A new report from the Centre for Social Justice, Maxed Out, reveals that UK household debt is now almost as big as GDP. The right-of-centre think tank (founded by the well-known social scientist, Ian Duncan Smith), wrings its hands over the disproportionate impact on the poor, but has few suggestions beyond "access to affordable credit", "responsible lenders" and greater "financial literacy" (the poor must be taught better habits). I was particularly struck by this nugget (pg 40): "The rapid growth of mortgages over the past two decades has contributed the largest total amount to Britain’s personal debt. However it is not as concerning as the rise in consumer debt over that same period. Unlike mortgage debts, which are tied to the value of a house, unsecured consumer borrowing is at higher interest rates and is more likely to spiral out of control, driving people into problem debt". In other words, despite the evidence of your own eyes, mortgages are not a problem. No, sireee.
Mortgage debts are not really tied to the value of a house, contrary to appearances. Though we think of a mortgage as a loan for which the property acts as collateral, in reality the loan is securitised against future income. As such, a mortgage is a form of "fictitious capital", like stocks and shares. It's a claim on the future. A subprime mortgage is risky not because of the quality of the property, but because of the quality of the borrower's future income stream. Property does not have an intrinsic value beyond that of the land it stands on (the productive value) and its utility as shelter. This is not trivial, but it is clearly much less than the market value. This Christmas there will no doubt be a new must-have toy, and with demand temporarily greater than supply, these will change hands on eBay and in pubs at a markup to the retail price, but that markup won't be £1 million, because the market-clearing valuation of buyers isn't that high, even on Christmas Eve. So what determines the persistent high price of housing?
I'm going to approach the answer via Paul Gilroy's preview of Steve McQueen's new film, 12 Years a Slave, in which he notes that "slaves are capital incarnate. They are living debts and impersonal obligations as well as human beings fighting off the sub-humanity imposed upon them by their status as commercial objects". Our key image of the antebellum South is of plantations and pathological gentility. In fact, most whites in the South were self-sufficient small farmers of modest means, i.e. "rednecks". This in turn meant low levels of urbanisation and industry, compared to the North, and consequently low levels of credit and a shortage of ready money. After slave imports were banned in 1808 (following the British abolition of the slave trade in 1807), domestic reproduction became the main means of growing the plantation workforce. The number of slaves grew from 750 thousand in 1800 to 4 million by 1860. The growth in the slave "crop" fuelled the expansion of cotton and other cash-crop production into the new territories west of the Mississippi, which was a primary source of the friction that led to the Civil War.
The recycling of export revenues into expansion, combined with limited money, meant that slaves became the dominant form of capital in the South and a de facto medium of exchange, used to settle debts and act as collateral for loans. The market value of a slave represented their future production. During the eighteenth century, slaves were seen as disposable commodities, often being worked to death within a few years of purchase. This partly reflected their economic equivalence with white indentured labour on fixed-term contracts (i.e. one died after an average 7 years, the other was freed), and partly the relatively low cost of adult replacements via the trade from Africa. Over the course of the century, rising prices for imported slaves and the growth of cash-crop demand (notably cotton for the Lancashire mills), led to an increasing reliance on slave reproduction, which is why the end of imports after 1808 did not lead to crisis. This in turn made it economically attractive to maximise the slaves' working lives, which led to the ideological reframing of them from the subhuman commodity of earlier years to the "children" in need of benevolent discipline familiar from Southern rhetoric.
The capital value of the slave was a claim on the future, i.e. the potential production of their remaining working lifetime, rather than the embodiment of past production. In the Northern states of the US, capital and labour were separate, even though all capital (e.g. plant and machinery) was ultimately the transformed surplus value of past labour. Future labour was "free", in the sense of uncommitted, although in reality the sharp tooth of necessity (and the flow of immigrants) meant the factory owners could rely upon its ready availability. So long as labour was plentiful, capital did not need to make any claim on the future beyond the investment in health and education required to improve the quality of the workforce in aggregate. The increase in demand for labour after WW2 allowed workers to negotiate improved wages, i.e. current income, but it also drove their demand for shorter hours and earlier retirement on decent pensions, i.e. a larger share of future time was to be enjoyed by the worker rather than transformed into capital.
The counter-measure to this claim on future time by workers was the growth of the property mortgage, which is a claim on future labour. The need for housing is constant and the rate of turnover is low, but these characteristics actually make it particularly elastic in price for two reasons. The first concerns disposable income. In a society where most people rent, average rents will settle at a level representing an affordable percentage of average disposable income. This level will in turn reflect the cost of other necessities, such as food and fuel, required for labour to reproduce itself and thus keep earning. This is a basic economic equilibrium. The price of a necessity cannot go so high that it crowds out the purchase of other necessities without social breakdown (hence why the price of bread is still regulated in some countries).
The cost of housing therefore relates to the value of current labour time - i.e. what you can earn this week or this month - and the percentage of income left after non-housing necessities are paid for. This serves to put a upper limit on the current cost of housing (i.e. rents and equivalent mortgage repayments), even where the rental sector is relatively small. The 80s and 90s were an era of falling real prices for food and clothing and flat prices for domestic fuel, which meant that the share of disposable income available for housing grew. From the mid-00s, the real cost of these other necessities started to increase above inflation, so constraining income for housing. Schemes like Right to Buy are therefore a reflection of increasing utility bills and more expensive shopping baskets as much as limited mortgage availability arising from the credit crunch.
