It’s time to call the housing crisis what it really is: the largest transfer of wealth in living memory

Image: Images Money, CC BY 2.0

One of the basic claims of capitalism is that people are rewarded in line with their effort and productivity. Another is that the economy is not a zero sum game. The beauty of a capitalist economy, we are told, is that people who work hard can get rich without making others poorer.

But how does this stack up in modern Britain, the birthplace of capitalism and many of its early theorists? Last week, the Office for National Statistics (ONS) released new data tracking how wealth has evolved over time. On paper, the UK has indeed become much wealthier in recent decades. Net wealth has more than tripled since 1995, increasing by over £7 trillion. This is equivalent to an average increase of nearly £100,000 per person. Impressive stuff. But where has all this wealth come from, and who has it benefitted?

Just over £5 trillion, or three quarters of the total increase, is accounted for by increase in the value of dwellings – another name for the UK housing stock. The Office for National Statistics explains that this is “largely due to increases in house prices rather than a change in the volume of dwellings.” This alone is not particularly surprising. We are forever told about the importance of ‘getting a foot on the property ladder’. The housing market has long been viewed as a perennial source of wealth.

But the price of a property is made up of two distinct components: the price of the building itself, and the price of the land that the structure is built upon. This year the ONS has separated out these two components for the first time, and the results are quite astounding.

In just two decades the market value of land has quadrupled, increasing recorded wealth by over £4 trillion. The driving force behind rising house prices — and the UK’s growing wealth — has been rapidly escalating land prices.

For those who own property, this has provided enormous benefits. According to the Resolution Foundation, homeowners born in the 1940s and 1950s gained an unearned windfall of £80,000 between 1993 and 2014 alone. In the early 2000s, house price growth was so great that 17% of working-age adults earned more from their house than from their job.

Last week The Times reported that during the past three months alone, baby boomers converted £850 million of housing wealth into cash using equity release products – the highest number since records began. A third used the money to buy cars, while more than a quarter used it to fund holidays. Others are choosing to buy more property: the Chartered Institute of Housing has described how the buy-to-let market is being fuelled by older households using their housing wealth to buy more property, renting it out to those who are unable to get a foot on the property ladder. And it is here that we find the dark side of the housing boom.

As house prices have continued to increase and the gap between house prices and earnings has grown larger, the cost of homeownership has become increasingly prohibitive. Whereas in the mid-1990s low and middle income households could afford a first time buyer deposit after saving for around 3 years, today it takes the same households 20 years to save for a deposit. Many have increasingly found themselves with little choice but to rent privately. For those stuck in the private rental market, the proportion of income spent on housing costs has risen from around 10% in 1980 to 36% today. Unlike homeowners, there is no asset wealth to draw on to fund new cars or holidays.

In Britain, we have yet to confront the truth about the trillions of pounds of wealth amassed through the housing market in recent decades: this wealth has come straight out of the pockets of those who don’t own property.

When the value of a house goes up, the total productive capacity of the economy is unchanged because nothing new has been produced: it merely constitutes an increase in the value of the land underneath. We have known since the days of Adam Smith and David Ricardo that land is not a source of wealth but of economic rent — a means of extracting wealth from others. Or as Joseph Stiglitz puts it “getting a larger share of the pie rather than increasing the size of the pie”. The truth is that much of the wealth accumulated in recent decades has been gained at the expense of those who will see more of their incomes eaten up by higher rents and larger mortgage payments. This wealth hasn’t been ‘created’ – it has been stolen from future generations.

House prices are now on average nearly eight times that of incomes, more than double the figure of 20 years ago. It’s unlikely that house prices will be able to outpace incomes at the same rate for the next 20 years. The past few decades have spawned a one-off transfer of wealth that is unlikely to be repeated. While the main beneficiaries of this have been the older generations, eventually this will be passed on to the next generation via inheritance or transfer. Already the ‘Bank of Mum and Dad’ has become the ninth biggest mortgage lender. The ultimate result is not just a growing intergenerational divide, but an entrenched class divide between those who own property (or have a claim to it), and those who do not.

Misleading accounting and irresponsible economics have provided cover for this heist. The government’s national accounts record house price growth as new wealth, ignoring the cost it imposes on others in society – particularly young people and those yet to be born. Economists still hail house price inflation as a sign of economic strength.

The result is a world which is rather different to that described in economics textbooks. Most of today’s ‘wealth’ isn’t the result of entrepreneurialism and hard work – it has been accumulated by being idle and unproductive. Far from the positive sum game capitalism is supposed to be, we have a system where most wealth is gained at the expense of others. As John Stuart Mill wrote back in 1848:

“If some of us grow rich in our sleep, where do we think this wealth is coming from?  It doesn’t materialise out of thin air. It doesn’t come without costing someone, another human being. It comes from the fruits of others’ labours, which they don’t receive.”

