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The housing market: unsustainable asset bubble or ladder to prosperity?

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Fran Boait, campaign manager at Positive Money, looks at the role of the housing market in creating a more sustainable economy.

This article originally appeared in Blue & Green Tomorrow’s Guide to Sustainable Homes 2013.

Every time I attend to a lecture on house prices, there is always a question in the Q&A from a continental European (usually German or Dutch). They ask, “What is the obsession that British people have with buying houses? We don’t have that in our country, we are happy to rent.” After mumblings from the audience the host will usually say something like, “Yes, we don’t really know either.”

But the question whether you should rent or buy, forces another question: what is a house for after all? Is it a home to live in, something everyone needs? Or is it really an asset that everyone should aspire to own? You could say it can be both – but is that even possible?

One consequence of everyone scrambling to get on the housing ladder has been that house prices have been rising much faster than wages, which means that houses become less and less affordable. Anyone who didn’t already own a house before the bubble started growing ends up giving up more and more of their salary simply to pay for a place to live. And it’s not just house buyers who are affected; pretty soon rents go up, too, including in social housing.

Click here to read the Guide to Sustainable Homes 2013

This increase in prices led to a massive increase in the amount of money that first time buyers spent on mortgage repayments. For example, while in 1996 the amount of take home salary that a first time buyer on an average salary buying an average house would spend on their mortgage was 17.5%, by 2008 this had risen to 49.3%. In London the figures are even more shocking, rising from 22.2% of take home pay spent on their mortgage in 1997 to 66.6% in 2008.

High house prices also act as a mechanism for transferring wealth from the young to the old, from the poor to the rich, and from those that don’t own their own home to those that do. Even those with housing don’t benefit massively from higher house prices; after all, we all need somewhere to live, and anyone selling their home will find that on average other house prices will have risen by the same amount, leaving them no better off.

In reality, only the banks and those with many properties benefit from high house prices. High prices mean that people will have to take out larger mortgages for longer periods of time, which means more money in interest payments for the banks.

So why are house prices so high?

Many of us were told that house prices are so high because there are too many people and not enough houses. The reality is that house prices were massively pushed up by the hundreds of billions of pounds of new money that banks created in the years before the financial crisis. Limited housing stock may have caused some shortage in areas, and there are many other complications too.

But a fundamental driver that caused a 300% house price increase in the 10 years up to the start of the financial crisis was mortgage lending. During the period in question the amount of money banks created through mortgage lending was collectively £417 billion (that’s £417,000,000,000).

So you might ask, where on Earth did that £417 billion come from in order to inflate these house prices out of reach from ordinary people? Well, when a new mortgage loan is made, the bank doesn’t borrow money from savers — banks actually create new money with every loan they make. Those numbers in your account don’t represent a pile of money in the bank; they’re just numbers; accounting entries in the computer system of your bank.

Paul Sheard, the head of global economics and research at Standard and Poors Financial Services Company wrote, “Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit ‘creation’ – credit is created literally out of thin air (or with the stroke of a keyboard).”

As the loan is repaid, the money disappears, whilst the banks keep the interest as profit. And since a loan on a house is secured by the house itself, and a substantial profit can be made on the interest on the loan, it is a win-win situation for the bank.

But is it a win-win situation for anyone else? Who benefitted from the banks creating £417 billion to lend to mortgages? The banks yes, and people that decided to become landlords of multiple homes, yes. But in reality all that debt into a non productive asset bubble really just laid the foundations for the 2007 financial crisis.

What would have happened if instead that £417 billion was used for something more useful, like green electricity, building sustainable homes, or retrofitting our housing stock to make them more energy efficient? House prices would have stayed lower. Yes, less people would own multiple homes, and yes, less people would own homes at all. But we would all have more disposable income because rent and mortgage repayments would be lower, there would be lower household debt, and we would be all be better off.

So why is the government trying to help people buy their houses again?

The government has launched a scheme, Help to Buy, offering financial support to help people buy homes. The scheme has meant that first time buyers, who otherwise would not have been able to, have been able to get on the housing ladder.

The appeal of living in a home you own is very understandable. But do the short-term benefits of more home owners outweigh the problems caused by avoiding a long term strategy to create a sustainable economy? We don’t think so. For the reasons outlined above, we think it is not a good idea to direct government spending into mortgages, and we are not alone.

