The following non-fiction article was written, and submitted to several publications, in 1998. Ten years before the credit crunch and subsequent cascade of economic crises. Not one of them wanted to publish it, which is why, when the worst happened, The Queen went to the London School of Economics, asked why they hadn't seen the crunch coming, and got fobbed off with some of the most pathetic excuses she can ever have heard.
Not perfect in every detail, the prediction is right on the essentials: the house building programme, which has been touted by government after government since that of Edward Heath, simply cannot be afforded by the UK economy. And it never will be affordable, because the property market that the programme is designed to serve, will create a debt bubble every time the economy tries to grow in order to afford it all.
Almost certainly, the UK property market needs precisely the kind of bust which successive governments have been striving to dodge since the late nineteen eighties, in order for it to be possible to build enough houses to meet social needs without distorting and then destroying the whole economy. If the property market was trapped on the roller coaster on its own, it wouldn't matter, but it's taking every bit of the economy with it, and has been doing so ever since Edward Heath and Rab Butler deliberately created a credit boom in the early seventies to make the electorate feel wealthier than they could ever really be.
The Trillion Dollar Millstone
There’s a neglected dimension to the debate on the government’s housing requirement (variously, it is 4.7 million or 5.1, or 5.5 million, new houses, to be built largely on greenbelt sites.) There are environmental arguments, sure, and big ones, not just to do with loss of countryside either! There are political arguments, because there seems to be an element of revenge about the way Labour wants to inflict unwelcome development on what it perceives as Tory shires (that shires vote Tory is both an outdated perception and a self-fulfilling prophecy in this instance!)
All these, and more, are discussed and will be argued ever more strongly in the coming weeks. But so far, there has been no serious discussion in any mainstream media of the economic implications of building around five million new houses, either on greenbelt land or brownfield sites.
One important economic distinction between new houses on brownfield sites and those on greenfield sites is that the latter get built rapidly and their subsequent sale and occupation is elective, whereas houses on existing urban sites get built at a steadier pace and their eventual sale or rental is more or less guaranteed, although the price might fall below the builder’s expectations. In terms of the overall economic impact, though, the principal difference the location of a new house makes is in determining the price and how much money has to be borrowed to pay for it. These days, that difference is smaller than it was.
In order to eliminate all possibility of hype from this article, I will assume the median figure for new house building, of five million units, and I’ll also assume that the average price will be towards the low end of the building industry’s expectations; say £70,000 per house. I’ll also assume that the UK mortgage industry will be more prudent than it has been for many a year and that mortgages will be no worse than 80% of purchase price and not the 90% which has become normal.
Since the government says that these houses are to be occupied by divorcees and the like, it’s hard to see many of them having enough capital to drive mortgages much lower than 80% of purchase price. It might be argued that some of these buyers will be financing the purchase of their new rural house by selling an old urban one, but then somebody somewhere has to enter the market by buying the old house for that to be possible, so 5 million new homes will always work out as 5 million new mortgages.
Right then, let’s please Stephen Byers with some arithmetic. Assuming the low price of £70,000 and a “prudent” 80% mortgage, that means borrowing of £56,000 per house. (This figure is certainly not above typical mortgages being sold at the moment.)
To a public used to this kind of figure in their own financial experience, this sounds dreary, but familiar and nothing to be worried about. So let’s add the chill factor. Multiply £56,000 by five million: 56,000 x 5,000,000 = 280,000,000,000. Gosh! that’s two hundred and eighty billion pounds!
But you don’t pay back a £56,000 mortgage with £56,000. Mortgage leaflets supplied by banks state the truth as circumspectly as the law allows, but a standard 25 year mortgage will typically require repayments adding up to two and half times the original amount borrowed. So, let’s multiply two hundred and eighty billion by two and a half, shall we?
280,000,000,000 x 2.5 = 700,000,000,000 Goodness me! that’s seven hundred billion pounds! But is that really a lot of money? Yes it is. There are 1.6 dollars to the pound. £700 bn pounds is 1.12 trillion dollars. A trillion dollars is a unit of currency only required previously to describe the grand total of US defence budgets for the entire length of Ronald Reagan’s presidency.
The projected cost of a manned expedition to Mars is a mere $100bn. People who advocate even an international project of that magnitude are looked on rather strangely. The government’s housing plans are ten times bigger!
Judging by their past performance, it is entirely possible that UK banks and mortgage companies will lend £280bn to the army of divorcees and “flexible” labour on short term employment contracts which the government says will require those five million new homes. What I question, however, is there being even the remotest chance that they will be able to meet the £700bn of repayments.
Much smaller debts than this have just crippled much stronger economies than ours all over the Far East. In terms of a national debt, a trillion dollars wouldn’t be remarkable, although our current national debt is smaller than this. But we’re not talking about a national debt, where the debtor is a nuclear-armed government immune to foreclosure, we’re talking about private debts which will be owed by people who, by the government’s own admission, are buying houses solely because of a personal crisis like divorce. They may already be paying another mortgage, or child maintenance.
