Sunday, 11 May 2008
Well-being and Judgement
Charles Kindleberger summed up the problem perfectly. “There is nothing as disturbing to one’s well-being and judgment as seeing a friend getting rich.”
Here in the UK, over the last ten years, envy, greed and fear tested the limits of “well-being and judgment." With house prices increasing at double-digit rates, it has been hard to stand back and question the sustainability of this explosion of wealth.
It was almost impossible to take a contrarian view on housing since the country was primed for speculation. TV channels devoted hours of programming that pumped up housing optimism. The central bank cut rates to historically low levels. Banks had forgotten about risk and were ready to lend. The financial supervisor was asleep. Even the government statistical service produced numbers confirming that household wealth had doubled in a decade.
Unfortunately, far too many people succumbed to the wealth creating euphoria of housing inflation. To be truthful, it is easy to understand why. It is hard to sit out a speculative mania, particularly when everyone else around you appears to be growing richer. It was easier to run with the herd as it raced into banks demanding mortgages and investing in buy-to-let. With the herd moving with such momentum, it was almost impossible to say no to housing.
Housing mania led UK households into investing, borrowing, and consuming at unprecedented rates. They dived into the buy-to-let investment industry, with scant regard for the risks. They swarmed across Europe, buying up cheaply constructed holiday homes. Until recently, households could discount their growing levels of personal indebtedness by appealing to the overall health of their balance sheets. Housing equity trounced debts every time. The market had made homeowners rich, at least on paper.
However, what happens to well-being and judgment when that paper wealth begins to evaporate and friends start to become poor? Is envy replaced by gloating as the the housing market transforms into a malign wealth destruction mechanism?
Unfortunately, well-being does not recover during a housing crash. People may have stopped bragging about house prices. An icy silence may have replaced the boasting. Nevertheless, this silence has not dissipated the growing fog of financial pressure.
The housing calamity is growing by the day. For those of us who avoided any entanglement in housing, there is little comfort in seeing others suffer. Gloating is a poor substitute for envy. It is, however, a good time for judgment, particularly if it leads to permanent changes that ensure that housing bubbles never happen again. Now is the time to radically reform the housing market.
We could start by liberalizing planning regulations. A new zoning system would be the ideal, defining all property according four types: industrial, agricultural, commercial, and residential.
Once a property has received its zoning, owners should be allowed to develop the land as they see fit. One immediate benefit would be better use of high value residential land by clearing the existing dilapidated Victorian housing stock and replacing it with more high-density housing. Reforming planning procedures would simultaneously reduce housing prices, increase housing supply, and generate a construction boom.
Second, we should introduce a national land tax. This would result in a more equitable tax system and discourage housing speculation. The tax should have particularly onerous rates on empty properties and idle land, which would again discourage speculation.
Third, the estate agent industry is in desperate need of reform. Customers need more transparency and honesty. In future, agents should be forbidden from giving any form of ill-informed investment advice. All offers on a house should be publicly disclosed, to prevent fraudulent price wars.
Finally, banks need tighter regulation. The FSA is manifestly incapable of controlling the banking sector. It should be abolished with its supervisory responsibilities returned to the Bank of England.
The housing bubble stretched every indicator linking house prices to sensible fundamentals. These fundamentals are reasserting themselves and the market is now turning into a wretched debt soaked mess. The crash will create enormous financial pain, and it is too late to save those friends who took on too much debt, remortgaged to finance excessive consumption, or who were suckered into a money losing investment after an inside track seminar. It is not too late, however, to prevent this kind of crisis from reoccurring in the future.