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Monday, February 18, 2013

What caused Housing Bubbles in UK


UK has recorder one of the most volatile house prices in the West since WWII. Many economists use UK as a prime example how "land restrictions cause housing bubbles".  But you they failed to provide evidence that UK home price volatility is caused by land restrictions and not something else. 
They overlooked the fact that beside tough land restrictions UK has the least stable and the most speculative banking system in the West. Maybe that has something to do with price volatility. Lets explore:  

If we look into history of UK banking you will find very interesting correlation between banking regulation changes and housing bubbles. 



Home prices in UK were relatively stable during 50s and 60s. Prices were slowly going up while government was slowly introducing "land development restrictions" in 1960s. This price growth could be attributed to land restriction regulation in addition to other causes (real income growth, etc.).

Suddenly, after decades of stability, house prices spiked in early 70s. Interestingly, that happened immediately after significant bank deregulation process: Competition and Credit Control in 1971 and big bank mergers in late 60s (during just two years in 1968, five big bank mergers occurred) . Competition and Credit Control relaxed bank reserve requirements, allowed deposit banks to participate on the market, removed interest rate collusion ... More interestingly, in 1970 (just before the bubble) new conservative government started relaxing many of the land development restrictions introduced by labour in decade before. Bubble burst and prices drop by 30% by mid late 70s. During this period of falling prices new labour government introduced new and tougher land restrictions but that didn't prevent house prices from falling.

Than, in late 70s, foreign exchange controls were lifted and 1979 Banking Act was passed. That coincided with the housing bubble that peaked in early 80s. This bubble was much smaller but real prices fell almost 20% after the burst. 

New conservative government started reforms that included removal of some land restrictions laws and big banking reform. In mid 80s ‘Big Bang’ reforms were passed (1986). These reforms caused expansion of  building societies and relaxation of lending standards. Deregulation turned building societies into real banks and enabled them to lend money freely. This was followed by big housing bubble of late 80s.   

Finally, world wide deregulation and globalisation of late 90s happened just before great housing bubble of 2000s. Lending standards were dropped, bank funding became obscure and credit issue relaxed. UK banking sector tripled in less than a decade. Speculations became global, included insurances, big funds ...    

This clearly shows that every UK housing bubbles since WWII occurred after a new bank regulation rules were passed (almost identical causation can be showed for USA, Australia ...). In some instances lend restrictions rules had been lifted before bubbles started inflation. These relaxations of land restrictions failed to prevent bubbles from happening.    

In addition, the theory that land supply restrictions cause house price volatility is very hard to apply on UK cities where population significantly declined over the last 40 or 50 years (Manchester, Liverpool, Sheffield ...). These cities did not require much of a new land to meet new demand, still prices were more volatile there than in cities with fast growing population and end even more land restrictions like London.

- Richard Davies, Peter Richardson, Vaiva Katinaite and Mark Manning of the Bank of England - Evolution of the UK banking system - 2010
- Peter Scott - The Property Masters - Taylor & Francis - 2013

2 comments:

  1. American banks have once again begun producing mortgage-based bonds in substantial numbers. Meanwhile, institutional investors have been buying up low-cost houses in order to rent them while speculating on the value. As a result, the housing market may be going into another bubble. Are we headed for another financial crisis? Moreover, is history destined to repeat itself, given human nature? If interested, see the following article: http://thewordenreport.blogspot.com/2013/04/return-of-mortgage-based-bonds-another.html

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  2. I believe you have very accurately outlined the true and actual MAIN causes (and effects) of and for the existence and occurrences of Housing Bubbles.

    This last article I think nailed it spot-on as I have myself followed for many years what the banks are doing as far as regulation and credit issuance is concerned.

    What has also changed however, is the legal status and types of ownership which has now changed from true Free Simple or allodial title to an inferior "legal title" whereby the actual beneficial interest *equitable title" to property is now in the hands of the State.

    Seeing that everyone's property today is held and used as collateral by governments against a nation's national debt, (thereby giving the State the superior title to any property) then it follows suit that credit issuance for the purpose of mortgages would be extremely relaxed when compared to the pre-1850s days when people actually owned their properties in either true Fee Simple (full title) or allodial title (full title as it was called in America).

    So today, the State has the superior ownership of all property. I think if people knew that, it would have produced quite a different outcome altogether. Probably a good thing that they do not know this as it is not taught in any modern educational systems for obvious reasons. Anyway that is why the councils can force you to build a fence so high or paint your house a certain colour or you must get permission to erect structures on your own land or whatever...it was not always like this.

    It took me many years of research and study and of both law and scripture to find this out.

    Claude Memma

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