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Why are House Prices So High?

Many of us were told that house prices are so high because there are too many people and not enough houses. While this is true, house prices have also been pushed up by the hundreds of billions of pounds of new money that banks created in the years before the financial crisis.

1. Banks created hundreds of billions of pounds and put it into property

In the ten years up  to the start of the financial crisis, house prices tripled. Many people think this is because there were not enough houses around, but that is only part of the picture. A major cause of the rise was that banks have the ability to create money every time they make a loan. During the period in question the amount of money banks created through mortgage lending more than quadrupled! This lending was a major driver of the massive increase in house prices.

UK House Prices

2. House prices rise faster than wages

House prices rise much faster than wages, which means that houses become less and less affordable. Anyone who didn’t already own a house before the bubble started growing ends up giving up more and more of their salary simply to pay for a place to live. And it’s not just house buyers who are affected: pretty soon rents go up too, including in social housing.

This increase in prices led to a massive increase in the amount of money that first time buyers spent on mortgage repayments. For example, while in 1996 the amount of take home salary that a first time buyer would spend on their mortgage was 17.5%, by 2008 this had risen to 49.3%. In London the figures are even more shocking, rising from 22.2% of take home pay spent on their mortgage in 1997 to 66.6% in 2008.1

Mortgage payments

3. House price bubbles benefit almost no-one

Asset price bubbles and the speculative behaviour associated with them tend to cause financial crises, which lead to lower growth, higher unemployment and higher government debt. High house prices also act as a mechanism for transferring wealth from the young to the old, from the poor to the rich, and from those that don’t own their own home to those that do. Even those with housing don’t benefit massively from higher house prices – after all, we all need somewhere to live, and anyone selling their home will find that on average other house prices will have risen by the same amount, leaving them no better off. In reality, only the banks and those with many properties benefit from high house prices: high prices mean that people will have to take out larger mortgages for longer periods of time, which means more money in interest payments for the banks.

References

1. Source: Bank of England Statistical Database and Nationwide House Price Survey

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  • Simon Thorpe

    Of course, there are some people outside of the banks themselves who have been profiting from this. People who own more than one house will have done very nicely thankyou, as will landlords with multiple properties. It would be interesting to know what percentage of the population is in this position. According to one recent report in the Guardian, the number of second homes is 165,000, which is less than 1% of the 25 million homes in the UK. Hmmm, let’s see. 99% and 1%. Where have I heard that before?

    • ianb

      I’d be similarly interested to know what proportion of the Tory vote has a mortgage/2 mortgages/paid off their mortgage. Assuming with only a dash of cynicism that the Tories raison d’etre is to defend the interests of the propertied class, we might expect it to be a sinificant chunk.

    • Chris

      Only people that have sold their other property(ies) will have done well though Simon. Those still holding them will get a nasty shock when the correction downturns again. Second homes tend to be for leisure not investment so I don’t know about the percentages. A lot of older people bought buy-to-let due to falling interest rates on savings. They now pay the banks to rent the money rather than the other way round (for savers).

  • Phil7

    House prices are too expensive. The government cannot support the housing market indefinitely. But how to take steam off the market without invoking a price crash which will cause havoc and misery? Let’s think outside the box for a moment. Why does QE have to go through to banks first? Why can it not be made available to the public directly? Here is how it could be done. Give every legal person in the UK a choice: Either half your UK residential mortgage debt or double your UK cash deposit savings. Funding for this comes from QE underwritten not by government/public debt but by bank/corporate debt to be repaid through a
    temporary levy on financial institutions in form of a new financial services
    ‘reparations’ tax on shareholder dividends and employees bonus & salaries. Crucially, a property sales tariff of 50% of the purchase price, payable by the seller, is introduced without exception. This fund will be credited to the buyer as long as he’s the owner occupier (primary residence) and a UK resident of x years. Otherwise the fund goes to the BoE to be taken out of circulation. Stamp duty remains payable by the buyer on the entire purchase price. Interest rates are increased back to levels required to meet inflation and to take off the pressure on residential property as an investment vehicle. Strict lending criteria (20% deposit, 3 time salary multiple) will put a cap on price inflation. To take steam off the rental market similar measures should be introduced there too. It may take a while to work out the details by way of modeling but this could fix our problem without causing havoc. Here is why: BTL owners will feel reluctant to switch asset investments as they would lose 50%. This
    will prevent a sales rush. Instead they will accept a cut on their investment
    yield and hold on. Sure, some people will feel less rich but this was paper
    wealth anyway. The majority of people will be better off. And the government will save on housing benefits…

    • John Pablo

      Right on! “As long as the land monopoly is maintained, the few can take possession
      of what Nature free of charge has granted to everyone, and usury will
      penetrate the whole society, and we will have banks, which instead of
      being servants for the exchange of goods will become powerful extorters.”
      - Pierre Joseph Proudhon
      For more, see here: http://www.landvaluetax.org/

  • GS

    OK so let me get this right. The banks lent the money, made a pretty penny on the interest and the mortgagor got what they wanted – the house purchase or re-mortgage to raise the money to buy a new kitchen, car or have a luxury holiday.
    The banks are therefore at fault for lending the money which created the debt and the innocent homeowner was scammed into believing his property was worth the price he/she paid or it was valued at. Then, due to some rogue banking charlatans in America, the cheap money and easy lending stops – OUTCRY!, the housing market cools off to a ‘just above freezing’ point and property values start to fall leaving many of the Smiths (who spent 5 years trying to keep up with the Jones’) in high LTV mortgages or negative equity.
    Question? Who valued these properties at this extraordinarily increasing value? And who propagated the increase in demand and created the boom?
    Who were the gazumpers and rapacious speculators?
    I suggest we look closer to home, at those that greased the wheels of the gravy train, rather than blaming those that manufactured the grease, the buyers and sellers with high debt, shabby mid 2000 kitchens and 2007 cars that devalued quicker than a Zimbabwean dollar.
    The greed mat is not only at the top of the footsteps of the banks buy on every doorstep of every buyer and seller that proliferated and profiteered from the housing bubble.

    • bookmanwales

      You have made a valid point and one which most people ignore.

      Those who bought under right to buy had huge discounts and could well have weathered a large rise in interest rates. However the majority of them, as you said, squandered that discount on Car, Kitchens and holidays abroad.

      The remaining homeowner population did the same each time there was a rise in property houses taking out further loans to satisfy their greed for the latest car / gadgets.

      The general population is just a greedy as the big banks and unless you can somehow change human nature then this will always be the case.

    • Dennis Crane

      Your views make sense. However, I disagree with the premise that property is too high. Please read my comment above.

  • Robert Hoogenboom

    You are leaving out too many steps here. Newly created money doesn’t literally flood into houses. What does this metaphor mean. What actually happens here?

  • The Greatest Scientist

    House owners are allowing price rising so when they make a definitive selling for their retirement, they are almost half millionnaire. simple. its a natural cartel.

  • richard322

    The fact that house prices are so high isn’t fundamentally caused by the financial system (though it’s a factor), but by the fact that the underlying land is privately owned or traded. Rising house prices are caused by rising land prices (building land prices in the UK rose by 800% between 1983 and 2003). Land has never been produced by humans and was, in primitive societies, never private property. At a certain moment the guy with the biggest sword put a fence around that, claimed “It’s mine” and started demanding money from people who wanted to use that land before or after his “ownership”. This is theft. Land should not be bought and sold at all. When we do allow land to be privately owned and traded, then it’s only logical that prices keep on rising forever. Land cannot be produced as demand increases (supply is fixed), and demand increases because of the rising population (everybody needs land because you can’t build your house or company or road on a cloud), so land prices typically are forever rising. The banks love that because then they can make safe loans to potential house owners (safe because the land is collateral) and make a lot of money in the process. Because the mortgage loan system ensures that there is enough money to facilite effective demand, it is certainly a factor, but it’s not the fundamental cause. Just like the existence of car loans do not fundamentally drive car prices up.

    • John Pablo

      Right on! “As long as the land monopoly is maintained, the few can take possession
      of what Nature free of charge has granted to everyone, and usury will
      penetrate the whole society, and we will have banks, which instead of
      being servants for the exchange of goods will become powerful extorters.”
      - Pierre Joseph Proudhon
      For more, see here: http://www.landvaluetax.org/

    • http://goodworld.lightnet.co.uk/ Janos Abel

      Well done Richard, for pointing out the real reason for the “house” price problem.

      Henry George has laid out the full economic logic behind the land problem more than a hundred years ago, and repeated attempts to correct anomalies in the land market have been consistently blocked by those who love to reap where others have sown (to paraphrase Adam Smith).

      PS Steiner’s vision of the ThreeFold Commonwealth is still waiting realization

  • Unknown Unknown

    No body cares about why it expensive, the question is what the bleeep is the government doing about it……………I sick and tired of this government. I never going to vote labour because of the unlawful war it went into in afghanistan iraq and I am definitly not voting conservatives any more because they support homos and life is still tough…………….can’t get job house or anything.

    • http://a-good-society.org Mike Boulton

      If we no not know why a matter is wrong how do we know if what the Government, or any other body , is doing is likely to be effective?

  • Grey Wanderer

    Hello I just found your website by chance and for some time I have been thinking about the problem of excessive money-creation. Over two years ago I wrote up a proposal to help fix the financial crisis and lower shelter costs to more reasonable levels. It can still be found here:

    http://www.operationblackarrow.com

    Abstract:

    How To Use The Philosophies of Republicanism (Sensu Stricto)
    and Distributism, in Combination with an Overnight “Type 2” Euro Money
    Creation Event, to Help Solve Both The EU’s Debt and Pensions-Crises,
    Help Save High Social Utility Capitalism and Help Re-establish and Widen
    Trust-Horizons, Both Amongst the EU’s Populations and Towards Their
    Political and Financial Institutions.

    I think it is an idea which could well dovetail with your own thinking alot..it involves what I call “hyper-egalitarian quantative easing” using a more moral form of money than we usually use.

    Hope you get a chance to read it,

    regards, S. Reynolds, Cork, Ireland

  • http://www.adamtudor.com/ tudoradam

    Until property stops being a profitable financial investment for anyone and everyone, and actually becomes (basic human right?) somewhere for a person to live, then this problem will never, ever subside.

    • Dennis Crane

      We as a people have tried common ownership. That doesn’t end up with well being for all. That is the nature of slavery. In a slave society everyone has a place to live, subsistence food and clothing and nothing else. History is clear. Profits, competition, and private property make upward mobility and a wealthy society.
      The idea you have is available now. Just volunteer to be a slave and you can have your grand vision.

      • Simon

        Problem is that it is unequal competition, with broken markets, so upward mobility is not a reality for many. The already very wealthy have too much power and influence.

  • Richard Atherton

    I like this video… but my questions is, rather than closing the video by talking about taking power away from banks, could the video close by talking about what new power structures would better serve society?

    • murrayzz1

      The video is only 2 and a bit minutes long. It takes a bit longer to explain the solution.

      If you are interested to know more about a working alternative to the current system, read “Modernising Money” by Positive Money’s Ben Dyson and Andrew Jackson.

  • John thatcher

    I’m not sure what but something is going on for this to be done on purpose possibly to keep people in debt and therefore as slaves to the wage you ensure your work force turns up for work each day.
    When people are in debt it’s a great way to control the masses most educated people don’t bother with religion so this is the new way to keep the idiots in line.

    • Dennis Crane

      Exactly so John. Please check out my comment above.

  • Ulf

    True—the banks create money out of nothing by just pressing a button on the computer.
    At the instance the button is pressed a risk (or liability) is taken by the bank. Therefore it is really not created out of nothing, it’s balanced by a risk taking.
    If the loan taker defaults the money has to be balanced out. It just does not
    disappear because it was created “out of nothing” In the case of a default the situation is not “nothing for nothing”. Banks have to pay “the nothing money” somehow.

    Please put this thought of mine on a track that better follows the thoughts of “Positive Money”

    • You make a good point

      What you said is true, but why am I not allowed to credit my own bank account with £10,000 and then lend that to my mate to buy a car. When my mate pays me back the liability is erased from my account. As you said, if there is a default I need to come up with the £10,000 to satisfy the liability, but why are banks allowed to create the liability in the first place?

      Better yet, I shouldn’t even have to use bank. I just create an online account on a website I set up and credit it with £10,000 and lend it out. Sure, I would have to have some collateral, (the banks though don’t have 100% of the money they loan, that is how a run on the bank happens), so say I put up a building I own and when my mate pays back the £10,000 I then delete those digits in the online account.

      Another example: Take Quantitative Easing. The BofE buys assets and credits the banks with digits in exchange for those assetts.

      I want to buy a boat; I credit my own account with digits, then transfer those digits to someone who needs the money. When they pay me back I agree to give the boat back.

      What it all boils down to it this: Money is not real. It is just a system we agree upon. This is easily demonstrated when you take Euros to a shop that only excepts Pounds. The shop does not agree with the Euro holder that they are worth anything, and so, they are worth nothing.

    • http://a-good-society.org Mike Boulton

      If it cost the bank nothing to create the money how does the bank loose if the buyer defaults?

  • Ben Jamin’

    The thing is, there wasn’t a baked bean bubble was there? Or a LCD TV bubble. Or a Big Mac Meal bubble. In fact these consumables have dropped in price in real terms.

    Not houses. The price to construct a house has also gone down.

    So why have “house prices” gone up?

    Is it really the banks?

    • murrayzz1

      Yes, it really is the banks. They won’t lend you £200K to spend on baked beans, or LCD TVs or Big Macs. They will only lend you that money secured against a property.

      When you get ever greater amounts of money chasing a (relatively) fixed supply of something, you get rampant inflation.

      The banks make those lending decisions, nobody else. Therefore the banks are responsible for the housing bubble.

      • Ben Jamin’

        We had property booms and busts for over 200 years. Long before everyone took out a mortgage.

        The majority of any properties value is its location. Location has a value but no cost of production. It is therefore the purist form of monopoly there is.

        Houses, baked beans, cars are Capital. Lending on those do not create bubbles.

        Land is not Capital. Lending and owning it this therefore speculation and can only create bubbles.

        If you reduce the value of land by taxation to zero, banks would then be free to lend on houses ie capital.

        Bubbles would then be impossible.

        It’s not the banks fault. It’s the way our tax system is set up. Which puts loads of money in their pockets, but that’s our choice.

        • murrayzz1

          Asset bubbles occur when there is excessive speculation on an asset. Taxation has nothing to do with it.

          Baked beans and cars are consumer goods. Houses are assets. If the money supply for a specific asset is increased (i.e. by banks lending for this specific purpose), with high demand and a relatively fixed supply, prices will increase.

          If the inflation thereby caused exceeds underlying long-term trends, this is referred to as an “asset bubble”.

          So even if land values were zero – although it is hard to imagine how this could ever be the case – as long as someone is prepared to pay for the property built on it, and as long as there is money available to fund it, bubbles are possible.

          In fact, if the money supply is increased for any specific asset without any corresponding increase in supply, a bubble is not just possible, it is inevitable.

          I agree with you on one question, though. It’s not the banks fault. They are operating exactly as designed. It is our fault for continuing to allow banks to create money.

          • Ben Jamin’

            Land is not Capital. Until you contemplate and understand why this is so, you will never get to the root of this problem.

            If you put a tax on Capital, it’s price goes up.

            If you put a tax on Land, it’s price goes down.

            “So even if land values were zero – although it is hard to imagine how this could ever be the case – as long as someone is prepared to pay for the property built on it, and as long as there is money available to fund it, bubbles are possible.”

            In which case the value of land wouldn’t be zero would it ;)

            Fractional reserve banking is not the enemy. Although admittedly, it perfectly exploits speculation in “monopoly shares” as speculators can leverage up.

            This has been happening for hundreds of years.

            If you tax away the capitalised income of Land/monopolies, it is impossible for bubbles to occur.

            This is very easy to do. Why muddy the waters by even talking about banks?

            They are just an easy target. It keeps people from seeing who really benefits from our rotten system.

            Banks do, as they are major landowners(mortgages) by they are not the only ones are they?

            The top 1% of wealthiest households own over 50% of land by value.

            The Capitalised value of monopoly shares in land is worth around £5 trn in the UK.

            Remember, that £5trn is not real wealth, like cars or houses. It is a claim on wealth. A claim on other peoples wealth.

            No wonder everyone wants a piece of that action eh?

          • Simon

            The banks created over £1 trillion of new money in 10 years from 1997. One third of this went into property, so causing house prices to triple in this period. Excessive lending was the main reason for the property boom, as it was in the late 1980s.

      • Tammy Wood

        I dis agree you can Not give back the vomited up big mac and the tv etc. The House haha haha of course they will lend for that come on why not,, money in and MORE money out. The realitors ARE THE Drivers here. The banks are in the “Back seat making out” WITH ALL THE CASH . Very stealthily if I might add. Not cool but true.

    • good society

      A good question, the answer lies largely in land ownership.

      See “Who owns Britain” by Kevin Cahill.

      This book is quite expensive £120 to £170 depending on
      seller but it is available in public library reference sections.

      The review by John Burns-Curtis conveys enough info to get
      the message.

      Google the book title and it should come up.

  • john

    Why don’t you ever hear people asking why house prices are not included in the inflation calculation.

    It is bewildering to me. In the 2000′s we were told that inflation was being kept low by the bank of england monetary committee and yet house prices were rising about 10% a year. How can the cost of the most expensive thing most people spend money on being going up 10% per year and yet inflation be said to be low.

    Real inflation (when you include house prices) was sky-rocketing in the 2000′s but this was not reflected in either the consumer price index or retail price index (the most commonly quoted inflation measures) because they ignore housing costs.

    Hence the bank of england maintained low interest rates because they were told to keep RPI and CPI inflation low. They completely ignored that fact that the inflation was in the housing market that was outside of their inflation measures.

    These are supposed to be intelligent people and yet it seems like fixing the inflation calculation would be a very simple and easy fix that would prevent this sort of asset bubble from forming in the first place because interest rates would be raised before an asset bubble got out of hand.

  • Peter AV Wright

    The point about money “creation”, is very valid, but let’s get down to basics – the Price of a new house is reasonable construction costs, plus reasonable Price for plot, (this is where control is needed) say 10,000GBP for house on 8 to the acre site, plus reasonable profit for developer. Infact this would more or less equal 80,000GBP for 3 bed semi. Also, encourage the smaller local builder to get involved.

  • Tammy Wood

    Its the realities who are the ones doing the gauging to their (neighbours.) Oh sure this piece of loopy is REALLY worth $ …. just smash out some nice (ities) in the main areas and bam $ sale time. Banks smacks.I think people need to take a HARDER,, LONGER LOOK-INSPECTION at the Real-ESTATES Board. Who’s running whom.??????? Tell me this who set the price for the prices in the Flats (an area of town in the city I live in ) that just had major flooding= realtor s that’s who. Not the bank. Some person with a huge price in their DESIREd cut says ask for this fix up that paint that and ((WE)* They try and make you with them * Can ask for this much MORE….See. there IS NOT AN AUTHORITY CAP ON THIS . WHY NOT.?? The Bank sits by soaking it in shaking hands with the “BOARD” saying thank you brother for cheating our brother out of hundreds of thousands of dollars. Nope we won’t bother you at all…you have the Floor, Mop it up.

  • JohnW

    If there were more than enough houses then competition would drive house prices down. We may have built 3 houses for 4 people but that’s still not enough if demand was already out stripping supply before you built them! it’s NOT a MYTH to say that there aren’t enough homes to satisfy demand (at least, not where they are most needed ie the south east).

    • Scott Simpson

      I agree with this. The price of homes is dictated by supply and demand simple. Of course there are other micro factors which affect house price variations from one development to another or one town to the next. And then there is speculation driven by greed or desire to make profit. The press looking for something newsworthy helps to fuel ‘we’re in a house price bubble’, a sudden increase in demand for housing in short supply leads to crazy increases in house values.

    • http://a-good-society.org Mike Boulton

      The major part of the cost of housing (60%) is in the land.

      Supply is not the major problem ownership of land is..

  • Dennis Crane

    I disagree with the basic premise that house prices are too high.
    1. It is not just housing but fuel, gold, cigarettes and bread that have gone up. This doesn’t reflect high house prices but low money value. In 1965 a gallon of gas was around 25-30 cents-over $4 now. That is a 10-15x increase. My father’s house was 20,000 now about 200,000. That shows a decrease in dollar value.
    2. Furthermore, house prices are so low relative to rents that you can buy a house and rent it out at a profit over the mortgage. You couldn’t do that in 1965.
    And 3. The cost to build a house (in San Diego) is more than the house is worth-per appraisal. This is not valid economics. This is a created effect.
    So, the premise is flawed on several measures. Yes as a percent of wages they are higher. This shows that wages have lagged. That’s what happens when you tax labor with income tax and allow imports from slave economies (like China) to come in free. Wages decrease relative to goods at about the rate of taxes. Pretty significant over time.
    Now, why would this false premise be pushed and how.
    1. Banks dislike increasing equity as it represents a type of wealth that lessens the need for borrowing-especially borrowing at higher rates.
    This is especially important when you have huge amounts of money created by enormous leveraging. Banks need poor borrowers who are barely capable of repaying their loans.
    2. As to how, simple, first you get a lot of talking heads to agree that there is a bubble. Then you start lowering appraised values-which the banks control.
    There is as well, a further factor operating to lower values. That is the decreasing % of employed people. I’m not talking about unemployment, I’m talking about the shrinking number of employed.
    That is steadily decreasing and as a consequence there is less demand for single family homes. The unemployed move in with granny or….
    So, even though prices are not really over-priced relative to other commodities, and the value of money, there is a shrinking demand and an intentional depression of housing prices. So house prices have declined. Wrongly and unfortunately so. Houses are the middle class saving haven. Their decrease spells the beginning of the death of the middle class. Income taxes will continue to depress wages and low house prices will wipe out equity. Presto fewer and fewer middle class savers.
    Another way of depressing the middle class is the lowering of interest rates. As interest declines (by decision from above rather than thru market forces), there is less lending for venture-small business and housing. Goldman Sachs will continue to pay an average wage of about $600,000 annum while the middle class withers.
    I’m getting away from the subject. Please consider that house prices are not too high. Money is becoming worth less because banks are making way too much by fractional reserve lending.

    • Simon

      Dennis, we are talking about the UK housing market here, which is different to the US where there has been a substantial correction. There is no doubt that prices are too high here, especially in London and the south east of England compared to say 45 years ago, relative to average incomes. As an example, my first house in Yorkshire cost £4,100 in 1979 9easily affordable for someone on a low income), in todays money it should cost £40,000. It reached £70,000 at the peak of the boom in 2007, but has dropped to about £50,000 because the local economy there is very poor and the area has declined over the last 35 years.

