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Boom Bust: House Prices, Banking and the Depression of 2010
Shepheard-Walwyn Publishers, Jan 2010, Pages: 288
When the 1st edition appeared in 2005, the consensus among forecasters was that the boom in house prices would cool to an annual 2 or 3% rise over the following years. The author, however, predicted that prices would continue to rise by more than 10% till the end of 2007, followed by a severe recession that would bottom in 2010.
The 2nd edition retains the original forecast but includes a new preface and two additional chapters.
Drawing on 250 years' worth of evidence, Harrison warns of the danger to banks, businesses and jobs of ignoring a remarkably regular 18-year property cycle that prevails in the global economy. He argues that granting the Bank of England independence cannot neutralise this cycle, as recent events have shown. On the contrary, the belief in the efficacy of monetary policy creates a false sense of security, evidenced by Gordon Brown's oft repeated claim that ‘we will never return to the old boom and bust'. Alan Greenspan in the US encouraged a similar belief which led to the risky sub-prime mortgage spree.
This instability is not the result of market failure, as many argue, but a failure of governance. It is the conditions under which the markets operate that are at fault. The boom-bust can only be neutralised by a change in the tax system.
The reason for the instability, Harrison explains, is not the housing market itself but the land market on which all buildings stand. Land is in fixed supply – as Mark Twain noted: ‘They're not making any more of it'. Therefore, as the demand for land for new homes and offices rises with population growth and economic expansion, market forces, which normally increase supply to reduce prices, have the reverse effect: prices rise. This encourages speculation, with banks lending more against escalating asset values and reinforcing the upward spiral. Under existing government policies, the only way land prices can be brought back to affordable levels is a slump, undermining the banking system and causing widespread unemployment and repossessions. This is exactly what is happening in America with the collapse of the sub-prime mortgage market. The run on Northern Rock shows the UK economy is not immune.
The author reveals that the government's monetary policy only has a marginal impact on land speculation, but as the Bank of England raises interest rates to curb house price inflation, the main victim is the first-time buyer and the productive economy, especially small businesses. The only way to neutralise the boom bust cycle is through a reform of taxation, he claims.
Martin Ricketts, Chairman of the Academic Advisory Council of the Institute of Economic Affairs and Professor of Economic Organisation, University of Buckingham, states that ‘…this book is an important contribution to an overdue debate.' Endorsing the thrust of Harrison's argument, Prof. Ricketts goes on to acknowledge ‘that insufficient attention has been given by policymakers to the rent of land as socially the most efficient source of public revenue' and that that will ‘have important practical consequences … for the stability of the economic system'.
Economic stability is the objective of governments around the world. Harrison explains how this may be achieved.
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