meat and grains, veg, the butcher to do his job, the carpenter to do his, the seamstress to do hers, and so on. Add in another $400,000, there is not 5X fish, meat, carpentry, just what was a $1 of fish is now $5.
that is a really thought provoking concept Sanford. However wages are not going up much so there must come a crunch point when the average wage earner simply wont be able to pay rent/mortgage. In south Brisbane you can buy a nice house for 400k$. they have lots of room and plenty of houses at the mo-so no currency depreciation there ? – So I guess there is that ‘depreciation’ only in certain areas vs generally – and maybe the reality is that people will have to move to those areas and thus perhaps lessen the investment/gambling concentration effect of a commodity (houses) being pushed up due to scarcity-in a kind of levelling effect ie JUST MOVE AWAY FROM THE HIGH PRICE AREAS. Resettle ,maybe with family, in a sensible area and escape the speculators rather than buy into (literally) their get rich scheme……
It’s one cause, David, but if the population were stable, credit cost fluctuation would cause price fluctuation within relatively limited bounds.
The elephant in the room is the UK population rising by 10 million, 18%, in 20 years. Not only were no special steps taken to accommodate the incomers, but those who pointed out this wasn’t an unalloyed good were gaslighted (told it wasn’t happening) or smeared as racists.
Keep fighting the good fight Peter. QE must have been the biggest elephant in the economic room ever since the taps were turned on in 2008/9, it’s astonishing how there’s still so little discussion of it.
Great article. But instead of a small, sidebar note of 500 words or so, I wish Unherd would publish more full-length articles about the current economy.
Unherd does not ‘DO’ economy, which is why I try… You inspired me to write on it again BTL – than and the fact the only article to reply to this Saturday was the very worst article ever printed here, just a loathesom bit on the end of the world done in a ‘Light harted’ stream of consciousness.
“Awaiting for approval” The censors work overtime on my posts – oddly when they put up the paywall one of the reasons was to ‘pay for the costs of moderation BTL’… haha, and all they do is bin it because of key words, and maybe my name at the top.
Or in my case because I exposed a nonsensical piece of feminist tosh and she complained to the moderators. It’s the ultimate downvote.
This makes too much sense to be implemented. Good luck with that.
Ok, amateurish covering of big issues, but a couple good points.
“As in any market, house prices are a function of both supply and demand. To make houses more affordable we need to increase supply by building the things.”
There is a LOT more to it than that! And by the way China built entire new cities which will never be lived in, and Many of millions of apartments and houses which will sit empty for ever, and prices never did anything but go up. (they did this for many bad reasons, one for infrastructure spending to stimulate, a madness China has totally taken up – AND because Chinese LOVE to invest, being pathological savers, so they buy dwellings as pure speculation as mortgage finance is made available, and other things, houses where no renters want them…)
But Here Is How I See IT:
Tech is Deflationary (prices drop, Thieves no longer steal TVs as they are so cheap). Automation replaces physical workers, software replaces office workers, prices of goods and services drop. Say at 2.5% a year. This is increasing FAST, covid response kicked this into top gear.
Our system is based on DEBT, especially after Breton Woods, 1971, $ Reserve Globally) $300,000,000,000,000 Three hundred TRILLION global debt. All fiat ‘currency’ is debt, it is not a money like gold in some big chest in the vault, but tokens of debt someone holds. Zero interest and inflation are the only way this may be paid – or it is global DEFAULT and society destroyed.
Debt is not repayable in DEFLATION, as the money already spent, and now Debt, is worth more than it was when borrowed – Deflation makes the currency worth MORE every year, debt harder to service as the real value of the debt is increasing.
This is why INFLATION has always been needed – it devalues the value of currency, and thus decreases the value of the debt. Debt just inflates away. My Parents bought an excellent house in London for 10,000 Pounds in 1970. The debt was inflated away, but the house value did not. Inflation is a TAX on the population, a very regressive one as the super wealthy own APPRECIATING ASSETS (like that house, growing in value) so win from inflation. Regular people own savings, bonds, pensions, and so lose to inflation (and wages have to always rise to keep up, if they do)
National debt means INTEREST on the debt must be zero – if it is to inflate away. Inflation and zero interest means NO SAVINGS, as they inflate away. Pensions are toast, people cannot safely save in Bonds as REAL INTEREST is negative! (real interest is interest – minus inflation. (now, 10 yr Treasury bond pays, 1.45% interest, inflation = 5%, real interest = Minus 3.25%, so your savings are less every year!) So people HAVE to invest in risk, the Stock Market, and hard assets (housing).
The Central Bank Debt is all to REDISTRIBUTE MONEY. They borrow from themselves, spend it, and then inflate it away. They spent, and inflation is the tax they use to repay it – EVERYONE PAYS this tax, (but the super rich.)
OK so this lays groundwork… will finish next post if this gets past the auto-mod s.
Money printing increases money supply = which is INFLATING the supply, so the Covid Response insanity meant global money creation of, say, $40,000,000,000,000 globally . In USA the M2 (money as cash or bonds, or things which can be converted to cash), went up 25% in 2020!!! 12 Trillion $ created in fiscal and monetary stimulus. This inflates the price of stocks, Bonds (that means they get less interest) and real assets as the money MUST go somewhere.
This is Inflation causing. Prices are rising.
But here is the trap the world is in – Tech is deflating prices 2.5%, reducing prices and costs, but the debt cannot be serviced without Inflation! So so much money has to be printed to Overcome the 2.5% deflation, AND then create 2.5% inflation on TOP. So 5% of inflation must be created (2.5% deflation + 5% inflation = 2.5% real inflation) by money creation – AND interest be kept ZERO! The USA – FED, Powell, wants 2.5% real inflation he says.
THIS CANNOT SUSTAIN.
The Central banks in all the world must keep printing to keep inflation, and large amounts to also overcome DEFLATION – AND must keep interest zero to service the National DEBTS. Normal people are toast, savings in a safe way gone, all must now speculate to get returns past negative, and a crash WILL come in the stock Market (Central banks are wildly propping it up). (Inflation, remember, is a tax on all)
Anyway – there is lots to say on this all – but this is about house prices, and the perfect storm.
Zero interest at Central Bank level, so almost free money, money which has interest in business, real estate, loans BELOW inflation! Then inflation to wash the debt away. Then Trillions of $ (Pounds, Euros, Yuan, Yen) money must be printed and it MUST find a home somewhere, and real assets are a place it seeks….
But the second thing is THIS cannot keep on keeping on – it is kicking the can down the road… UBI will be coming soon, JUST as a way to keep printing money! To keep the inflation game going, and zero interest, so Global debt can be serviced and inflated away in a Real Deflation Tech economy.
You must Increase Debt to make inflation so you can Service your Debt!!!!!! Wild Times! haha, paradox….
Two irresistible forces fighting it out, inflation and debt – deflation. Meanwhile we get all the things going on, but at some point the paradigm must change, and it may be very bad.
Or so goes my theory – I could be totally wrong. I am a conspiracy loon.
As a very small house builder I have a lot to say on the issues of increasing housing supply – that is also problematic.