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Monday, 12 April 2021


Why the Bank of England authors are deluding themselves (and their bosses and the Treasury).

To repeat what they said

 No, house prices are not a credit-fuelled bubble. Thanks to the long-run in interest rates (and rising incomes) house-prices and rents are actually a bit cheaper than you’d expect.”

The source of this amazing conclusion is a Bank of England paper “UK house prices and three decades of decline in the risk‑free real interest rate” by David Miles and Victoria Monro. [M&M] So this is a credentialed paper from an authoritative source. David Miles is a professor at Imperial and on the BoE ‘expert committee’. This is the credible, logical, rational voice of economic orthodoxy!”

THIS DOESN’T FEEL RIGHT — houses are, if anything, a bit too cheap — SO WHY IS THIS WRONG?  Let’s go through it.

M&M (the authors Miles and Munro) falsely  assume the British house-buying and -renting public are indifferent between renting and buying. Wow! So much for Thatcher’s great Home-Owning Democracy! Of course the British love owning their homes. An Englishman’s home is his Castle, as the saying goes.

Now there is a place where the inhabitants take a rational (in economic terms) decision between renting and buying. That is Germany where they differ in two significant ways:-

         —NO house-price inflation. Look at M&M’s Fig. 2, In Germany incomes have risen just as much, or more than in the UK and interest rates if anything have generally been lower than here as well. M&M fail to explain why this should be, apart from vague comments about elasticities. If they can do it, why can’t we?

Highly regulated tenancies. Not for them the ‘evict-on-a-whim’ landlord-friendly situation described by Chloe Timperley in Generation Rent.

Another unstated falsehood by M&M is to assume that Housing is a normal consumer good. Actually, Shelter (Housing) along with Food and Clothing are not just consumer items, they are basic necessities. Thanks to the efforts of entrepreneurs and engineers food and clothing are cheap and plentiful. It is as Galbraith once said “The greatest failure of Capitalism” that housing, decent or otherwise, is beyond the reach of a large part of the British population because it is too expensive. That House Prices should be stabilized or reduced is a consequence of it being  a basic humanitarian necessity.

Also un-commented on by M&M is the strange anomaly—a product which has tripled its (real) price while the quality of the product is the same.

What sort of house you get for your money in 2021 is the same, often worse than in the 1980s. Most (80%+) of house sales are of second-hand properties so many are from the 1980s or older! New-builds are notoriously getting smaller. Compare this to every other consumer product. Invariably they becoming more technically capable year-on-year, and get cheaper! It’s called ‘Progress’, so why doesn’t it apply to the housing market?

What M&M fail to point out is that Housing has become more of an ASSET class rather than a consumer product, and a different form of economic analysis should be applied. This is why we have a Housing Crisis. Housing needs to become more of normal consumer item, less of an investment vehicle.

As Steve Keen (2021) puts it (why asset markets such as housing are not like ‘normal’ consumer goods markets

Once the role of credit in aggregate demand is understood, it’s easy to extend this to asset markets, in which credit plays a major role. With mortgage debt as the main means by which houses are purchased, there is a causal relationship between new mortgages—or mortgage credit—and the house price level. 

There is, therefore, a link between change in mortgage credit, and change in house prices (Zhang and Bezemer 2014). The same logic applies to change in margin credit, and change in stock prices. The correlation between change in mortgage credit & change in house prices since 1971 is 0.64, while the correlation between change in margin credit and change in Shiller’s CAPE index since 1990—when margin debt began to rise again after 50 years of being below 0.5% of GDP—is also 0.64.” (p40  The New Economics: A ManifestoApril 2021 pre-pub pdf) 

Figure 11: Change in household credit and change in house prices (Correlation 0.64)


This type of borrowing for house-purchase that drives asset price bubbles, and does precious little benefit to benefit society. We need means by which this kind of borrowing can be discouraged, while lending for productive purposed can be enhanced.

To be fair M&M realise that the usual nostrum for solving the housing crisis – ‘Build More’ – is a non-runner.

(on p4) “But low supply elasticities  - the focus of a great deal of attention [they mean sluggish housebuilders] – could not in itself account for more than a part of the rise in prices. Were the supply elasticity for new house building in the UK much higher, the rise in house prices generated by very low interest rates would likely still have been significant.”

 Inheritance spreads the wealth?

M&M contend that so long as we leave more than we have inherited, the accumulation of 'equity' benefits Society.

Housing as an asset—not as good as it might be

I have explained this elsewhere. You may withdraw equity, but that's only borrowing, usually at penal rates of interest. A house is not very 'fungible'--you either sell the whole thing, or you don't. Unlike shares is is difficult to sell part of a house.

Asset-status creates incentives for a backward house-building industry

The last thing the home owners, esp the owned-mortgage-free lot want to avoid is a flood of newer cheaper better houses. The house-builders are happy to comply, and provide their customers exactly what they want.

Hoarding as a rational strategy another reason why Build More won’t work. Good article in Guardian about landlords hoarding property, plus some silly suggestions for elderly home-owners as a ‘cure’ Landlord power is not just bad for tenants. It harms homeowners, too

But what is the asset that house-buyers crave? It is the value of the PLOT of course Unless we focus on plotvalue there is no way out of the housing crisis.

The Death of the Home-Owning Democracy, no more spreading the wealth. Dying anyway rate of O-O down from 71% to 63% ? So much for no bubble, reasonably priced houses! I’m going to look more closely at this shibboleth. Is the HOD such a good thing? It’s obviously good for the Tories as ?greedy rentiers vote Tory as the protector of unearned wealth?

Householders indifferent between owning or renting? Piffle


from IpsosMori 2017 election. How Britain voted in the 2017 election | Ipsos MORI. Home owners including those who own outright are still in the majority.

Percent by tenure in 2018. Total housing stock 23,534,000 homes, of which

Owned outright            34.4 %

Owned with Mortgage   29.3 %

Social Renting              16.9 %

Private Renting            19.4 %

 (Source English Housing Survey data on tenure trends and cross tenure analysis - GOV.UK (

 The Reference for this blog Miles, David &  Victoria Monro (Dec 2019)UK house prices and three decades of decline in the risk‑free real interest rate Staff Working Paper No. 837 Bank of England


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