What’s going to happen to house prices over the next two years? Most people think they'll collapse. They might - but I don't think they will.
Why? Well, let’s start with looking at where money itself comes from, and the money that goes into housing in particular. Despite what some think, it’s not mostly printed by the Bank of England: in fact, banks notes are a tiny percentage of our money supply. The vast majority of money in our economy - well over 90% - is loaned into existence: in other words, it starts off as credit, being extended by a bank to a borrower, created out of thin air by the bank on a computer screen.
Now, imagine you’re a banker. Think of it! The money! The power! The sheer sexiness of staring at excel spreadsheets all day in a very well-cut suit….. mmmmmm…… crumbs I miss being a banker. Anyway: now imagine you have to lend £250,000 pounds to meet your bonus criteria, and you have a choice - you can lend to:
(a) a person to buy a house
or
(b) a new start-up business.
Option (a) takes all of ten minutes to do due diligence on - just look at a few pay slips, and the house valuation, then pop out for a long cocaine-themed lunch - and best of all, if it goes wrong, you can confiscate the property, or force them to sell it and get the money back that way.
Winning!
Option (b) however, is quite tricky: how on earth are you to judge whether their business plan is going to work or not? I mean you’re a banker for Chrissakes, not someone who knows anything about commerce or money. And what if it goes wrong? You’ll just lose the £250,000 and have nothing to confiscate. Crumbs. I think I need a long lunch to recover from just thinking about it.
Accordingly, most bankers would far rather lend into the housing market than to productive businesses - and the statistics bear that out: 60% of new bank lending goes into residential housing, less than a third into new businesses.
Keep that in the back of your mind.
Now imagine you’re a politician, with an election coming up - or maybe you've just won one and need to get things motoring. A politician! Think of it! The power! The erm, lack of legitimate sources of money. The sheer sexiness of….erm….legislating, erm….. Anyway: you need to get GDP expanding, as otherwise you’ll lose and have to go back to being a banker.
Now, expansion in GDP can be driven by three things: (i) productivity growth, (ii) population increase, or (iii) debt.
Take the first driver of growth, productivity: this has been flat in the UK since 2005. Since that year, we have been a net energy importer, and combined with a current account deficit, this element of growth has effectively stalled. Unsurprisingly, as you can’t escape physics: the correlation between energy and economic productivity is approximately 0.99 - and if you need to import energy, you need to buy it with money you’ve earned in exports. Which we’re not. Hence we’re stagnating. Simple (FYI this, not the fact she liked being nasty to northerners, is why we started growing when Thatcher came to power: we happily at the time found large amounts of oil and gas in the North sea. Which is now running out…)
Ok, so option (i) is not going to help.
What about option (ii)? Well, importing more and more of the world every year to boost GDP is increasingly off the cards: people are starting to work out that per capita GDP is partly negatively correlated with this, and if continued, it might lead to a British Trump. Or a second one, depending on your viewpoint.
So this leaves you option (iii): debt. Lots more of it. Let’s pump more into the stagnant corpse of the British economy so it makes a “wheeeee” sound as it leaks out, which in the short term voters will mistake for actual, real, growth, not just debt-fulled GDP expansion. This is basically all you have left at this stage.
Combine this with a recent collapse in money supply after the unprecedented interest rate hikes: the one thing that a government fears, other than scary monsters, is deflation - as given the unprecedented debt levels we have as a country, this could easily spiral into outright default, which is unthinkable. Hey presto, you have the perfect rationale for the government to initiate a final, gratuitous debt-binge, before the whole thing inevitably collapses, like a banker on cocai….(ok, might stop that metaphor before you get the wrong impression of my former life in banking).
So, as a politician, how are you going to do this, and get the debt pumps flowing so all those lovely votes will flow after them? Well, by leaning on banks to lend. And where will this debt go? Well ultimately obviously into lunch-expense accounts for bankers, but first…into housing.
There could be a major geo-political event that means this doesn’t happen - this process is not inevitable. Xi Jinping might fancy an extended summer holiday in Taiwan (and take the People’s Liberation Army with him as a special treat - good beaches apparently). The Houthis might decide to invade Wales. New Zealand might invade Australia. Or the bubble may pop through subconscious political hari-kari. This argument does suppose that politicians have some capacity for rational thought left, which is not a given. Who knows.
House prices will go down eventually. Our fiat current currency system is going to collapse - it’s simple mathematics. But, what’s my short-term base case - ie what is probably going to happen to house prices in the next two years? Well, they'll probably go up.
And why? See above.