This will create, not just ripples, but a shockwave which will rip through every single area of the British economy and every area of everyday life. Like the seventy years ruin which befell Tyre in biblical times, the British economy will simply choke to a halt under the strain of servicing the debt: Small businesses will find it impossible to borrow (“a second mortgage, Sir? really!”), consumer spending will dwindle, house prices will freefall; compounding the bad debt problem and bumping-off building firms all over the place! and foreign investment will shun the UK when the scale of the government’s fiscal recklessness becomes clear. We definitely won’t be welcome to join the Euro after this!
It will be probaby the worst economic crisis in Europe since the hyperinflation which brought the NAZIS to power. An interesting comparison, because the only escape from a trillion dollar debt will be hyperinflation. And with Labour as unelectable as the Tories, what sort of politics will a desperate and angry public turn to then?
All these, and more, are discussed and will be argued ever more strongly in the coming weeks. But so far, there has been no serious discussion in any mainstream media of the economic implications of building around five million new houses, either on greenbelt land or brownfield sites.
One important economic distinction between new houses on brownfield sites and those on greenfield sites is that the latter get built rapidly and their subsequent sale and occupation is elective, whereas houses on existing urban sites get built at a steadier pace and their eventual sale or rental is more or less guaranteed, although the price might fall below the builder’s expectations. In terms of the overall economic impact, though, the principal difference the location of a new house makes is in determining the price and how much money has to be borrowed to pay for it. These days, that difference is smaller than it was.
In order to eliminate all possibility of hype from this article, I will assume the median figure for new house building, of five million units, and I’ll also assume that the average price will be towards the low end of the building industry’s expectations; say £70,000 per house. I’ll also assume that the UK mortgage industry will be more prudent than it has been for many a year and that mortgages will be no worse than 80% of purchase price and not the 90% which has become normal.
Since the government says that these houses are to be occupied by divorcees and the like, it’s hard to see many of them having enough capital to drive mortgages much lower than 80% of purchase price. It might be argued that some of these buyers will be financing the purchase of their new rural house by selling an old urban one, but then somebody somewhere has to enter the market by buying the old house for that to be possible, so 5 million new homes will always work out as 5 million new mortgages.
Right then, let’s please Stephen Byers with some arithmetic. Assuming the low price of £70,000 and a “prudent” 80% mortgage, that means borrowing of £56,000 per house. (This figure is certainly not above typical mortgages being sold at the moment.)
To a public used to this kind of figure in their own financial experience, this sounds dreary, but familiar and nothing to be worried about. So let’s add the chill factor. Multiply £56,000 by five million: 56,000 x 5,000,000 = 280,000,000,000. Gosh! that’s two hundred and eighty billion pounds!
But you don’t pay back a £56,000 mortgage with £56,000. Mortgage leaflets supplied by banks state the truth as circumspectly as the law allows, but a standard 25 year mortgage will typically require repayments adding up to two and half times the original amount borrowed. So, let’s multiply two hundred and eighty billion by two and a half, shall we?
280,000,000,000 x 2.5 = 700,000,000,000 Goodness me! that’s seven hundred billion pounds! But is that really a lot of money? Yes it is. There are 1.6 dollars to the pound. £700 bn pounds is 1.12 trillion dollars. A trillion dollars is a unit of currency only required previously to describe the grand total of US defence budgets for the entire length of Ronald Reagan’s presidency.
The projected cost of a manned expedition to Mars is a mere $100bn. People who advocate even an international project of that magnitude are looked on rather strangely. The government’s housing plans are ten times bigger!
Judging by their past performance, it is entirely possible that UK banks and mortgage companies will lend £280bn to the army of divorcees and “flexible” labour on short term employment contracts which the government says will require those five million new homes. What I question, however, is there being even the remotest chance that they will be able to meet the £700bn of repayments.
Much smaller debts than this have just crippled much stronger economies than ours all over the Far East. In terms of a national debt, a trillion dollars wouldn’t be remarkable, although our current national debt is smaller than this. But we’re not talking about a national debt, where the debtor is a nuclear-armed government immune to foreclosure, we’re talking about private debts which will be owed by people who, by the government’s own admission, are buying houses solely because of a personal crisis like divorce. They may already be paying another mortgage, or child maintenance.
This will create, not just ripples, but a shockwave which will rip through every single area of the British economy and every area of everyday life. Like the seventy years ruin which befell Tyre in biblical times, the British economy will simply choke to a halt under the strain of servicing the debt: Small businesses will find it impossible to borrow (“a second mortgage, Sir? really!”), consumer spending will dwindle, house prices will freefall; compounding the bad debt problem and bumping-off building firms all over the place! and foreign investment will shun the UK when the scale of the government’s fiscal recklessness becomes clear. We definitely won’t be welcome to join the Euro after this!
It will be probaby the worst economic crisis in Europe since the hyperinflation which brought the NAZIS to power. An interesting comparison, because the only escape from a trillion dollar debt will be hyperinflation. And with Labour as unelectable as the Tories, what sort of politics will a desperate and angry public turn to then?
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