It’s abundantly obvious that Britain’s long property boom is coming to an abrupt and painful halt. Articles such as this from today’s Independent strongly suggest that not only are prices already falling, but there is much worse to come.
It’s perhaps time to start asking the question about what these events tell us about markets and prosperity.
Property price equals wealth?
It is almost axiomatic in large swathes of the media that rising property prices are a good thing, a sign of increasing prosperity. I believe this is nonsense – how can a rapid increase in the price of this most basic of commodities, much faster than people’s pay – possibly be a sign of wealth? If any other essential goes up in price in this way, it’s seen as quite the reverse. Now this is partly because we don’t consume houses – but we do buy and sell them, on something called the property ladder, although the fact that the price of the house we might want to buy in future has gone up means that the increase in wealth is more apparent than real. And we can borrow money against them. But it’s also because there are far more people at any one time who own houses than are seeking to buy one. It’s essentially an illusion of the prosperous.
But there is a social pressure too. Unlike our neighbours in Europe, the British are obsessed with home ownership – it’s part of our obsession with class – and people will take increasingly desperate measures – by which I mean borrow increasingly unsustainably, or even dishonestly, to fulfil the dream of home ownership. And this process is of course self-fulfilling – the price goes up, so the amount that one has to borrow goes up, but so too does the value of the security … until it all goes bad.
Credit crunches and blind stupidity
The recent events – blamed increasingly on what has become known as the credit crunch, the domino-like collapse of world liquidity caused by the collapse in the sub-prime market in the United States – seem to me to illustrate some important facts about the way in which what I firmly believe to be the illusions of market economics are maintained. It should have been obvious that the collapse was going to happen. Increasing lending, desperate borrowing by people who cannot afford to repay in an environment – in the United States in particular – in which real incomes remained static or were even falling – can only lead one way. And add to this a financial system which seems totally dependent on faith and optimism, and the speed and severity of the crash become almost inevitable.
In the circumstances the word “credit” is accurate indeed. What we have is a system in which people who have been sold (not least by themselves) as great experts, manipulators of a fundamentally benevolent system – have shown themselves to be about as understanding of reality as a Roman soothsayer inspecting the innards of a sheep. It’s all puff, all desperate blind faith, with no underpinning whatsoever. In most other areas of life, it would be called sheer abject stupidity – but when one calls oneself a banker and wears a pinstripe suit one seems to be able to get away with stupidity more easily than most. (But not more easily than the legions of journalists, TV programme-makers and pundits who have wittered on for the last few years about housing booms). There is a whole industry – an industry built on an edifice of epic stupidity – that has been building all this up as wealth.
Inflation, inflation, inflation
As any economist knows, there is a simple word for what has happened: inflation. And it’s no less inflation for not being included in the official figures. And we know what inflation does; it creates illusions.
The bursting of the bubble is wholly predictable by anyone with the slightest understanding of the basics of economics. The fact of what has happened over the past few years is that the commentariat has taken leave of its collective senses. It has simply praised the workings of the market, without giving a thought to the consequences, and has shown a pitiful inability to engage with reality.