The surprising reason we started valuing houses so highly.
There was a time before the Brits were obsessed with housing. What changed in the late 1960s and 1970s?
The British television show ‘Location Location Location’ leaves little room to doubt what the programme’s producers believe to be the most important factor in making houses worth what they are. Proximity to one’s place of work, amenities, good schooling and so on are the key considerations when buying a house or flat. Not so, according to a recent Financial Times article.
In a somewhat off-beat piece in its House & Home Saturday supplement1 (FT Link), the FT suggests with some justification that the great revolution in the Brits’ infatuation with housing in the late 1960s and 1970s was the wider adoption of central heating.
While it sounds a little mundane, the article states that “in 1970, the average internal temperature in Britain was 12C, according to UK government statistics; by 2010, it had reached 16.9C.” This was apparently enough not only to make people want to invest more money in their homes, but it also changed the way we behave - would teenagers be so keen on lurking in the bedrooms if they were freezing cold?
The article could have gone further. While anyone whose boiler has broken down knows of the misery of a cold house, anyone who’s been in a modern office when the aircon has failed will recognise how uncomfortable working life becomes when the computers and strip lights heat everything to a sweat-inducing temperature. The arrival of home air conditioning in the more sultry US at around the same time was an equally enormous improvement.
Hot or cold, technology suddenly made homes more liveable - and therefore more valuable. It is hardly a surprise then that DIY suddenly became a popular pursuit around the same time. Yet central heating and aircon should be seen as the culmination of a wider set of technological advances, including running water, plumbing, labour-saving devices and more efficient and cheaper building materials. Growing affluence (more money to spend) and increased leisure time (more hours in which to spend that money) clearly also played their part. There was also a rise in demand for housing as the baby-boomer generation came of age and started to marry and form households.
So does something being valued more highly always mean that the price goes up sharply? Economics tends to try to reduce interactions to rules expressed at their most basic level in terms of mathematical formulae, and while this is convenient and useful, it tends to simplify and generalise.
For something as complex as the idea of value and how we value things, it is perhaps easier to see changes in value as a progression, especially in how we tend to respond to economic and social incentives over time. Understanding changes in value in an economy therefore becomes a matter of research into the past (like history) rather than experimentation (like science).
With respect to the relationship between value and price, how true is it to claim that central heating and the like really made house prices go up from the 1970s onwards? We can start to answer the question with an appeal to formal logic. In the conditional statement ‘if P then Q’, Q is necessary for P, as the truth of Q is guaranteed by the truth of P. P is also sufficient for Q, as P being true means Q has to be true, while P being false does not imply that Q is not true. Phew.
Most likely, technological advances and demographic changes were necessary but not sufficient grounds on which our increased sense of value of housing led to the huge house price rises experienced since the 1970s. ‘Necessary and sufficient’ means that P is true if and only if Q is also true, ie: both statements need to be either simultaneously true or simultaneously false. If Q is nice warm houses, more wealth and baby-boomers having kids, what was P?
Around the same time we got central heating and aircon, a revolution was happening in banking in the UK and elsewhere. In 1971, the Bank of England produced a report entitled ‘Competition and Credit Control’. The credit controls that had characterised western economies since World War II were being lifted, and this meant that commercial banks were now allowed to enter the British mortgage market. These commercial banks would go on to lend more, at a lower interest rate, and with a lower initial deposit than the traditionally-conservative British building societies.
So the P discussed above was a bank-driven credit boom - and this should more properly be understood as monetary inflation, albeit from the private sector in this instance rather than the government.
While people are generally familiar with issues around the supply and demand functions of actual houses (as we see in the debate about the effects of immigration), they tend to be less well versed in issues around the supply of credit, including its costs. When housing slumps, it’s not because there are fewer people around, but because credit conditions (the amount of credit available and also its cost in terms of the lending rate charged) become more onerous.
What does this mean for public housing policy? As the population grows, clearly more residences are needed. Yet when the UK government announced its Help to Buy policy in 2013, it was really adding more credit to the system which kept house prices high. Under the terms of the policy, would-be owners only needed a 5% deposit, with the government providing a 20% equity loan (40% in London) to help the purchase of new homes valued up to £600,000 in England (£300,000 in Wales).
This subsidy worked out very well for home builders, and banks could lend with impunity knowing the taxpayer was good for a first loss of 20% of the value of any new build purchased under the scheme. Evidence suggests the long-term effect was negligible if not negative on overall home affordability, with many users of the scheme left reliant on rising house prices to help justify much larger mortgages than they would otherwise have been able to afford2.
The housing crisis in the UK is not a unique phenomenon - Canada, Australia and the US are in the same boat, to name a few other countries. