House Prices
Most of the debt in the UK is borne by individuals in the form of mortgages. Between 1960 and 1996 total UK mortgage borrowing rose from £3,350 million to £409,433 million. Since then, it has more than doubled, passing the £1 trillion point in May 2006. This is mainly attributed to banks getting into the mortgage lending business (and many building societies demutualising and becoming banks) in the 1980's. As banks are not limited to lending out only the amount deposited with them, but can create as much 'money' as they wish in the form of loans to house-buyers, we now have a situation of an unlimited amount of money chasing a finite housing stock, which is a recipe for inflation.
Mortgages are commonly accepted as the normal way to 'purchase' a house. Indeed, most people who have a mortgage would describe themselves as 'owner-occupiers', when really the bank owns the property until the debt has been paid.
The word 'mortgage' means 'death-pledge' or 'death grip'. It stems from medieval times when mortgages were a method of raising money on a property that you already owned outright if you had fallen upon hard times. It was seen as a last resort.
If you fail to keep up repayments on your mortgage the bank has the right to repossess your property. The fact that banks don't actually have he money they loan you is overlooked, but they will get that money back either by your repayments, or by repossessing your house and selling it!
In the early 1900's the idea of individuals borrowing vast sums of money against their future income was not entertained. Old sayings like "neither a beggar nor a borrower be" and "if you want it, you've got to earn it" were commonplace, and warn of the dangers of borrowing.
It is was only in the interwar years that people started to buy his or her own homes rather than rent. Once borrowing money against your house had become established, pretty much everyone wanted to do it.
Houses in the 1930's were cheaper relative to income than now. They were about twice a man's annual salary, and buyers had more money to put down as a deposit, generally about 25%. The average life of a mortgage was about 8 years - not because it was transferred to another property, but because it was settled early.
Nowadays many mortgages take two annual incomes into consideration and 100% mortgages are common. In America, some lending authorities don't even ask about income, they just lend! - Confident that they will get their money one-way or the other (repossession).
Ultimately, the price of houses doesn't reflect the price of the properties (although that is relevant, see business) or how much we can afford to pay, it is dependant on what we can be persuaded to borrow.
When the prices of our houses are escalating, those of us who are owner-occupiers appear to do well out of the housing market. But we only make money if we sell up and move out of housing. Meanwhile, first time buyers have an increasingly hard time trying to get onto the property ladder.
When confidence fails in the housing market, people who have been persuaded to borrow beyond what they can reasonably afford face paying back a loan on a property that is 'overvalued', repossession or houses that they can only sell at a lower value than the price purchased.
We also have a situation now, where more people are re-mortgaging their properties to help their children buy a house, to help them through their retirement or pay for a new bathroom/kitchen/extension. This in turn means that less property is passed down to the next generation.
So why did successive governments site back and allow – even encourage –the increased borrowing which has now driven property prices up beyond the reach of most first-time buyers?
When we remember that mortgages provide the country with around 60% of its money supply, it seems reasonable to assume that any loosening of the criteria for borrowing served a definite political and economic objective. Relaxation of the rules has certainly led to a massive expansion of the money supply by making it possible for people to take on previously unthinkable quantities of housing debt.
The result is that housing costs now absorb 17.5% of the average UK homeowner’s income after tax. In 1960, the comparable figure was 9.5%, and remembers in those days 'household income' would usually refer to one full-time wage, whereas today it generally includes two.
For the banks, the property bubble is a huge money-creation bonanza. For the government, it is a valuable source of revenue, as stamp duty and capital gains tax roll in, and inheritance tax thresholds fail to keep up with grossly inflated house prices. Not to mention the fact that all those debt-soaked property 'owners' are obligingly taking on, at their own risk and expense, money supply duties which should be shouldered by a public authority.
However, there has never been a bubble which didn’t burst, and unless this one is the exception to the rule, the excessive borrowing fostered by bank and government policy may once more end in negative equity and widespread repossessions.
As long as governments rely on systemic debt to put money into the economy, it is in their interests to keep mortgage lending high and you and your children will be the ones to suffer!
The significance of falling house prices
Mortgage approvals reach record low
On 24th June 2008, the British Banker's Association reported that mortgage approvals for May 2008 were 56% down on the same time last year. Overall, during 2008, the value of home mortgages is down 57% compared to the same time in 2007.
If this trend continues, then with much less money available to house buyers, house prices can be expected to plummet. People with houses to sell will try to resist this trend by asking for the higher prices that they have come to expect, until it becomes apparent that, in a falling market, those who sell soonest will get the best price.
