Sunday, 2 December 2012

On the cost of housing

Graph shows rise of average UK house price 1986-2013. Source: Office of National Statistics
I've blogged a fair bit about this house as structure, and, by implication at least, as therapy. Now that it is finished, it's time to talk about it as politics. Housing, in this world, is intensely political. We're currently going through an extremely severe period of political turbulence caused mainly by unsustainable housing debt, both in the US and in Europe - in the UK, in Eire, Spain, Greece... Houses, we hear, are expensive. So expensive that ordinary people can afford them only by taking out enormous loans, which consume the overwhelming majority of their disposable incomes for most of their adult lives. Just yesterday, the Westminster government announced a scheme to allow people to borrow up to 95% of a quarter of a million pound price, in order to 'stimulate the building industry' and 'help people into the housing market'.

And it seems to be true; it seems houses do cost that much. Of the houses currently for sale in my home village, only one, a tiny upper flat, is offered at an asking price below a quarter of a million...

Yet the main structure of this house cost less than £4,000. At £6,000 it was comfortable, habitable. Now, admittedly, I have spent more - my off-grid electrical installation has cost £4,500, for example - but that's not a cost the average home has to find. Again, admittedly, it's not a big house. It has about 22 square metres of floor downstairs, and about eight square metres upstairs, so about thirty all together. But from what I've learned building this house, I seriously believe you could build a comfortable, elegant family home for £10,000. This house has four trusses each with 4.8 metre tie beams; five trusses with six metre tie beams, still at 2.4 metre centres, would give 72 square metres of floor area for substantially less than twice the materials I've used.

On David Cameron's '5% of £250,000' scheme, the purchaser would have to raise twelve and a half thousand pounds deposit, and would then have to pay one thousand six hundred pounds a month every month - in good times and bad, in sickness and in health - for the next twenty-five years - assuming interest rates didn't rise above their present historic low. And yet, I'm arguing that a family home can be built for just that deposit. What's going on here? How can such different estimations of the cost of housing both be right?

Artificial scarcity

In the software industry we're familiar with the concept of 'artificial scarcity'. In the Internet age, the real cost of reproduction of a digital asset - be it a movie, a musical recording, an image or a software package - is essentially nil. Once the cost of production is covered, the producers can afford freely to gift a copy of their product to every single person on the planet - as Linus Torvalds, and many other producers of open source software, have proved by doing so. Digital goods are, in essence, too cheap to meter. Yet you can't get a copy of Microsoft Word, or Pulp Fiction, or Dark Side of the Moon for free. The producers want you to pay a high price for a copy of something that is in principle infinitely abundant. Markets - those free markets which conservative political theorists believe to be self regulating and infallibly wise - don't work like that. If something is infinitely abundant, its price drops to zero. In order to maintain a price above the material cost of reproduction, the producers have to make their goods artificially scarce. They do this by means of a law, copyright, which prevents people from copying their work. You can argue about the merits of copyright as you will; it isn't what's at issue here. What's at issue is that the law is used to make things artificially scarce, and this has the effect of raising the price that can be charged above the natural market price.

The primary law which makes housing artificially scarce is planning law. A house cannot be built, legally, without planning consent. Planning consent is often hard to get, and thus the value of land which has planning consent is enormously inflated. I've ignored the price of the land in stating the cost of my house. The land cost £40,000. But there's ten acres of it. If I were to build houses on it at a modest density of four to the acre, the cost of the land would be a very reasonable one thousand pounds per house, still leaving the total cost of a family home below Mr Cameron's notional deposit. But here's the rub: I don't have planning consent. This house does not legally exist, and I could, at any moment, be ordered to demolish it. Land in this village with planning consent is currently on the market for £70,000 for a quarter acre plot. That means, in effect, that the value multiplier created by the artificial scarcity in housing land is 2800%: land with planning permission sells for twenty eight times as much as land - good land - without. I'm not saying that planning law is without merit any more than I'm saying copyright law is without it, but I am pointing out one of its unintended - and desparately damaging - consequences.

There's another consequence of expensive housing about whose merit one can argue, but which undoubtedly raises the price even further. If people are going to have to borrow for twenty-five or thirty years to buy a house, then the lender has to be confident that the asset is going to retain its value as collateral over that time. Which means we are required by law to build houses with a design life of at least sixty years; and that means building conservatively, with tried and tested methods. This house is experimental in several ways, but one of those ways is that it is by design and intention bio-degradable; I'll write about this later in an essay on the house as philosophical object. But, briefly, without maintenance it will rot away - apart from the glass - into the natural materials of field and forest from which it was built. It has a design life, I'd say, of thirty years, although with reasonable maintenance I see no reason why it should not last very much longer. If housing is cheap and bio-degradable, then houses can be treated as disposable: they can be rebuilt at need at little economic or environmental cost. But our present building regulations, written in large part to protect lenders' collateral, prevent people taking this light-hearted approach to dwellings.

