The End of Cheap Money

Are we on the edge of a great housing market readjustment?

Towering Columns

In The Times, Juliet Samuel says the house party of never-ending price rises may be about to come crashing down:

The flipside of rising mortgage costs is that house prices are now falling. This is no blip. It is probably the start of a sustained and dramatic fall in property values. Housing economists such as Ian Mulheirn argue that decades of rising house prices have been driven not by a lack of building and nimbyism but by ever-lower interest rates. As the cost of borrowing fell further and further, we used all this cheap money not to invest in infrastructure or technology but to bid the cost of houses up and up. This is what the fiscal and regulatory incentives encouraged us to do.

Whether or not Mulheirn is correct that housing supply is irrelevant (I’m sceptical), it is obvious he is on to something: low interest rates turned houses into a huge asset bubble. But now inflation has forced central banks to raise rates. The house party is over and our relationship with property is about to change. That ought to be a good thing, especially for the young. But as I’ve said, houses also happen to be the economy’s most important asset. Another way of summarising the situation is to say that British households are about to get a lot poorer than they ever imagined.

…Inflation is bad for most people, especially the poor, but it is good for indebted governments because it erodes the value of debts. Inflation may also, over time, reduce the value of property relative to daily costs of living, bringing house prices down in a more orderly manner. And if, in the end, the choice is between a painful, inflationary slow-burn adjustment or the risk of bank failures and economic depression triggered by higher interest rates crashing the housing market, it is pretty clear which way the government — any government — will lean. It need not necessarily change the Bank’s job explicitly to signal this shift. Officials are sensitive to mood music from their bosses. Looking back at the 1970s, it’s always striking how long it took for governments to defeat inflation. “Why didn’t they act earlier?” one wonders. Now we’re here — and it’s becoming clearer.

And in The Spectator, Kate Andrews says quantitative easing and failure to build combined to create a fantasy housing bubble:

The Bank still struggles to admit that it was mass money-printing that contributed so heavily to an inflation spiral; that perhaps it’s failing to take the heat out of the economy because it pumped so much ‘free’ money into it. Pandemic cash is still sloshing around. Oxford Economics estimates that the total excess savings held by households accumulated at the height of the pandemic now ranges somewhere between 6 per cent and 12 per cent of the UK’s total GDP. This money keeps being drip-fed by consumers into the economy, driving up prices. All this demands higher rates which, in turn, will keep affecting the mortgage market.

…It is impossible to separate the looming mortgage crisis from the wider housing crisis that has been plaguing Britain for decades. The utter failure to build enough homes throughout the 2000s and 2010s has created a generational divide in which homeowners tend to be older and better off. Home ownership for those aged between 25 and 34 was down from 51 per cent in 1989 to 28 per cent in 2019, according to the right-leaning Centre for Policy Studies. For the poorest young people, it dropped from 24 per cent to just 11 per cent. These distortions have been propped up for a long time.

Still, however rigged, Britain’s housing market – a stock worth almost £9 trillion – remains the bedrock of the economy. At the height of the first lockdown, people weren’t allowed to sit on a park bench, but they were allowed to view flats. The reason for this was not scientific or health-related, but economic: if any part of the economy had to be preserved, it was the housing market, especially in a time of such uncertainty. This time around, the uncertainty can’t be mitigated. 

Also in The Times, Panmure Gordon chief economist Simon French says Rishi Sunak has limited room for manoeuvre on tax:

[T]he economics of tax cuts remains a source of contention. For some observers, the fact that the UK’s tax burden is the highest in 75 years is reason enough to take steps to reduce the size of the state. Yet in 1950 there were only 5.4 million people aged 65 or over; today there are almost 13.2 million. If you adjust for what economists term the “old-age dependency ratio”, there is little evidence that the tax burden has materially changed over the past 25 years. Successive governments have simply chosen to preserve and in some cases increase transfers to a growing segment of the population.

There is also another point of friction, one that relates to the way the OBR looks at the behavioural impact of tax cuts and, indeed, spending programmes. There is frustration in some quarters within government that the OBR is sceptical of policies designed to provide incentives for economic activity. They contend that these can have big economic impacts beyond the arithmetic impact of cash in and cash out of the Treasury.

Richard Hughes, the head of the OBR, will be looking on nervously as attacks mount on Andrew Bailey, his contemporary at the Bank of England. Independent economic actors will find their role becoming increasingly political the longer Britain’s bout of sluggish growth continues.

In Reaction, Alice Darwell says the UK Government will need to act in support of investors in Ukraine’s reconstruction:

Should the UK Government be doing more to support British investment? In general, UK business and capital is more than able to fend for itself. However in this case, Government support is obviously needed – as other allied Governments are recognising and acting on. If UK business wants to explore investment, whom at Whitehall does it call to ask what support there will be through financing and political risk insurance?  Who in Whitehall is going to help it secure the agreements and commitments it will need from Kyiv?  Has any designated resource – human and financial – been allocated to help British investment to identify and secure investment opportunities in Ukraine? Is the Government monitoring what others are doing and ensuring that UK business will also get the right support to operate on a level playing field?

Infrastructure is likely to be the most promising early-stage investment avenue for investors, where Ukraine can guarantee offtake over 10-30 year agreements and credit enhancement from the World Bank and EBRD should be available. Utilities are both a prime focus for Ukraine and an opportunity for investors to showcase green energy solutions alongside other emerging technologies. The Government could support UK investors with priority access to Ukrainian decision makers on energy, telecoms, green technology and other key infrastructure projects – ideally showcasing UK tech and engineering prowess.  It could establish a development finance institution for Ukraine with a similar mandate to British International Investment, to encourage the rich vein of smaller Ukraine businesses and entrepreneurs to re-ignite the economy from the ground up.

All too often, the Government machine gets a bad press. But we know from the past that when the stakes are sufficiently high and given a strong lead from No.10, it can deliver. We saw that with preparations for the 2021 Glasgow climate conference, which benefited from having its own full time cabinet minister, Sir Alok Sharma. The success of Dame Kate Bingham’s vaccine taskforce reflected her leadership and not being part of the Whitehall machine but having a short reporting line to the prime minister.

On ConservativeHome, Paul Goodman says Conservatives shouldn’t only focus on culture wars - but that they do still have to be fought:

In the view of voters, the most important issues facing the country remain the economy, the NHS and immigration.  Woke is joined to the last especially by small boats, and its belief hat national borders are illegitimate. But if the Conservatives fix their gaze on it to the exclusion of all else, they will be turning their backs on the voters.  Meanwhile, there are three courses that Ministers should take – since Woke is especially vulnerable when it compromises women’s safety, what’s taught to children, and fairness more broadly (for example, when biological men compete in women’s sports).

First, speak.  Government is a bully pulpit, and what Ministers say matters.  So Gillian Keegan must be quick on the draw, for example, about self-ID in schools.  Second, they must act.  The recent Freedom of Speech Bill was a start.  “In terms of academic freedom, it is a game-changer,” Eric Kaufmann wrote recently on this site. Now, Kemi Badenoch has urged Ofsted to send inspectors into Rye College in East Sussex – the school in which a teacher allegedly told Year 8 pupils they were ‘despicable’ for stating there are only two sexes.  But third and ultimately, the Government must think strategically.

On this site recently, Kate Coleman and Maya Forstater described the confusion about sex and gender in the Equality Act.  This cats cradle needs to be untangled, and the Conservatives have had 13 years to do it.  But it remains a mass of twisted threads.  Why? You might say because Tory MPs themselves have no united view – as we’ve seen over the mooted trans conversion therapy ban, which a minority who believe in self-identity enthusiastically support.  But my sense is that they are a relatively small slice of the Parliamentary Party.

At UnHerd, Peter Ramsay says Brexit exposed the poverty of our political parties, and that the cause of sovereignty and nation-building must go far beyond leaving the EU:

Brexit has illustrated how true sovereignty always required more than the Eurosceptics’ call for the legal supremacy of a sovereign parliament within the territory it rules. As Martin Loughlin, Britain’s leading constitutional theorist, has long argued, parliament’s legal supremacy is worth little if it is not underpinned by a relationship of political authority between the rulers and the ruled. For politics to function, in other words, voters must believe that parliament, and the government that is answerable to it, really represents us, so that we recognise its laws as our laws. And it is this which generates the real power of government to get anything useful done. Yet today, those with eyes to see — and that’s now most of us — know that our major parties can no longer sustain this kind of authority.

