We don’t need to build all of these houses

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:

John Bell,

Ordinary bloke


5 thoughts on “We don’t need to build all of these houses

  1. How does this directly relate to your climate change crusade?

    What you say here has a foundation of truth, but the whole economic theory is a lot more complex with many more facets than just housing markets causing boom and bust cycles. Take the pension deficits in many countries. There is a whole world of chaos waiting to happen in the UK alone as a lot of people don’t save enough in pensions and rely on their propert going up in value to ensure old age security. Property can also go down in price, it does happen but in short cycles generally. People are sold pensions on a forecasted return of 8% roughly. However this is using data from the past 10 years, look longer term and you will see it’s more like 2%. Now that is a scandle and a time bomb in one.

    I don’t think that building more houses is a real solution, you need to look also at social issues such as limiting immigration and reducing red tape so ordinary people can attempt to develop and extend their own home. Unfortunately for the UK, we are a small island with many people so things can’t improve easily. Countries need an abundance of space to reduce the price of land and therefor the cost of housing in my view.

    • Good question – it relates to climate change because of three reasons. Firstly, the financial system is geared towards lending money to assets, rather than the productive economy – if more was spent on the latter, there would be more to invest in green technology. Secondly, the cycles of boom and in particular bust get in the way of meaningful progress on long-term issues. And thirdly. more building just adds more space for us to heat.

      To understand how real what I say is, read the book, come along to talk or watch the video.

  2. Good stuff John. Banks create money through lending, but you also have to look at the central bank and regulator.
    They can easily reign in excessive lending, even under the fractional reserve system. However, Both the BoE and FSA behaved abysmally.
    You will like this John: take a look who the deputy chairman of the FSA was in the run up to the financial crisis..: the chairman and former CEO of HBOS — sir James Crosby. Unbelievable.

  3. I’ve been thinking about this for a while….
    Irrespective of if we need more homes or not, why not have our government insist that all new houses have solar panels on the roofs when built and solar heating panels. The cost would be met through a mixture of goverment funding and construction company contribution. we’re all in it together. Any surplus electricity generated could be fed back into the national grid (at no cost or recompense to anyone). Thus reducing the amount of electricity generated by coal or oil power stations.

    I don’t know the exact figures but I suspect that every little helps.

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