A fall in house prices will be good news for first-time buyers and others wanting to move up the property ladder, but only if they are lucky enough to secure one of the increasingly rare mortgages. People who have avoided the borrowing and spending binge of the last decade, and carefully saved up their money, will find their prudence paying dividends now.
By contrast, those who thought that ever rising house prices would guarantee them a pension in their old age through equity release or down-sizing will discover that they have been led up the garden path by financial commentators.
Wider concern
However, the fall in house prices and the restriction on mortgages that has caused it presages a period of concern not only for established home-owners but for everyone.
The reason for this is the extraordinary but plain truth that, when banks lend out money to borrowers, they are in effect creating the nation's money supply by their very process of lending. They create credit out of thin air which borrowers spend as if it was 'real money' and so it becomes the currency of the nation. So our money supply is created out of the debts of borrowers!
This money creation process occurs no matter who might be the borrower, whether the Government, a corporation, or a private home-owner, but mortgages are important because over recent decades they have created 60% of the nation's money supply.
The house-price bubble
House prices were able to over-inflate so excessively because there was no limit to the amount of money within the housing market. It was created as the very mortgages used to buy the houses!
Once the banks had begun to bend their own rules about how much buyers could borrow (up to five times a couple's joint income), the banks could lend as much as people were prepared to borrow, and with house prices shooting ever skywards, people were desperate to buy in fear that they would be left behind.
The bubble bursts
When banks create an asset for themselves in the form of their customer's mortgage (which word is derived from French and means 'death-bond'), they also create a liability for themselves within the money markets. Usually the customer's repayment of their mortgage more than pays for this liability. Should the customer default on their debt, the sale of the repossessed house will cover the bank's liability, unless of course, there is no one available who can afford to buy a house at the top of the market whose own mortgage-to-income ratio would not be so high as to make them likely defaulters themselves.
When houses could no longer be sold for their asking price, house prices began to fall, and those banks with too many unsold repossessed houses on their books discovered that their assets started to fall in value below their liabilities. Suddenly, the banks became very risk averse, granting mortgages with very much smaller income multiples than before and then only with large deposits to safeguard themselves from negative equity. This is the credit crunch.
Bad news all around
This might be good news for some first-time buyers, but it is bad news for the economy. Extraordinary though it might seem, without the continuing rise in the value of new loans being granted year-on-year, the economy will begin to run out of money. With 60% of the total UK money supply being based on mortgages, a 56% drop in the value of mortgages will mean a 33% drop in the nation's money supply. This will not happen over-night. It will take a year or two to feed through into the economy, but it will happen unless action is taken.
To put this into perspective, the Great Depression is reckoned to have been caused by a 27% drop in the money supply. The current figures, and the fact that both Britain and the world is much more heavily dependent upon debt-based money than it was 80 years ago, suggest that the economic difficulties towards which Britain is now blindly drifting could be much worse that the 1930s.
The Government's choices
Faced with this prospect, the Government has two choices (short of fundamental money reform). It can increase its own borrowing, thus replacing private borrowing by public borrowing as the means of creating the money supply, or it can drop base lending rates in order to encourage greater private borrowing.
Increased Government borrowing will only put off the problem for another few years (and another Government), placing an increased burden of taxation on future generations.
Increasing private borrowing, especially if it is directed towards consumption rather than production, will simply increase the rate of inflation as more money floods into the economy.
The present Government's own rules about the amount it can borrow and the level of inflation it can permit deny it both of these options, so its strategy seems to be centred around doing nothing and hoping that the bad times will pass, like a spot of bad weather.
Stagflation
Stagflation, a combination of a stagnant economy with inflation, was a feature of the 1970s, and it might be with us into the 2010s, yet according to conventional economic theory, stagflation is impossible.
A stagnant, recessionary economy is a consequence of insufficient money in existence to enable the economy to flourish to its full potential. Inflation is the existence of too much money chasing too few goods. Stagnation and inflation cannot, in theory, occur together. That they can and do is a consequence of our debt-based money supply. Money created out of thin air as credit, such as mortgages, is not limited by any controls, and can be created without regard to national production. However, as the money supply increases so the amount that needs to be extracted from the economy to pay the interest on this credit increases even faster, so there is less for ordinary spending, businesses suffer and the economy faces recession. With debt-based money, there can be both too much and too little money within the economy at one and the same time!