On September 18, Adair Turner, the former chair of the now-defunct Financial Services Authority spoke about the scheme on Newsnight. He stated, “I certainly have worries about the Help to Buy scheme… I think we may be overdoing the stimulus to the housing market and we may come to regret that. I feel that we have a whacking great hangover after a debt-fuelled housing boom and our policy seems to focus on a bit of the hair-of-the-dog that bit us.”

He is not the only commentator warning. Ann Pettifor is an economist who predicted the crisis in 2006 in her book, The Coming First World Debt Crisis. She spoke about this subject on Radio 4 on August 15, warning that the government’s Help to Buy scheme will create another ‘bubble’.

“We are making people think they can buy another property and taking out mortgages which they simply can’t afford in the long term. Those prices will fall at some point”, she said.

“I think it’s artificial and can’t be sustained. People’s incomes are falling in real terms, and have done so for five years. Now there’s been this sudden, go on let’s just go made because everyone says its recovery.

“At a fundamental level it’s quite dangerous because household debt is still 153% of GDP.

“There’s nothing seriously underpinning this recovery, and that’s why it’s Alice in Wongaland, the confidence fairy is out there.”

An alternative

Can an economy run on the feeling of being wealthy, the so-called ‘wealth effect’, that arises when houses price are increasing? Clearly, it is not sustainable in the long run. We need wages to catch up with rent and mortgage repayments, and the only way to achieve that is to get money to create jobs rather than to inflate house prices.

But will banks ever want to direct their lending activities into productive industries such as sustainable housing and green infrastructure, rather than asset bubbles? We don’t think so. We don’t think we can rely on banks with short-term profit motives that clearly don’t fulfil the wider needs of the economy. Therefore we need to change the rules of the game. If we have people that want to work and jobs that need doing, why can’t we create a system that achieves these things?

Positive Money is advocating that the Bank of England create new money that can enter the economy via the government. This could be done in three ways: increase government spending; cut taxes; or make direct payments to citizens. Although each of the options has its own appeal, we think that because the UK needs to reduce unemployment, the biggest benefit to society would be to increase government spending to create new jobs.

Opportunities to create jobs and build a more sustainable economy lie in green energy infrastructure, building sustainable and affordable housing, and developing better public transport. It’s not that we can’t afford these things; it’s that we haven’t got an economy that works.

We believe that it’s time to radically rethink how the system works and we have a blueprint for an alternative. 

Fran Boait joined Positive Money as campaigns and operations manager in November 2012. Prior to that, she was an Earth scientist researching carbon dioxide storage.

Further reading:

Ernst & Young: fears of a housing bubble are ‘unfounded’

Gross lending by mutuals up 32% in 12 months

Help to Buy scheme to launch three months early

Bank of England to review government mortgage scheme

The Guide to Sustainable Homes 2013 

Editors Choice

2017 Was the Most Expensive Year Ever for U.S. Natural Disaster Damage

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Natural Disaster Damage
Shutterstock / By Droidworker | https://www.shutterstock.com/g/droidworker

Devastating natural disasters dominated last year’s headlines and made many wonder how the affected areas could ever recover. According to data from the U.S. National Oceanic and Atmospheric Administration (NOAA), the storms and other weather events that caused the destruction were extremely costly.

Specifically, the natural disasters recorded last year caused so much damage that the associated losses made 2017 the most expensive year on record in the 38-year history of keeping such data. The following are several reasons that 2017 made headlines for this notorious distinction.

Over a Dozen Events With Losses Totalling More Than $1 Billion Each

The NOAA reports that in total, the recorded losses equaled $306 billion, which is $90 billion more than the amount associated with 2005, the previous record holder. One of the primary reasons the dollar amount climbed so high last year is that 16 individual events cost more than $1 billion each.

Global Warming Contributed to Hurricane Harvey

Hurricane Harvey, one of two Category-4 hurricanes that made landfall in 2017, was a particularly expensive natural disaster. Nearly 800,000 people needed assistance after the storm. Hurricane Harvey alone cost $125 billion, with some estimates even higher than that. So far, the only hurricane more expensive than Harvey was Katrina.

Before Hurricane Harvey hit, scientists speculated climate change could make it worse. They discussed how rising ocean temperatures make hurricanes more intense, and warmer atmospheres have higher amounts of water vapor, causing larger rainfall totals.

Since then, a new study published in “Environmental Research Letters” confirmed climate change was indeed a factor that gave Hurricane Harvey more power. It found environmental conditions associated with global warming made the storm more severe and increase the likelihood of similar events.

That same study also compared today’s storms with ones from 1900. It found that compared to those earlier weather phenomena, Hurricane Harvey’s rainfall was 15 percent more intense and three times as likely to happen now versus in 1900.

Warming oceans are one of the contributing factors. Specifically, the ocean’s surface temperature associated with the region where Hurricane Harvey quickly transformed from a tropical storm into a Category 4 hurricane has become about 1 degree Fahrenheit warmer over the past few decades.

Michael Mann, a climatologist from Penn State University, believes that due to a relationship known as the Clausius-Clapeyron equation, there was about 3-5 percent more moisture in the air, which caused more rain. To complicate matters even more, global warming made sea levels rise by more than 6 inches in the Houston area over the past few decades. Mann also believes global warming caused the stationery summer weather patterns that made Hurricane Harvey stop moving and saturate the area with rain. Mann clarifies although global warming didn’t cause Hurricane Harvey as a whole, it exacerbated several factors of the storm.

Also, statistics collected by the Environmental Protection Agency (EPA) from 1901-2015 found the precipitation levels in the contiguous 48 states had gone up by 0.17 inches per decade. The EPA notes the increase is expected because rainfall totals tend to go up as the Earth’s surface temperatures rise and additional evaporation occurs.

The EPA’s measurements about surface temperature indicate for the same timespan mentioned above for precipitation, the temperatures have gotten 0.14 Fahrenheit hotter per decade. Also, although the global surface temperature went up by 0.15 Fahrenheit during the same period, the temperature rise has been faster in the United States compared to the rest of the world since the 1970s.

Severe Storms Cause a Loss of Productivity

Many people don’t immediately think of one important factor when discussing the aftermath of natural disasters: the adverse impact on productivity. Businesses and members of the workforce in Houston, Miami and other cities hit by Hurricanes Harvey and Irma suffered losses that may total between $150-200 billion when both damage and sacrificed productivity are accounted for, according to estimates from Moody’s Analytics.

Some workers who decide to leave their homes before storms arrive delay returning after the immediate danger has passed. As a result of their absences, a labor-force shortage may occur. News sources posted stories highlighting that the Houston area might not have enough construction workers to handle necessary rebuilding efforts after Hurricane Harvey.

It’s not hard to imagine the impact heavy storms could have on business operations. However, companies that offer goods to help people prepare for hurricanes and similar disasters often find the market wants what they provide. While watching the paths of current storms, people tend to recall storms that took place years ago and see them as reminders to get prepared for what could happen.

Longer and More Disastrous Wildfires Require More Resources to Fight

The wildfires that ripped through millions of acres in the western region of the United States this year also made substantial contributions to the 2017 disaster-related expenses. The U.S. Forest Service, which is within the U.S. Department of Agriculture, reported 2017 as its costliest year ever and saw total expenditures exceeding $2 billion.

The agency anticipates the costs will grow, especially when they take past data into account. In 1995, the U.S. Forest Service spent 16 percent of its annual budget for wildfire-fighting costs, but in 2015, the amount ballooned to 52 percent. The sheer number of wildfires last year didn’t help matters either. Between January 1 and November 24 last year, 54,858 fires broke out.

2017: Among the Three Hottest Years Recorded

People cause the majority of wildfires, but climate change acts as another notable contributor. In addition to affecting hurricane intensity, rising temperatures help fires spread and make them harder to extinguish.

Data collected by the National Interagency Fire Center and published by the EPA highlighted a correlation between the largest wildfires and the warmest years on record. The extent of damage caused by wildfires has gotten worse since the 1980s, but became particularly severe starting in 2000 during a period characterized by some of the warmest years the U.S. ever recorded.

Things haven’t changed for the better, either. In mid-December of 2017, the World Meteorological Organization released a statement announcing the year would likely end as one of the three warmest years ever recorded. A notable finding since the group looks at global land and ocean temperature, not just statistics associated with the United States.