If Brexit has made the void of political authority inescapably apparent, merely leaving the EU has not done much to fill it. Without new politics and a new electoral system, our clapped-out political parties will continue to find their policies in the forums of the cosmopolitan elites: Net Zero, mass migration, identity politics, information control, proxy war. They will limp along offering nothing too innovative: more green austerity, more culture wars, more censorship. They will stay close to the Single Market, relying on the strictures of the Northern Ireland Protocol, rather than trying to conjure up something new

…Once we take this nation-building perspective, novel solutions to the familiar problems of our age will surely arise. For at its heart, such nation-building is a process of investment in the nation’s people and in the infrastructure, both economic and political, that we need to rule ourselves. It allows us to identify the real obstacles in our domestic constitution to the revival of our collective public life, emphasising equal citizenship over narcissistic identity and ethnic or religious divides. And, crucially, nation-building is inherently internationalist — as opposed to cosmopolitan and intergovernmental. After all, respecting one’s national sovereignty includes, and even depends on, that of others’. Far from being isolationist, then, Brexit remains a huge opportunity to break free from the decaying structures of globalism and Atlanticism, and instead to make friends not only with the restive peoples of Europe, but also with the rising powers of the Global South.

Wonky thinking

The Resolution Foundation published a new report, Beyond Boosterism, laying out a plan to increase UK private investment, including leveraging pension funds more effectively:

The UK economy is more than 15 years into a period of very low economic growth. Underlying this has been stagnant growth in labour productivity, which has caused incomes to stagnate and fall further behind those in neighbouring countries. Labour productivity has grown just half a per cent per year since 2005, half the rate in the OECD as a whole. And productivity actually fell by 0.6 per cent in the four quarters to Q1 2023.

There are a wide range of views about the cause and extent of Britain’s productivity growth problem. But one area of broad agreement is the role played by the UK’s low investment rate, which our previous work has shown is an area where the UK stands out. This report focuses on business investment – which comprises about 60 per cent of total investment – and the crucial role of public sector investment has been covered in a companion report in the Economy 2030 Inquiry.

In the years since the financial crisis, the UK’s business investment rate – the fraction of GDP devoted by firms to building structures, buying machines and doing research and development – fell back from already the relatively low rate in the 2000s, leaving us further behind rates in comparable countries. Among a set of 21 high income OECD countries, the UK’s share of business investment in GDP fell from 16th in 1995-2007 to 20th place in 2008-2021, ahead only of Greece.4 Investing too little for one year is manageable, but doing so year after year is a recipe for relative decline.

It is true that the picture looks more promising on intangible assets – a concept that reflects “know-how” in businesses. Research and development (R&D) expenditure is a key example of intangible investment which is included in gross fixed capital formation (and “capitalised” for the purposes of the national accounts). This is an area where UK businesses do better than previously thought; taking into account recent ONS restatements, overall investment in R&D as a share of GDP exceeds the OECD average, although still lags behind countries like the US and Germany. And the UK underperforms by less if we include a broader set of intangible investments (such as market research and branding, or training) in our comparisons, although these are harder to measure and define, and therefore not normally included in national accounts data. Nevertheless, if we consider the outcomes of intangible investments, we can see that there is room for improvement in the UK across areas that matter for productivity: the UK’s management practices are not best in class, and patenting intensity and digitisation in firms tend to be middling versus other advanced economies. So it doesn’t seem likely that the UK’s performance on intangible investment makes up for its poor performance with respect to investment in tangible assets – underinvestment across both, together with skills, explains the UK’s productivity gaps with its key comparator countries.

New polling by Frank Luntz for the Centre for Policy Studies found that British voters - including Conservatives - have mixed attitudes towards freedom:

[W]hen we asked people what threatened their freedom, Tories tended to feel their freedom was most at threat from crime, antisocial behaviour and migration. Labour supporters chose politicians and government bureaucrats. Tory voters were also much more likely to trust the country’s leaders and institutions, and to believe the Government tends to give freedom (63 per cent) rather than taking it away (37 per cent). For Labour voters, the proportion was almost exactly the reverse.

…Yes, voters believe freedom is a good thing. And it is frequently seen as a positive force. Some 71 per cent of voters told us that building homes so people have the freedom to live where they want was more important than the freedom to prevent building in their community (29 per cent). But alarmingly, 36 per cent said prosperity should be the least important value for the UK – catastrophic given the country’s desperate need for growth. Similarly, few voters on either side identified opportunity as the Number #1 priority value – even though politicians of all stripes talk about it incessantly. There are too many people in the UK who have come to believe that opportunity is for someone else, not them.

Having conducted similar surveys in the US, it’s remarkable how different our views are towards government. A large majority – 65 per cent to 35 per cent – told us that it was government’s job to protect most people against most risk, rather than to act as a safety net when people need it the most.

All of which is terrible news if you want to argue against bailouts for mortgage-holders, or indeed for tax cuts and a smaller state. We even found that Tories are more likely than Labour voters to associate government spending with investment in public services, rather than government wasting your money – and indeed that the public’s overall priority when it comes to “economic freedom” is better public services rather than lower taxes or less regulation.

And Policy Exchange released a new report with a foreword by Michael Gove, Better Places, explaining how Britain can build more liveable, beautiful communities:

How do we create better places? This has been an essential human challenge for countless civilisations throughout the ages and the greatest fruits of these labours have been cities, towns, villages and streets that are loved and revered by either their local communities or, in some cases, by a captive audience around the world.

In Britain in 2023 this question assumes a unique political urgency because the Government has placed the revitalisation of places at the heart of its flagship levelling up agenda. But if places are to be the litmus test of socio-economic renewal and if, to a large extent, we are to judge the success of levelling up on the quality and condition of the places it has affected, this initial question begs another equally complex one: how do we ensure new developments will make places better?

And herein lies the problem. It is relatively easy to measure the results of Government expenditure or intervention in many areas, defence spending results in “X” amount of new tanks which provides “Y” amount of enhanced military capability, health spending results in “X” amount of new hospitals which provides “Y” amount of increased treatment capacity. These are distinct, quantifiable, measurable outcomes that lend themselves well to clear numerical analysis and comparison. This is not the case with places. Yes, a new residential development may provide “X” amount of new homes or a new traffic layout system may provide “X” amount of additional pedestrian space. But none of this sheds any light whatsoever on what the place feels like, how people react to it, how popular it is or what kind of character or identity it maintains. In short, normal objective assessment criteria for placemaking - the principal tool deployed to deliver better places – is largely unable to determine whether places possess the most crucial ingredient in determining whether they fail or succeed: a ‘sense of place’.

This paper represents what we believe to be ground-breaking attempt to develop a universal tool capable of measuring how successful developments will be, (or are) at placemaking for the very first time. The Placemaking Matrix will therefore bring placemaking in line with other UK statutory assessment systems like EPC (Energy Performance Certificate) ratings and OFSTED (Office for Standards in Education, Children’s Services and Skills) rankings.

Book of the Week

We recommend Tomiwa Owolade’s new book, This is Not America: Why Black Lives in Britain Matter. Owolade says we have fallen into a trap of following American political trends on race and identity, and that black Britons are British first and foremost.

One such important difference between Britain and America is race, and this will form the focus of this book. Over the past decade, racial topics have become much more visible in the British media landscape. As the researcher David Rozado puts it, in a blog post that was published in August 2022, ‘over the last decade, various studies have suggested that the UK is now rapidly following the United States into a more polarized politics in which intensifying “culture wars” over issues such as racism, identity, diversity, the legacy of history, and “social justice” or so-called “woke” politics are becoming far more prominent’. Rozado adds that ‘between 2010 and 2020, terms such as racism and white supremacy in popular UK media outlets increased on average by 769% and 2,827% respectively’. The problem is that, all too often, these discussions reflect an American perspective.

