To understand the mechanism that drove the global economy into depression, substitute “land” for “housing”. All the analyses refer to housing crises around the world, and the related financial symptoms like the sub-prime mortgage racket. But these terms are intended to disguise the site of the problem – the way in which we make money out of land without adding value to the wealth of our nations.
The problem is most visually obvious in countries like Ireland and Spain, with their swathes of unoccupied housing developments. The dwellings were constructed not to provide homes. The purpose of the market was to extract land rents. The houses were an inconvenient necessity for the speculators. Less visible in exposing the source of the economic collapse is the unaffordability of homes in countries like the UK and the US. But in all countries, from Canada to China, the overwhelmingly important dynamic is the extraction of the rents produced by the people who work for their living.
Because of the linguistic contortions, analysts are successfully distracting people away from the action that is needed to re-balance the market economy. Result: all the action is aimed at further enriching those who exercise the power to grab the flow of rents, at the expense of the working population.
So, for example, in Britain, while the rest of the economy is languishing, the mortgage market and house building is beginning to recover. Does this mean the beginning of a recovery? No! All that is happening is that the land bankers (euphemistically called building companies) are collecting the subsidies provided by government in the form of higher prices for the land which they bought cheaply at the bottom of the business cycle. Taxpayers are being milked once again, a scam that is rationalised as “helping first-time buyers to get on to the property ladder”.
The eye-washing process that is calculated to protect the rent seekers is going into overdrive. In Britain, the Royal Institution of Chartered Surveyors (RICS) has produced a report censuring governments of the last 50 years for pursuing “short-term and partial policies”. They wrap their mumbo-jumbo up with statistics showing the decline in the output of houses over the last 40 years. The reality: successive governments have pursued policies in line with the logic of the ideology which obliges politicians to put rent-seeking before everyone else’s interests.
Over those last 40 years, the land bankers have increased their returns on the one asset that does not depreciate: land. The land bankers shrewdly misdirected the public’s attention from their ulterior motive by blaming the planning system for the decline in output of dwellings. But remember this: the town and country planning acts which came off the Parliament conveyor belt in the 1940s were the result of frustration with the property market that failed to serve the nation’s interest over the previous century. Planning was the inadequate response to the distortions in the housing market created by the rent grabbing motive.
Now the RICS wants government to reinforce the profits of the land bankers. Even though building companies hold permission to construct 400,000 new dwellings, government is being urged to release public land for development. And the RICS wants the current pathetically low tax burden on land profits to be reduced even further – all in the name, of course, of helping “hard-working families” to get on the property ladder.
If you want to understand how to solve the so-called housing problem, just invert everything that the RICS recommends. That will get you closer to the truth. And it will also identify the way in which the tax regime needs to be re-structured, to shift the incentives in favour of the wealth creators. But that will not happen, anywhere in the world today, because it would offend the interests of the rent takers.
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