Britain’s housing crisis is complicated mess. Fixing it requires a long-term plan and a bold new approach to policy. But in the meantime let’s start calling it what it really is: the largest transfer of wealth in living memory.

  • Ben Jamin’

    Housing issues are land issues. How the value of land is distributed is a question of basic justice. There has been a complete lack of honesty regarding that fact when discussing this matter.

    http://markwadsworth.blogspot.co.uk/2015/12/we-dont-have-housing-crisis.html

  • Jeremy

    Wonder if high house prices has something to do with the millions of migrants in the country

  • Janet T-Tremaine

    Any land granted to house builders and indeed sold to them, should in the Sales/Transfer Agreement, have a clause stating that the planned houses, including the “affordable/social homes”, have to built within a stated (say 2 year) period of the transfer to the builder of the land. If the builder fails to build the stated houses, a penalty should start accruing + interest for each successive year, for failing to build the houses for which he got the land This would stop builders from hanging onto land and then not building any houses at all, but selling on the land at exorbitant prices to the next house building company – and they end up doing the same thing and/or to build houses BUT not affordable/social ones and then keep possession of them until house prices are so high that the houses built are no longer affordable but have become a money-making racket at the expense of young families not being able to afford a home.

    • ANGRY_MODERATE

      It’s a small technical fix that would have been useful a few decades ago. Now, the problem is massive and structural and needs a massive fix. I would be so bold as to state that the only possible solutions to property inequity and housing costs are so big and fundamental that everyone with a house (let alone those with multiple properties) would oppose reform. In other words, the country will remain stuck in this quagmire of injustice and inequality unless the political system actually collapses in something like civil war.

      • BC

        You’re right about the size of the problem but we shouldn’t lose sight of the fact that those with multiple properties are still quite a small minority. While they certainly have the money to mount a strong challenge to any serious assault on their excessive wealth, ultimately they are well outvoted. The argument articulated by JSM about wealth made while asleep is not an unduly complex one. If it is advanced by progressive politicians with conviction it will receive a fair reception but they will need to mobilise those who routinely don’t vote. The question is whether or not said politicians have either the will or the courage to mount such a fight. Corbyn and McConnell? I wonder.

        • Nzm Ak

          i can see that we are to put blame on house(s) owners yet the main issue is the government that not function well that only see higher premium they can charge. Gov. obviously granted lands to developer so that it can charge hefty premiums while they can charge little premiums from land granted to individuals to build their own home.

          • BC

            “i can see that we are to put blame on house(s) owners yet the main issue is the government that not function well that only see higher premium they can charge. ”

            Nope. The main issue is that the housing crisis has transferred wealth upwards and is exacerbating the very inequality which it results from.

          • ANGRY_MODERATE

            The original blame goes onto government — Thatcher was the culprit, as always — but now the problem lies both with government and homeowners with valuable housing stock who are not prepared to lose their ill-gotten gains. Basically, the entire UK economy has been badly damaged with this massive wealth transfer (as this article states) and the beneficiaries of it do not wish to solve the problem. They prefer to see young people homeless and in poverty, while they luxuriate in expensive houses and even collect extortionate rents from additional properties.

            You could not devise a more evil and dysfunctional system of housing if you tried. Thatcher’s sobriquet of “witch” is well-deserved.

          • BC

            But isn’t it a bit misogynous – or at least may be seen as such? Otherwise I completely agree. What is even more galling is that buying to rent is actually represented in the media as a socially responsible activity – see the BBC’s “Under The Hammer” for example.

          • ANGRY_MODERATE

            You mean that the male form — wizard — is not seen as evil? Hmm, maybe so. It’s one of the historical facts of western life, that women with power are considered to be evil and men with power as merely talented.

          • Nzm Ak

            to be honest, i charge rent way below what others call standard rate. eg. if std rate are 650, i would asks 400

    • I agree – but you don’t need a new ‘penalty’. Councils should just have the power to start levying council tax on vacant lots with planning permission – after say six months. This would reflect the social cost of lengthy build programmes (the development blight of heavy lorries rumbling through towns and villages) and the need for councils to invest in associated infrastructure.

  • BC

    This is well explained. A particularly nice touch is enlisting John Stuart Mill’s articulation of the moral case against economic rent. This drives home the fact that this is not a left wing back-water but based on principles long cherished by liberals too.

  • MD

    Just as the word ‘greed’ has been erased from the lexicon (we are now apparently ‘aspirational’ if we want piles of cash and more stuff to make other people jealous) so have the words ‘usurer’ and ‘usury’. However, it takes only a cursory glance to see that usurious lending is the primary – arguably the only – driver of ‘economic growth’ in the UK (and USA). There’s much to be said about [decadent] societies which are saturated in financiers’ debt at all levels and wherein financial speculation has replaced production and export as the main economic driver, but suffice to say history shows it generally doesn’t end well. Sadly after Brexit I have a feeling that ‘aspirational’ sociopaths in ‘The City’ will be unleashed and then we’ll really be ‘getting what we want and getting it good and hard’.

    • BC

      “However, it takes only a cursory glance to see that usurious lending is the primary – arguably the only – driver of ‘economic growth’ in the UK (and USA). ”

      You’re quite right but this is an inevitable consequence of capitalism. As a minority accumulates the surplus value created by others it generates demand for “investment opportunities”. When this is combined with squeezing the purchasing power of the real creators of wealth the only avenue for profit is the kind of usurious lending you describe: effectively renting the surplus back at ruinous rates to the very people who created it and creating temporary demand which is structurally unsustainable.

      “…but suffice to say history shows it generally doesn’t end well. ”

      Right again. The neo-liberal dogma maintains that any economic activity which generates a profit is wealth creation so the squeezing of real wealth creation is not a problem. In fact, many of them would agree with the basic premise of this article – but would not think it a bad thing. For them , the wealth transfer the author describes is just “how it all works”: Irresponsible borrowers paying the morally correct penalty for living beyond their means.

      • MD

        I haven’t read Das Kapital but I think possibly you’re describing Marx’s conclusions (haven’t read Picketty’s tome either).

        I’m not sure however we’d be in this state, drowning in debt from cradle to grave, if we’d held on to our manufacturing base – after all, the mass production of the consumer goods we used to make has served the Chinese frighteningly well for the last 20 years.

        But HEY apparently – we’re a ‘post-industrial’ economy now – it’s all financial services, real estate, coffee shops and hairdressers.

        We don’t need nerdy scientists and engineers making stuff (‘touch labour’ as I laughingly heard one management consultant refer to the process of actually making product), do we..?

        The magic money fairy and her everlasting credit tree will continue to provide! And if she doesn’t – well my parents will just have to stump up, innit.

  • James Rivett-Carnac

    A fundamental problem lies with present economic theory . Economics has always mascaraed as an exact science. There is nothing scientific about it . Unlike Boyles Law, for example, in physics ., which states that for a given volume of gas, if heated the pressure will increase. economics ignores these rather awkward social problems and the problems or pressures they may generate. Environmental theory may suffer the same un-scientific fate, if there is no attempt to put value on qualitative factors like clean air, pure water and human happiness. Cost benefit analysis is the biggest con of all . It never accounts for costs nor benefits because it cannot measure them . Housing cost benefit analysis suffers from the same fate. After the second World War, successive governments in Britain invested heavily in Social Housing, The problem now is that much of this has become Private Housing. The problem always lies with security of tenure and is the reason why lessees are very loath to invest on improving properties that do not belong to them, because at the end of the day they will not benefit but the landlord will.Karl Marx said it all 150 years ago.

  • Bernard Crofton

    The value of a building plot is the residual element* between the selling price and the costs of construction. When prices rise (e.g. as a result of “help to buy” schemes) most of the increase goes into land values.
    Only public housing to rent can solve the housing shortage. Development for profit cannot do so. If prices stabilise or fall, speculative developers have to stop building or make a loss on land they already have.
    This is so elementary, I cannot believe it is just stupidity that leads politicians and journalists to ignore it.

    * Yes the residual element is now the majority element in Britain.

    • Nzm Ak

      Public housing rent(PHR) wont help in stopping the house price issue since private housing also work hand in hand with government that provides gov. with hefty premiums. Total scale of PHR with no private involvement would means that communist system practiced.

      • Bernard Crofton

        This is nonsense. There are no “premiums” to government on what you call PHR. Instead there is a huge escalating burden of taxes being diverted to Housing Benefit on high rents, which have risen because of shortage.
        The Tory response has been to penalise families who can only find a flat with one bedroom more than they “need”.
        Private landlords do not work with government, especially local government. But this government ( a third of whose MPs are landlords) works for landlords!

        • Nzm Ak

          so you would say gov did not charge land tax according to status of the land in your area?

