House price inflation and the madness of monetary socialism

Picture of the Bank of EnglandVia House price inflation should be capped at 5pc, RICS says – Telegraph,

House prices should be prevented from rising by more than 5pc a year to stop another bubble destabilising the economy, a top property institute has urged.

For comparison, the UK inflation target is 2%. The RICS story is here.

With excessive price growth and high mortgage lending having led to a vulnerable banking sector, specific policy on limiting growth is needed. Such a policy could be implemented with caps on elements such as loan-to-value ratios, loan-to-income ratios, and mortgage durations, or imposing ceilings on the amount banks are permitted to lend, should prices exceed a given limit.

Deliberate interventions in the economy have been made to promote lending and particularly into housing (again) to stimulate the economy. To the extent this is a success, it is creating activity in the housing market which is dependent on those interventions – IE, it is a bubble.

So now RICS want to limit the bubble to two and a half times the rate of growth of those prices in the inflation target. They promote a range of further economic interventions to achieve the policy.

This is socialism, that is, economic planning. It never achieves the ends aimed at. If it did, the world would adopt all-round planning, which requires public ownership of the means of production, and the utopia of Communism would be “ushered in”.

Regional analysis of the recent employment figures showed that the South East was doing best and the North East worst. Look at the regional price data for the past decade (eg this) and you’ll see the rate of house price growth slows further from London. These facts are consistent with the so-called Cantillon Effect: new money in an economy produces distortions. Price inflation happens nearest the source of the new money.

The housing market and financial system are already awash with absurdity but RICS wants even more intervention. Young people are priced out of the housing market and groan under the burden of high rents. Some homes may be due price rises well over 5%, if they are currently severely under-priced. Some people have made apparent gains in the value of their homes which dwarf their lifetime incomes. Capital is being poured into housing, which is essentially a durable consumer good not a capital good, where it cannot increase real wages.

In a nutshell, here we go again. Policy is producing undesirable side effects, frankly unjust ones, so the same people who call for economic interventions are calling for yet more intervention to fight their consequences. This is folly and it leads only in one direction: impoverishment.

Far better to abandon the monetary socialism which got us into this mess and enable a just social system of inclusive prosperity based on meeting the real needs of other people. That requires honest money which holds its value and which is not subject to manipulation. It means commodity money and free banking, not fiat money and central banking.

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Comments & Responses

2 Responses so far.

  1. Ralph Kent says:

    Well said. RICS proposal of more intervention is just tackling the symptoms, not the cause. Refreshing to hear a Conservative actually recognise the madness of QE / FLS / HTB – its just a shame that those who are making the ill-judged decisions – Gideon, Pickles, Brandon Lewis are either a) too stupid b) too focused on Middle England and the next General Election to take on board the patent common sense you have espoused above. This is just intergenerational theft on a societal scale.

    The continuing policy of wilful inflation creation serves as a huge moral hazard, promotes poor investment decisions and increasingly acts as a disincentive for the least well-off to bother carrying on.

    What will it take for those behind the QE policies to sit up and take notice? More than 50% of UK property owned by overseas landlords looking for their portfolio to be underwritten by UK taxpayers?

  2. tery hamer says:

    Surely you mean: “This is YET MORE socialism, that is, YET MORE economic planning.” ?
    Are we not already well down the road when the Bank has a mandate to “manage” inflation within a couple of percent?
    And what would the Conservative’s chances be in the next election if they gave a pledge that they would NOT manage the Economy?
    Just one more wafer-thin intervention.
    Where should you stop messing about?

    I’m just being picky. It’s a daft idea that a part – albeit a major part – of a complex and interrelated market economy can be managed in isolation without affecting the rest, and without needed further management intervention to counteract the unwanted side effects. And so on …