ourEconomy: Analysis

The hidden inflation that the political class won’t talk about

Not everyone is feeling the pinch – those with assets are enjoying a wealth bonanza

Stewart Lansley
20 September 2022, 1.03pm
Property prices in the UK have risen more rapidly than incomes

Richard Baker/Alamy Stock Photo

The government is moving – finally – to partially protect family budgets from the cost of living crisis. But the surge in prices for everyday goods is far from the only source of inflation.

For decades the price of key assets – especially property – has been rising more rapidly than incomes, leaving a long trail of social and economic damage. The effect has been a wealth bonanza for those with assets, but bad news for the millions of households that have been unable to board the runaway wealth gravy train. Yet such inflation has failed to raise a whimper amongst the political classes or headline writers.

The UK is asset rich. Private wealth holdings (such as property, land and financial assets such as shares) are worth around £15trn, nearly seven times the size of the economy, up from three times in the 1970s. That is, they have been rising in value at just over twice the pace of the economy.

These holdings are heavily concentrated at the top – much more so than is the case with incomes. The wealthiest tenth of households hold close to 45% of all wealth. In contrast, the share held by the poorest half of the population is lower today than in the 1970s, and has never exceeded a tenth, an extraordinary verdict on Britain’s record on social progress in recent decades.

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Moreover, the growth in personal fortunes at the top has been largely unearned. They are the product, for example, of the rolling privatisation of commonly owned assets since the 1980s (the proportion of all assets that are publicly owned has fallen from a third in the 1970s to less than a tenth today), as well as a deeply embedded process of economic extraction, including paying out vast amounts to shareholders in dividends and share buybacks.

Another important factor driving the ever-growing wealth mountain has been asset inflation – or ‘passive accumulation’ – especially in financial holdings, property and land. Since 2008, asset inflation accounts for an estimated three-quarters of the growth in UK wealth holdings. House price inflation alone has, according to the Resolution Foundation, delivered “an unequal and untaxed £3trl capital gains windfall” over the last two decades.

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As the Victorian philosopher John Stuart Mill warned, reproachfully, property owners simply “grow rich in their sleep without working, risking or economising”. Yet while unearned wealth should be more highly taxed than earned income, the revenue from capital taxes raises only a fraction over 2% of GDP. Taxes on incomes, by contrast, account for around a quarter of GDP.

In the mid-1980s, the average house cost four times the typical yearly salary. Today that ratio has doubled to over eight times as much. This has had a number of adverse side effects. It has shattered the home ownership dream of young people without asset-rich parents, resulting in a process of upward transfer from young to old. Home ownership rates among those aged from 25-34 have fallen from 55% in 1996 to 34% in 2016. The same trend has led to a growing dependency on private renting and growing housing insecurity.

Inept government policy

Surging house prices and the fall in home ownership rates are the largely predictable consequence of inept state economic policies. Successive chancellors, especially since 2010, became addicted to house price inflation to re-fire an economy deadened by austerity.

One of the effects of the Bank of England’s post-2009 quantitative easing (QE) programme, which pumped some £895bn into the economy – but with a limited impact on Britain’s productive base – has been a long and deeply damaging property boom. This has been the result of the way QE has cut interest rates while making mortgages easier as well as cheaper.

A recent study by the IMF on the role of QE concluded that direct transfers from the central bank to households (rather than indirectly to banks) – a form of ‘helicopter money’ – would have been more equitable and more effective in rebooting weakened economies.

House-price inflation has intensified Britain’s growing housing crisis, from unaffordable rents to a severe lack of genuinely affordable social housing

‘Help to buy’ schemes and stamp duty holidays, dismissed in the right-of-centre Spectator magazine as “bungs for first-time buyers to keep the housing bubble inflated” have helped a small group of lucky buyers. But by boosting demand while doing little to promote new housebuilding, they have added further upward pressure on prices, thus raising the barrier for everyone else.

An important difference between asset appreciation and today’s mostly externally driven consumer inflation is that the former could largely have been avoided by smarter policies, including less reliance on monetary policy through a lower level of austerity, and the avoidance of self-defeating schemes such as help to buy, which artificially boost prices.

House-price inflation has intensified Britain’s growing housing crisis, from unaffordable rents to a severe lack of genuinely affordable social housing. Yet the control of house-price inflation largely disappeared with the bonfire of banking and credit regulations in the mid-1980s. Although this meant that mortgages became easier for some, the wider effect was to create asset bubbles by fuelling the competition for a limited stock of homes.

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Tackling this crisis requires measures from new restraints on private rent levels to the expansion of the volume of social housing – through for example, the highly successful Right to Buy-back council homes scheme operating in London.

These need to be backed by tougher credit controls, using instruments the Bank of England has so far only sparsely employed, and ending the way that boosting housing wealth has been used by the Treasury to raise consumption during economic downturns. This would aim at keeping house-price inflation to agreed limits, thereby limiting the credit bubbles and the passive and damaging upward redistribution of recent times, and ultimately widening access to home ownership.

Stewart Lansley is the author of "The Richer, The Poorer: How Britain Enriched the Few and Failed the Poor. A 200-Year History."

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