The UK’s economic future is linked to the US’s future, too.
The house price crash starts in 2008
We trim this New Year’s Eve article which appeared in the UK’s Evening Standard, 31 December 2007.
by Fred HarrisonTen years ago, in my book The Chaos Makers, I forecast what would happen to the economy in 2008: a house-price crash ahead of a wider recession.
My prediction looks like being confirmed: the latest survey of the housing market shows house prices stalling in most parts of the country, with predictions of a fall next year. Meanwhile, the Chartered Institute of Personnel now expects unemployment to rise by 150,000 -- taking the number of people out of work to its highest level since 1997.
It need not have unfolded this way. In 1997, I submitted papers to Gordon Brown, the new Chancellor. I explained that house prices would peak in 2007 because of frenzied activity in the land market.
I warned that the downturn in house prices would presage a global depression in 2010 -- unless he radically reformed taxes so that they were shifted away from work and towards speculation in land. That way, investment would go into the real economy instead of simply fuelling another property boom. Naturally, Mr Brown took no notice.
Instead, he stuck with conventional Treasury policies. But handing responsibility for setting interest rates to the Bank of England was never going to stop the property market from soaring: lower interest rates might be good for business but they also give landowners and speculators an even bigger return on their land, fuelling a new property boom.
House prices may turn down over the next six months, according to the consensus view, but they will pick up again towards the end of 2008. These assurances are irresponsible. In my view, the decline in house prices will exceed 20% over the next two years.
A decline in house prices is good news for first-time buyers, but we have grown to rely on property as the collateral for our credit-funded consumption binge. Reduce the value of the collateral and people's spending power is reduced, too. That raises unemployment and further weakens people's willingness to buy property.
The historical evidence is clear: over the past 200 years, housing booms have always been followed by recessions. Our economy is like a drug addict: the heroin of house-price rises is bad for the body, but cold turkey is still a painful business.
The real estate sector is now effectively a single global market; property cycles have converged. The US cycle came to an end in 2006. The housing markets in Ireland and Spain came to an end in 2007. Downturns in property prices are surfacing all the way from Eastern Europe to the Far East. The remaining property markets will peak in 2008.
As the property dominoes fall across the globe, the ensuing financial crisis will eclipse the present current credit crunch in the banking sector. It takes two years or so for a recession to take hold after house prices have peaked. So I am satisfied that my gloomy prediction of a full-blown recession in 2010 will turn out to be correct.
I forecast Mr Brown will not achieve his target -- three million new homes built by 2020. Housing starts began to fall last year: this always happens when the price of land becomes unaffordable. Government should give priority to reforming the tax system.
The Chancellor should give priority to reducing income tax (which makes it uneconomic for some people to work) and VAT (which reduces consumption). Instead, a tax on land values would let government raise revenue from the value created by investments in public infrastructure, such as London’s Jubilee line extension. Such investments raise the productivity of the economy -- for example, by getting people to their place of work more quickly.
These gains from taxpayers' investments surface as rising land values: a flat in Stratford, for example, will be worth far more when Crossrail opens for business. Shifting taxation so that owners of land paid an annual tax on that land's value -- rather than on the property sitting upon it, as council tax does -- would also discourage speculation and a new property bubble.
It will be hard to avoid bad economic news in 2008. Shouldn't that be all the more incentive for political leaders to work together to agree a radical way out of the cycle of boom and bust?
The Need For a New Economic Paradigm
Review of "The Losses of Nations"
The “Crash of 2007-8” is underway
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