I don’t think there is a housing shortage in the UK. House prices are too high and so there is a shortage of affordable housing. To help reduce house prices the response has been to try and build more – the bigger the supply, the lower the price, or so the theory goes. This places more and more pressure to encroach ever further on the precious green spaces within and around our towns and cities.
But the reason our house prices are too high has nothing to do with lack of supply, and much more to do with how money is created by our financial system. This isn’t obvious and takes a bit of getting your head around. Transition Town Berkhamsted are hosting a big event with a speaker Fran Boait from the Positive Money campaign to help us all understand. I’m going to have a go at explaining, but am in no doubt I’ll make a hash of it – so come along to the talk or watch the video at the end…
It’s official, the financial system is broken. You’ve heard it repeated over and over in the media. I have recently been made aware of exactly why is it really is fundamentally flawed. The inevitable consequence are the booms and busts and recessions that we have habitually seen on and off over the years.
The interesting point is that there is a way to fix it. Not one you’d hear of much in the mainstream media to date. There is a growing movement called Positive Money that are lobbying and raising awareness of the issue and the obvious fix.
Technical bit – from reading the book Modernising Money: How Our Monetary System is Broken And How It Can Be Fixed, by Ben Dyson and Andrew Jackson.
Ask yourself this – how is money created? You probably think of the royal mint, or the Bank of England. You’d be wrong.
97% of the money in the UK economy is created by a bank giving someone a loan. All they do is open an account for you with a positive balance, and note down that you owe them that balance plus interest. No physical money needs to exist for this to happen.
The banks want to loan as much as possible, because that is how they make a profit. And they don’t need that much in reserve to make those loans – if they loan you £100, they need much less than £100 to start with, and they can reduce this further by immediately selling on the fact that you owe them some money to someone else.
And ratio of their capital to the value of loans they make is lowest for mortgages. So of the money they give out, they want to give as much out for mortgages as they can, so they can loan out more and increase their profits.
Following a recession, banks are less willing to loan out money. When they loan to people to buy houses, they notice that house prices start to go up, so they want to attract more people to take out mortgages, so they lower the mortgage rates slowly, and people are willing to take out larger mortgages, and house prices go up. House prices are going up, so more people want to invest in housing, so more mortgages are taken out, and house prices go up again.
In short, house prices are too high because banks create money, biased towards the housing market, which is relatively fixed in size, so the more money floating around the housing market, the more houses cost.
It also leads inexorably to booms and busts, as bank loans tend towards the housing market and financial assets, which creates no real value in the economy. This creates an asset bubble, and a recession ensues.
The fix is simple, and of course very difficult. The loophole in the law that was put in place in 1854 to stop banks from creating money is fixed – banks cannot create money by a trick of accounting, by creating a loan. Instead money is created by a central bank, such as the Bank of England. Profits from the creation of this money goes to reduce debt or spend on something useful, and the money created is directed towards a productive part of the economy. Booms and busts are a thing of the past, and asset bubbles cease.
I am in no doubt that this makes little sense to most readers, so come along to the talk, read the book, or watch this video. It’s really good: