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Cooking the Books 1: Living in an asset

At the beginning of March the Nationwide Building Society reported a fall in its house price index of 0.2 percent. They attribute this to a mere blip in the market. Other commentators are not so sure; they see it as a sign that the predicted end of the present house price boom is nigh.

Actually, it is not really a boom in the price of houses. Houses are a product of labour and so have a value of their own but, once built, they are subject, through use, to depreciation and will only maintain their value if money is spent on their maintenance. With inflation, the price of a properly maintained house will tend to rise anyway, though, with gains in productivity in the building industry, the cost of building a house will fall.

What is booming is not the price of the house as a building but the price of the land on which it stands. As land is not the product of labour it has no value, just a price which Marx (in Capital, Volume I, chapter 3, section 1) called an “imaginary price-form” as it wasn’t an expression of value. The price of land, however, is not entirely irrational but is calculated by “capitalising” the income it can be expected to bring. So, if a plot of land brings in an annual income (normally as rent) of £5000, it can be regarded as a capital-value bringing in an income of this amount and, if the rate of interest is 5 percent, as worth £100,000.

This in fact is how surveyors and property speculators calculate the monetary value of a property, though over a longer period than a year. Because of the permanent, if at the moment fairly slow, inflation, “income” can include the expected rise in price by the end of the chosen period. Also, if the chosen rate of interest is different, then so will the monetary value. For instance, if, in the example above, the rate had been 4 percent the monetary value would be £125,000. If the rate had been 6 percent it would be £83,333.

Low interest rates will tend to encourage a rise in the actual selling price of land anyway because they will tend to increase the demand for it. This is especially the case with the land on which houses stand, in that the house with its land is generally bought by taking out a loan (a mortgage) and the lower the rate of interest charged on it the more people that can afford to enter the market.

Most people buy a house to be their home for the foreseeable future, but a significant number now buy a house as a financial asset which they hope will increase in price, so enabling them to realise a capital gain. This has introduced the same sort of speculative element into the housing market as exists on the stock exchange, with people gambling on an increase in what their asset is worth.

It is this that has led one school of capitalism-watchers to argue that not only does this make a housing bubble possible, but that a bubble actually exists at present and which will sooner or later burst, leading house-and-land prices to fall.

If this happens, then, in a period of relatively low inflation as at present, this price fall wouldn’t be absorbed by house-and-land prices not rising as fast as inflation but by them actually falling. There would be widespread negative equity and repossessions. And it wouldn’t be just those who bought a house as a speculative investment who would get their fingers burnt. Those who bought a house merely as a place to live in would suffer too.

Capitalism is exposed as an irrational and anti-human system when a basic human need such as shelter can become the subject of stock-exchange-like speculation with all the consequences that can result when a speculative bubble bursts.