Qui bono?

So if we have what amounts to a conspiracy to inflate the price of housing, qui, as they say, bono? To understand the answer, one needs to look at the history of the speculative bubble in housing. Over the past half century, the price of housing has risen considerably above the rate of inflation. Which means that everyone who has owned a - legal - home has seen a windfall profit, a profit which has come directly out of the speculative bubble. And people are naturally inclined to project the past into the future. House prices have risen, so house prices will go on rising. In fact, we've already reached the natural limit of the bubble. Like any other ponzi scheme, it can go on running only as long as there are new people prepared and able to buy into the scheme, and frankly there no longer are. New entrants into the housing market may wish to join the dance, but they can no longer realistically raise the buy-in price. So house prices cannot rise.

Housing is one of the two products - the other being pensions - that have over the past two generations required most people to hand over most of the money they earn to the 'financial services' industry, and the 'financial services' industry grew very fat and greedy on the proceeds. Note that I'm not claiming that the 'financial services' industry invented planning law, let alone that they did so with malice aforethought. Rather, planning law was created by well meaning people to tackle real problems. If people were allowed to build their own houses wherever they wanted to, some of them would be eyesores. Some of them would impact on other people's views and other people's amenity. If people were allowed to build houses ignoring the building standards, some of them would be dangerous, and some of them would fall down. Planning law and building standards tackle real problems in the real world. But by interfering with the market, they create excess value for someone to hoover up; they create, in effect, a new ecological niche. We tend to call the creatures which move in quickly to exploit new ecological niches 'vermin'. Or 'financial services'.

But if house prices can no longer rise, neither can they be permitted to fall catastrophically. The majority of people in what Ed Milliband so elegantly calls the 'squeezed middle' have their all invested in the bubble and if - when - the bubble bursts they will all be bankrupted. Developments which disturb their willing suspension of disbelief in the prospect for further growth or at least stability of the bubble cannot be permitted. More seriously, when, in 2009, the bubble trembled in the States, 'financial services' institutions round the globe shuddered and fell.

It's one of the features of modern Western democracies that political parties seek their crucial election finance from those people who have surplus wealth, and those who have surplus wealth are by definition those who are profiting from the status quo. Which, in both Britain and the States these days, largely means the financial services industry. So it's little surprise that when 'financial services' institutions shudder and fall, our politicians, whom we elected with their money, choose to use our money to bail them out. A financial meltdown, we're told, is too appalling to contemplate  And the problem is, in the short term at any rate, that's true. If banks crash, if currencies crash, it becomes impossible for every other business in the economy to transact their business, because our economy is built on exchanges of value, on quid pro quo, where the quid is vectored through the banking system.

So the 'financial services' industry cannot be allowed to collapse. Yet that industry depends in large part on the tithe of mortgage charges it levies on householders, which enable those householders to have and to hold houses purchased at artificially inflated prices. If - when - the bubble bursts, those householders will be bankrupted. If - when - those householders are bankrupted, they will cease to pay their tithe to the 'financial services' industry, and the 'financial services' industry will be bankrupted. And that must not be allowed to happen.

Adversus Haereses

You think I've come a long way from my modest little house on top of my hill, don't you?

I haven't.

This modest little house on top of the hill is the concrete exemplar of a disruptive, a revolutionary, idea. The idea that you can build your own dwelling, yourself, now, at a cost that will not require you to borrow any significant sum. That idea is heretical, because if the young people who ought to be taking out David Cameron's quarter of a million pound mortgages hear it and heed it, they'll stop taking out quarter million pound mortgages. They'll stop buying houses, and start making their own. Which means that housing will no longer be scarce. Which means that the market price of housing will drop - as it naturally must - to the cost of production. Which means that people who bought houses on borrowed money at artificially inflated prices won't be able to sell them at artificially inflated prices. Which means they're bankrupt. Which means the banks are bankrupt. Which means the economy, and the political system as we know it, must collapse.

Heretical ideas must be suppressed. If I stand still alone on my hill and watch the sun going down, I can be ignored and left alone. But if I were foolishly to get up in public space and point out that the emperor has indeed no clothes, the council not only could order me to demolish my modest little house. They'd have to. It is a concrete exemplar of a revolutionary idea, and so - for the good of society, for the good of us all - it must be suppressed.

Or in this case, demolished.
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