The second reason is that the cost of housing also reflects longevity. In a society where most people buy a house, the utility of the property will typically be a factor of the future years of the buyer - i.e. how long you expect to be able to enjoy living in it. Assuming you have the funds, you will pay more, relative to current income, if you expect 100 years of utility rather than 50. The assumption is that a longer life means a longer income stream, which essentially means a longer working life. Mortgage terms are typically based on a peak earning period of 25 years, with a buffer of a decade or so either side - e.g. start work at 21, buy a house at 31, pay off the mortgage at 56, and retire at 66. If longevity were 100, and the retirement age were 80, we would have mortgage terms nearer 40 years. But that would not mean correspondingly lower repayments (the monthly outgoings would be the same because that would reflect the "rent" level), rather purchase prices would be higher.
The combination of these two factors - current relative affordability and the duration of a working lifetime - is what determines the long-run cost of housing. Though property prices in the UK, and particularly in London, are heavily influenced by induced scarcity, this localised "froth" serves to mask the strength of these underlying forces.
Between the mid-70s and mid-00s, house purchase prices relative to average earnings roughly doubled, from 2.5 to 5 times, facilitated by easier mortgage credit. However, this did not cause a "crisis of affordability" for three reasons. First, more properties are now bought by dual-income couples. The increase in working women has two effects: it increases the income stream for some buyers, but it also lowers the average of earnings (because of the gender pay gap). Second, the average ratio is affected by increasing inequality - i.e. if the prices paid by the top 10% grow faster than those paid by the remaining 90%, the average cost of housing will be dragged up. Third, the average age of a first-time buyer has increased from mid-20s to mid-30s since the 1970s. This means that their income will tend to be higher, relative to the average of the population as a whole, because most people hit their earnings peak around 40.
Seen in this light, historic house price inflation reflects three secular trends: increased longevity; the absorption of women into the workforce; and increasing income inequality. This is not to say that the share of income going to housing hasn't increased - it has and the UK is particularly expensive - but that the increase in housing costs is driven by more than just demand outstripping supply. Even without induced scarcity over the last 40 years, we'd probably have seen the cost of housing go up. The point is not that "houses are more expensive", but that the amount of future income (and thus labour time) you have to promise in return has grown. The consequence of this will be an increase in average mortgage terms to keep pace with an increasing retirement age.
A paradox of modern society is that while technological advance should allow a reduction in working time, we are taking on more debt and thus pushing back the point at which we can begin to reduce hours. Some of this debt can be considered as investment finance, i.e. where we expect increased future income as a result, such as student loans, but the bulk of it is mortgage debt, which is unproductive at a macroeconomic level beyond the consumption sugar-rush of equity release. We kid ourselves that this is an investment too, but the capital appreciation on property, which reflects the future income of potential buyers, is only possible in a society committing an ever-larger amount of future labour time. While some individuals can buck this trend, either through luck or calculation (some will always buy low and sell high), society in aggregate must make a bigger contribution with every passing year, which for most people means working longer.
One result of this is that average working hours have increased in a bid to maximise future income, which means that the housing market works against productivity growth - i.e. we are driven towards increasing the quantity of time, not its quality, as a quicker way of increasing income. Job security has evolved from a dull constraint in the 60s, through a refuge from turbulence in the 80s, to an elite aspiration now. Ultimately, this constrains innovation and risk-taking (outside of financial services). It is a commonplace that high property prices distort the economy because more and more capital is tied up unproductively, but what isn't so readily recognised is that the embodiment of labour in mortgages also acts as a psychological drag: "The delirious rise in property prices over the last twenty years is probably the single most important cause of cultural conservatism in the UK and the US".
The "capital incarnate" of slavery undermined the economy of the South (1). When the Civil War broke out, the Confederacy had only 10% of manufactured goods in the US and only 3% of the firearms. Though it had been responsible for 70% of US exports by value before the war (mainly "King Cotton"), most of the receipts had been recycled into slaves or used to buy goods from the North. The failure to grow industries outside of the plantation system meant it had a population of only 9 million compared to 22 million on the Union side, and 4 million of that figure were slaves who could not be trusted with a weapon. The duration of the war was largely a result of the South having a third of the soldiery and (initially) the better generals, but unable to buy sufficient materiel, and unable to liquidate their slave capital or use it as collateral for foreign loans, the outcome was never in doubt.
I was always bemused by the claim made in the 1970s and 80s that the "right-to-buy" was a good thing because it meant council tenants would take better care of their properties. It was obvious on the ground that the tenant's pride reflected the quality of the housing, not the nature of tenure, and it was a myth that councils wouldn't let you paint your doors a different colour. It is only with time that I have come to appreciate the ideological foundation of that claim, and to see the parallel with the claims made by Southern planters in the US that their slaves, as valued property, were better cared for than free Northerners thrown out of work during industrial slumps.
1. The total capital value of slaves in 1860 was $3 billion. The total cost of fighting the Civil War was roughly $3.3bn for each side, though this was a much larger per capita burden for the South. In other words, fighting the war cost the Union roughly the same as it would have done to buy-out the slave-owners (cf. the £20 million spent by the British government compensating West Indies slave owners in the 1830s). As such a prohibitively expensive scheme would have been politically impossible, while war against an aggressively secessionist South would have patriotic backing irrespective of the casus belli, an armed conflict was probably the only way of reforming and integrating the US economy as it expanded westwards.