More and more we are told that rising home prices are signs of a recovering economy, but is this really the case? Or, does government policy aimed at helping you onto the homeowner ladder actually make it harder for you?
Below I am going to discuss some of the methods by which the government has often unwittingly gamed the market against would-be home buyers.
Around the world, government schemes such as the UK Government’s “Help to Buy” induce first home buyers to take on debt they might not be able to afford otherwise. Such well-intentioned (and vote winning) programs actually harm the very ones they purport to help, as is the case with many government programs. Under such schemes, the homebuyers’ ranks swell, and who are now armed with the extra easy government currency with which to flood the market place. The obvious inflationary consequence of the expansion of the currency supply is that the home owners (the sellers) will raise their prices to capture this extra currency. So, home prices go up, more construction is artificially stimulated and associated jobs created, and more people are induced into debt. We can see we have some of the features of a misallocation of resources, a “housing bubble”.
Additionally, government institutions and Reserve Banks often provide ‘lender of last resort’ and ‘deposit insurance’ protections (bail-out insurance) to private banks, giving rise to “moral hazard.” Arguably, it was such ‘moral hazard’ that caused the global economic crisis in 2008. Private banks, knowing taxpayers would pay for their private losses, are incentivised to gamble like a teenager with Dad’s credit card at a casino. They’re increasingly likely to make even more loans, further diluting the currency in circulation, further swelling the ranks of would-be buyers, all of which is reflected in soaring home prices.
In order to induce people to taking on the immense debt of a mortgage, banks often dangled adjustable rate mortgages (ARMs) with ‘teaser rates’ in front of the would-be borrowers, where the initial interest rate on a home loan is tantalisingly low, before increasing dramatically over time, placing immense strain on the borrower who has borrowed to the hilt on the teaser. If anything impaired their ability to repay, like job loss, borrowers could find themselves in personal default, and or bankruptcy. This is disastrous for the banks’ balance sheets too.
Banks increase home prices.
Central Banks, granted explicit licence from government, have a monopoly of the currency supply through legal tender laws. Also, they are given government licence to fix the price of currency. These 2 permissions allow Central Banks to do what is illegal for you and I: to counterfeit currency, and to fix prices. Such fraud is repugnant to a free society. Currently, Central Banks have fixed the price of interest rates very low, allowing people to borrow more easily, increasing personal debt. Also, Central Banks’ currency printing, and lending, dilutes the value of the existing currency, meaning it now takes more pieces of paper currency to buy the same product.
In addition to Central Banks printing currency, private banks also practice Fractional Reserve Banking. This further dilutes, drastically, the already diluted value of the currency in your pocket. The result of these, again, is home prices rise to reflect the debasement of the currency supply.
Government restricts supply.
Supply and demand, it’s what it’s all about. The more scarce something in demand is, the higher its price. Homes are no exception. Government zoning laws, environmental regulations, and property use restrictions and licencing drastically reduce the amount of land available for home construction. For example, if Hong Kong had to suffer the same building restrictions that the UK has, it would never have made such economical use of its scarce territory. Relatively tiny Hong Kong (4th) actually has a population density far greater than neighbouring China (83rd), whose population exceeds 1.3Billion people.
Government building works builds distortions.
When government announces vote winning construction works, such as stadiums, dams, bridges, schools, hospitals, roads, rail ad infinitum, government, like anyone else, must enter the market to purchase those scarce commodities necessary to construct its vote winning promises. Materials including: labour, steel, cement, lumber, iron etc, which may have otherwise gone towards home construction, now find themselves in additional demand by a buyer with the deepest pockets in the market, the government, and redirected to the government’s ‘plan’. The obvious consequence of this central economic planning is that these scarce materials’ prices rise to reflect their increased demand as the market naturally attempts to ration those materials according to the increased demand, and to incentivise providers of those materials to seek out and provide more of them. To compound these distortions, government by doing this injects $Millions and $Billions into the economy, either by printing the currency or borrowing it to pay for these works, again further diluting the currency in your pocket. Also, public works mean more taxes to pay for them.
Government construction of public homes produces similar distortions, with the added penalty of misallocation of what is tantalising wanted: homes. Location and configuration of homes being built by central economic planners ensures a misallocation of resources from what the market would have selected as actually the most efficient location and configuration of those homes.
It is noteworthy to mention that government construction works are particularly vulnerable to corruption and cronyism, almost always running over promised budget, costing the taxpayer more as suppliers of materials take advantage of the government’s (taxpayer funded) purse to inflate their prices.
If government got out of the property market with ‘Help to Buy’ schemes, and horrendous guarantees of bank bailouts and deposit insurance which encourage moral hazard and speculative lending, we’d see far fewer people holding yet more debased currency in a flooded market of artificially bid up prices. We’d also see less predatory lending from banks, recklessly aimed to induce people into taking on debt beyond their means, and whose defaults are devastating for all parties concerned.
Demanding a return to honest banking, and the enforcement of insolvency laws against banks, would result in much less inflation. Fractional Reserve Banking would now be criminalised for the fraud that it is. If we returned to honest money, not fiat currency, we’d see little to no inflation (as was the case in USA between the Civil War and the creation of the Federal Reserve System in 1913, and its subsequent decouplings from the classical gold standard). Gold and silver, historically, have been the best forms of money.
We should demand government unshackle us from constrictive planning permissions, and land-use and zoning laws. A better solution is to replace these infringements of property rights with the established principles of common tort law, which protect property rights. By doing this, we’d see scarce land used much more efficiently, resulting in lower prices and greater housing abundance.
Getting government out of grand works projects, building ‘white elephants,’ would be extremely beneficial too. When government builds, it bids the price up of, absorbs, and redirects scarce resources that we desperately need in our economy, particularly in the construction of our homes. Ending the construction of government housing would also reduce the misallocation of resources we see with government redirection, and its associated cronyism.
As we have seen throughout all of government’s well-intentioned measures, its outcomes are almost always opposite to what was intended. The free market best allocates resources where they are needed most, not public bureaucrats. We need to liberate our market so that it can best aid us in realising our dreams of home ownership. We need more freedom and less government.
Food for thought:
We desire lower prices in all our products, but why do government and ‘experts’ say the opposite is desirable for the most expensive product we’ll ever buy, our homes?
If you want to see how the next housing bubble is currently being inflated by a “well-intentioned” government plan, repeating most of the above errors discussed, click here.
Emily Green is a contributor for The Libertarian.