Not all the most financially impactful weather events in 2017 were hurricanes and wildfires. Some of the other issues that cost over $1 billion included a hailstorm in Colorado, tornados in several regions of the U.S. and substantial flooding throughout Missouri and Arkansas.

Although numerous factors gave these natural disasters momentum, scientists know climate change was a defining force — a reality that should worry just about everyone.

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Environment

How to be More eco-Responsible in 2018

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eco-responsible
Shutterstock / By KENG MERRY Paper Art | https://www.shutterstock.com/g/kengmerrymikeymelody

Nowadays, more and more people are talking about being more eco-responsible. There is a constant growth of information regarding the importance of being aware of ecological issues and the methods of using eco-friendly necessities on daily basis.

Have you been considering becoming more eco-responsible after the New Year? If so, here are some useful tips that could help you make the difference in the following year:

1. Energy – produce it, save it

If you’re building a house or planning to expand your living space, think before deciding on the final square footage. Maybe you don’t really need that much space. Unnecessary square footage will force you to spend more building materials, but it will also result in having to use extra heating, air-conditioning, and electricity in it.

It’s even better if you seek professional help to reduce energy consumption. An energy audit can provide you some great piece of advice on how to save on your energy bills.

While buying appliances such as a refrigerator or a dishwasher, make sure they have “Energy Star” label on, as it means they are energy-efficient.

energy efficient

Shutterstock Licensed Photo – By My Life Graphic

Regarding the production of energy, you can power your home with renewable energy. The most common way is to install rooftop solar panels. They can be used for producing electricity, as well as heat for the house. If powering the whole home is a big step for you, try with solar oven then – they trap the sunlight in order to heat food! Solar air conditioning is another interesting thing to try out – instead of providing you with heat, it cools your house!

2. Don’t be just another tourist

Think about the environment, as well your own enjoyment – try not to travel too far, as most forms of transport contribute to the climate change. Choose the most environmentally friendly means of transport that you can, as well as environmentally friendly accommodation. If you can go to a destination that is being recommended as an eco-travel destination – even better! Interesting countries such as Zambia, Vietnam or Nicaragua are among these destinations that are famous for its sustainability efforts.

3. Let your beauty be also eco-friendly

eco-friendly

Shutterstock / By Khakimullin Aleksandr

We all want to look beautiful. Unfortunately, sometimes (or very often) it comes with a price. Cruelty-free cosmetics are making its way on the world market but be careful with the labels – just because it says a product hasn’t been tested on animals, it doesn’t  mean that some of the product’s ingredients haven’t been tested on some poor animal.

To be sure which companies definitely stay away from the cruel testing on animals, check PETA Bunny list of cosmetic companies just to make sure which ones are truly and completely cruelty-free.

It’s also important if a brand uses toxic ingredients. Brands such as Tata Harper Skincare or Dr Bronner’s use only organic ingredients and biodegradable packaging, as well as being cruelty-free. Of course, this list is longer, so you’ll have to do some online research.

4. Know thy recycling

People often make mistakes while wanting to do something good for the environment. For example, plastic grocery bags, take-out containers, paper coffee cups and shredded paper cannot be recycled in your curb for many reasons, so don’t throw them into recycling bins. The same applies to pizza boxes, household glass, ceramics, and pottery – whether they are contaminated by grease or difficult to recycle, they just can’t go through the usual recycling process.

People usually forget to do is to rinse plastic and metal containers – they always have some residue, so be thorough. Also, bottle caps are allowed, too, so don’t separate them from the bottles. However, yard waste isn’t recyclable, so any yard waste or junk you are unsure of – just contact rubbish removal services instead of piling it up in public containers or in your own yard.

5. Fashion can be both eco-friendly and cool

Believe it or not, there are actually places where you can buy clothes that are eco-friendly, sustainable, as well as ethical. And they look cool, too! Companies like Everlane are very transparent about where their clothes are manufactured and how the price is set. PACT is another great company that uses non-GMO, organic cotton and non-toxic dyes for their clothing, while simultaneously using renewable energy factories. Soko is a company that uses natural and recycled materials in making their clothes and jewelry.

All in all

The truth is – being eco-responsible can be done in many ways. There are tons of small things we could change when it comes to our habits that would make a positive influence on the environment. The point is to start doing research on things that can be done by every person and it can start with the only thing that person has the control of – their own household.

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