  • BillChilds

    Another interesting aspect to this is the role of Housing Benefit. The government taxes our earnings and uses the revenue to pay money indirectly (through tenants) to landlords to compensate for the fact that rent prices are too expensive for a set percentage of the population to afford.

    In other words, not only are house prices taking up a greater share of our incomes, but we also have an increased tax burden to prop up a system which has become unaffordable. Housing benefit is effectively a landlord subsidy dressed up as a pillar of social justice. It doesn’t help those on lower incomes (it makes no difference to them whether they’re paid £100 or £400 in benefits – it’s tied to their rent and goes straight to their landlord), it simply takes money from ordinary taxpayers and gives it to some of the richest individuals in the country (landlords).

    It’s actually quite ingenious when you think about it: a redistributive mechanism from the poor to the rich dressed in the trappings of welfare. It currently amounts to around £20 billion of public spending a year: i.e. rather than allowing the free market to operate with respect to house prices, we put £20 billion of taxpayers’ money into the system to artificially inflate rent and generate higher profit margins for landlords. I’m not sure on what planet that makes sense, but it’s not this one.

  • w w

    The real point of the video is that banks are ‘creating’ money out of thin air and it should be stopped – along with quantitative easing (printing money) using the same parasite banking system.

  • AW1983

    The Government will keep prices high until the spoilt generation have finished downsizing and liquidating their assets into their pensions, then they’ll let prices collapse. That’s why I’m not buying and I am emigrating (again).

  • juliebird

    We are parculiar in this country that everyone wants to buy their own home. We don’t save and we don’t put money in to support our old age we plough everything into buying a property. If you look on the continent most citizens rent, rents are cheaper and the citizens save money to support their old age. Most properties on the continent are owned by private landlords or investment institutions. We have a ludicrous situation in this country with elderly people sitting on high value assets – houses but cannot afford to put the heating on. In France there are no credit cards only debit cards as the French government does not want its citizens to get into debt. Its not just properties and mortgages that cause debt.

  • Dennis Perrin

    the housing bubble vid has loud music together with a quiet voice – difficult combination for clear hearing!

  • GaryReber

    My colleague at the Center for Economic and Social Justice (www.cesj.org) Michael Greaney addressed this subject a couple of days ago on our blog:

    “Money” is anything that can be accepted in settlement of a debt. It is the

    medium of exchange, by means of which we exchange what we produce, for

    what others produce so that goods and services can be consumed. As Adam

    Smith pointed out, and which formed the basis for his economic theories, the sole purpose of production, after all, is consumption.

    Money facilitates both production and consumption. It does this by providing a convenient way to obtain what we need to produce, and to trade what we produce for what others produce.

    All money is therefore a contract, just as (in a sense) all contracts are money.

    All contracts consist of “offer,” “acceptance,” and “consideration.”

    “Consideration” is whatever of value is being exchanged, something that has or will be produced.

    There are two basic types of contracts by means of which exchanges are carried out. These are called “mortgages” and “bills of exchange.” Financial historian Benjamin Anderson claimed that the first principle of finance is to know the difference between a mortgage and a bill of exchange.

    A mortgage is a contract conveying an interest (ownership stake) in the present value of an existing good or service. A bill of exchange is a contract conveying an interest in the present value of a future good or service.

    All things being equal, the present value of the existing good or service conveyed by a mortgage, and the face value of the mortgage, are the same. A mortgage pays interest on the face amount of the mortgage, and it passes as money at the face value.

    All things being equal, the present value of the future good or service conveyed by a bill of exchange, and the face value of the bill are not the same. Usually the present value of a bill of exchange is less than the

    face value. It therefore passes at a discount. A bill of exchange does not pay interest. The gain to the holder comes from the difference between the discounted amount, and the face value when redeemed.

    This is why “accepting” a bill of exchange is also called “discounting” for the first acceptance, and “rediscounting” for subsequent acceptances.

    Houses are built using bills of exchange after which the builder sells the house, which is purchased with a mortgage. The market dictates what the value of the house is and what value will be reflected in the mortgage.