  • guy hawkins

    housing/real estate speculation is a product of banks creating money for asset acquisition…if money for real estate had to come from the productive economy speculation would be greatly curtailed…it is a banking regulation issue… https://www.youtube.com/watch?v=MechH0ebs_c

    • Nzm Ak

      and now they are afraid of their own speculations. one real example: a bank is asking other collateral(eg. other land or house) for a apartment purchase with value about 100 times of the applicant’s gross monthly salary.

    • itdoesntaddup

      Correct. The twist is that the banks then sell our debts to foreigners, so we gradually impoverish ourselves as we pay the interest and principal that previously recirculated in the domestic economy.

  • Adrian Mizzi

    This is an interesting article but the author is missing basic economic knowledge. This comment is being written by someone that does not own property – yet.

    The author has misunderstood the concept that the underlying reason for property values to rise is not due to land values as being the source, but on economic activity around the land. If for example google decided to locate its head office in a small town (a totally unrealistic scenario but polarises the point) then property values would increase – the increase is not due to the land increasing in value magically as the author has indicated, but due to the economic fundamentals of the location (hence why you hear the phrase location location location for property)

    The second major reason for property increasing is due to global (and domestic) investors viewing property as an alternative investment – it is safe and can offer a high return.

    In London, the above are the two major factors why property has bubbled so high – this is ofcourse the major concern of brexit. If there is a hard brexit and lots of financial services are forced to leave (an unlikely scenario in my opinion, or well, not as dramatic), then the fundamentals of the economy would be at threat and so there will be a forecast of lower demand for the future which would cause prices to fall. Additionally, investors may no longer view property in london as a safe haven and will also depart. The impact would be the bubble bursting. However, it would reopen the doors to property to people who could not afford it before. The economy would eventually find a new equilibrium.

    The author has taken the perspective of blaming capitalism for the problem of house prices. But I find it absurd to ignore all the real economic reasons as to why this has occurred. It is ofcourse true that investors are sitting on assets that are creating wealth for them, but these investors took a risk by investing in property and they are entitled to a return for their risk. The concept is no different to opening a new shop which later becomes successful and the owner can just reap the return. This is the fundamental of capitalism.

    Ofcourse capitalism does go too far where it does not really draw a line for the accumulation of wealth. If you think about it, countries around the world are mainly measured by GDP growth; so investors that are able to continually benefit out of this continuous growth will reap rewards until there is no more gdp growth (from a macroeconomic point of view). Ofcourse, it is rare to hear of a country experiencing negative GDP growth and wealth globally just keeps on rising.

    In terms of property, Government policies like inheritance tax help to spread the wealth but there are always loopholes. Capitalism is the worst economic system, except for all the others.

  • nlpmum

    More complexity: 1. There is very little suitable housing for older people so they are staying in large, inappropriate houses until they cop it at which stage they pass on a highly taxed nest egg to their progeny who will still be unable to afford to buy. 2. A TERRIBLE lack of regulation around rental properties which allows landlords to get away with blue murder (there isn’t even an obligation for a rental property to have any form of heating, and many are riven with damp). 3. No provision (except in council held properties) for long term rentals. 4. Not enough houses in the areas where they’re needed – mostly where there is a power stronghold of people in large properties who have a nimby attitude to new building.

  • Cindy Rosengarten

    Most people, even those benefitting from a so called ‘wealth transfer’, start off at the bottom. After years of hard labor to pay off their property, they certainly deserve to benefit from this ‘transfer’ in their old age, as this is a primary means now of financing retirement. The really easy solution is to heavilly heavilly dilute the housing stock so it is plentiful, and inclusive of larger residences for growing families. This would require a total opening of greenbelt land for 5 years or so. I think that is fair. Preservation of open fields is not as important as providing homes for people. As far as ‘justice’ is concerned- go stick it. Land or property should never be stolen and redistributed. No one deserves to be lazy and get things for free, ever… There are other options.

  • itdoesntaddup

    This analysis is very incomplete. In order to realise a bubble price for property someone must buy it, which means either they are already a wealthy cash buyer, or they are borrowing to make the purchase. Many cash buyers are from overseas, particularly in the London area, so the ownership of wealth is foreign (and the cash raised by the seller effectively goes to pay for our very substantial current balance of payments deficit). Mortgages are funded by selling mortgage backed securities mainly to overseas investors. The wealth is not real, and indeed such wealth as we have is being bled out of us and transferred to foreign interests.

    • George Carty

      Most homeowners realize their property wealth not by actually selling their home, but using it as collateral to access more credit (to spend on cars, holidays, home improvements or whatever). That only requires that the bank accepts the bubbled-up valuation, not that the market does…

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