Britain is not America: black British people are distinct from black Americans in many relevant ways. Black British people, for example, are overwhelmingly immigrants or the children of immigrants. The average black American, by contrast, can trace his or her ancestry in America further back than the average white American. The black British population only reached 1 per cent of the general British population for the first time in around 1980. Black people now constitute 4 per cent of the British population. Since America’s founding, however, the black American population has been between 12 and 19 per cent of the general American population. For a long while, black British people largely meant black Caribbean people. This is no longer the case. Over the past thirty years there has been a significant shift in the nature of the black British population: there are now twice as many black Africans in the country as black Caribbean people. Most black Americans are still the descendants of the enslaved Africans imported to America between the seventeenth and nineteenth centuries.

Race is different between the two countries in another sense, too: the racial composition of Britain and America. White people constitute 60 per cent of the population in America: in Britain, by contrast, they make up 81.7 per cent of the population. There are more than three times as many Asian people in Britain as black people: Asians now make up 9.3 per cent of the British population. In America, by contrast, there are twice as many black Americans as Asian-Americans. America also has a distinct ethnic group that numbers almost 20 per cent of the population – the Hispanic or Latino – for which there is no equivalent in Britain. In all of the above respects, race in Britain is different from race in America. This should come as no surprise: Britain’s political institutions, history and many of its cultural values are different from those in America, so why should we assume that race would be the same between the two countries?

Many of us forgot these differences after the murder of George Floyd. On 25 May 2022 the British Labour Party announced that it would introduce a new Race Equality Act. As part of the announcement, the party released a video on social media explaining why Britain needed legislation to combat systemic racism. David Lammy, the Labour MP for Tottenham, was the first person to appear in the video. Near the start, he said this: ‘George Floyd looked like me. He could have been me.’ But Floyd only looked like Lammy in the most superficial sense, and his life experience could only have been like Lammy’s in the most superficial sense, too: in that they were both black. David Lammy is a British politician and lawyer representing a London constituency: he is not similar to George Floyd. George Perry Floyd Jr – known simply as Perry to his family and friends – was born in October 1973 in Fayetteville, North Carolina, to George Floyd Sr and Cissy Floyd. He was arrested more than twenty times in his life by the police, often for dealing drugs, and he spent almost one-third of his adult life in jail. He also attended a segregated school, an experience that doesn’t correspond to the experiences of black British people.

Ultimately the announcement was pointless. We already have the 2010 Equality Act, which supersedes the 1976 Race Relations Act and explicitly prohibits racist discrimination. It is not clear to me what a new Act would do. In the video Lammy adds that ‘We face the issues of structural racism in our lives every day. That’s why George Floyd’s death sparked a global movement, stretching from Minneapolis to Manchester to Mile End.’ Why should we assume that being a black person in Minneapolis is the same as being a black person in Mile End, apart from the magical powers of alliteration? Lammy doesn’t enlighten us.

Racism is not the same everywhere in the world. Racism reflects norms, and norms are not universal. They depend on the social, cultural, economic and demographic background of a country. The racism against African migrant workers in Italy is not the same as the racism against indigenous communities in Australia; the discrimination against Indian labourers in Qatar is not the same as the genocide against Uighur Muslims by the Chinese Communist Party. There are some similarities between the racism experienced by black people in Britain and America because both countries have some cultural affinities, but there are also many important differences. They are different countries.

Quick links

Traders predict interest rates will rise to 6 per cent and stay there until May.

14 million mortgage-holders could see a 20 per cent cut in their disposable income.

Over 30 are injured following an explosion at the Catholic education headquarters in Paris.

The Government’s net zero strategy will involve a significant expansion of the pylon network.

Former Chancellor Philip Hammond said immigration should be increased to keep wages down.

One in three Tory MPs may stand to lose their seat at the next general election.

Labour is drawing up plans to fill the House of Lords with new peers.

HS2 is set to cost more than double the £33 billion budget set a decade ago.

3.3 per cent of the world’s “unicorn” companies are in London.

Alzheimer’s and Dementia were the leading cause of death in England in May - 10.9% of all deaths.

Burglars could be released six months early to ease prison overcrowding.

Chinese companies have bought up $1 billion worth of Nvidia GPUs for AI this year.

Joe Biden would beat all Republican candidates for the White House, but Ron DeSantis is closest.

AstraZeneca is planning to break out its China business and list in Hong Kong.