Dr Richard Wellings, the Deputy Research Director of The Institute of Economic Affairs in London, and Professor of Economics Steve Keen, from the School of Social and Behavioural Sciences at the University of Kingston, also in London, join the program.
Professor Keen advocates that the fundamental cause of rising house prices is rising mortgage credit. He sees that it is the finance industry which is putting up house prices, not a fundamental shortage of supply. This has an enormous effect on an economy, he says, because when people borrow money from a bank they create money which they then spend not only on goods and services but on assets including housing. "This gives you a burning economy until people can't take on any more debt, you reach a ceiling, in most countries that is between 80% and 100% of GDP, and you have a financial crisis. That's exactly what happened back in 2008." The reason that governments allow this to happen, Professor Keen says, is because it is easier to generate money by allowing investment into housing than into an industrial sector, which may not grow at the same rate. When a country comes to rely on money made from investing into property the results can be disastrous when the bubble bursts. "If an economy is fundamentally mortgage driven, and when that rate of debt growth slows down, then that slow down itself is enough to cause a crisis." The danger is that governments can tend to work hand in hand with the banks to support ever rising house prices, because it is easier to manage an economy that way.
Dr Wellings says that in most western countries there are very strict controls on land use which artificially restricts the supply of new housing. Building regulations can effectively ban very low-cost housing, he says. "Basically, poor people aren't allowed to build low cost housing…. This is one reason why housing is an attractive investment because of the restriction on the supply side. You also have tax breaks which make residential property a very attractive investment."
There appears to be a trade-off between protecting the countryside and housing, which Dr Wellings dismisses as having been taken to a ridiculous extreme, in order to keep supply low and thus prices up. Some countries though, such as Germany, make attempts to control house prices, and this has meant that people save more, which means that they invest more through stocks and shares into the economy, which is good for the German economy.
The second part of the programme focusses on the social cost of high house prices which: prevent mobility, price many workers, including teachers, nurses, firemen, even doctors out of large cities, and can turn city centres into investment banks for overseas investors. The stunting effect on personal growth and development of living to serve mortgage payments is discussed as well as many other negative effects of governments allowing house prices to rise to a far higher level than people can actually afford.
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