  • http://www.streetcheck.co.uk/ StreetCheck

    While I would say that house prices are high (relative to income, in the South East in particular), I wouldn’t necessarily blame the banks for this. I would say that most home owners and buy-to-letters have a perception that house prices should increase, giving them return on their outlay and allowing them to potentially use that capital in the future (retirement etc). This creates a market where sellers simply cannot countenance selling for less than they bought for. In such a system, the price departs from the asset’s worth – you wouldn’t expect a car to increase in value over a few years, even if you have serviced it and kept it clean.

  • Cooper

    All i see are comments pointing the finger. However you can swiftly point it back at the buyer. Sure house prices are high, but I don’t see anyone dropping the price of there house to help the person behind them. Greed and stupidity is what fuels the whole thing. Greed: pricing your house far above what it is actually worth. Stupidity: Spending that much on it anyway.
    How about no one buys a house. Freeze the market. Force the government to lower the supposed value. Have developers and builders forced to lower prices to sell there stock.
    As long as the public keeps opening there mouths to this s**t the government, banks and builders with keep on shovelling it in.

  • Riasat ALi

    I totally agreed and suffered as well, the only beneficiary of this bubble market are those who are already having more than one or more properties.
    After all, we all need somewhere to live, and anyone selling their home will find that on average other house prices will have risen by the same amount, leaving them no better off. In reality, only the banks and those with many properties benefit from high house prices: high prices mean that people will have to take out larger mortgages for longer periods of time, which means more money in interest payments for the banks.

  • Christian

    Ok so I have read the majority of posts on this page, all with different reasons as to why house prices rise (Banks, Land, Loans etc.)… all your posts are right! … But why do we proceed to accept this? Why do we keep living around what certain “Mp’s or what the “government” says. I mean if an mp from one government party says we will have to cut spending’s on national health and education, the majority of people will vote for the contrasting party (not noticing the whole system is run by one objective but hidden by many faces) the political system is structured so that the people think they have a say but tbh the shots are being called whether the voice of the people are made or not). I understand certain laws restrict us from living well and certain laws protect us however this only creates an opportunity for other laws to be created, laws which are created to protect the system. ( For example if there was to be a revolution on the streets of London tomorrow, I have no doubt that the police and army will do everything in its reach to protect the GOVERNMENT!! , however their wages are payed by the tax payer, not the GOVERNMENT!!,, I also have no doubt that blood will be shed if it ever gets to a stage where the people decide to overthrow the government.. but one question I always ask my self is… what happens when that person goes home takes off that police uniform or that solider uniform ??
    they become human again, they become the father they become the son or the brother they always were they become part of the community they were sent to destroy or defend against, that means he or she is part of the civilization the government want to destroy. the point I am trying to make here is that we are all puppets controlled by a puppeteer and until we don’t ALL stand up and open our eyes the world will carry on destroying its self!! all governments are set up to do 3 things… 1.GOVERN, 2.MAINTAIN OREDER 3.CREATE PROFIT OFF THE PEOPLE for the next generation of people in power.. (ROYAL FAMILY, MPS, BANKS etc).
    I am a product of this environment which I was created to destroy!
    in the name of the Lord Amen.

  • http://goodworld.lightnet.co.uk/ Janos Abel

    One comment out of 47 names the problem correctly. House prices do not
    rise; only land prices do. Normally when the price of something rise it
    stimulates the supply of those things and the price stabilizes.. With land
    being in fixed supply this adjustment can not take place.

    The end result is that owners get a regular unearned bonus of *at least*
    £10,000 every year from the renters in the form of land value increase.

    There is one one way to eliminate this unfair advantage: levy a charge on this
    yearly increase and use the proceeds either to eliminate some of the more
    regressive taxes like VAT, or distribute it as an unconditional pay to everyone
    in the community. This is just fair since land value is created by the
    aggregate demand that the surrounding community generates.

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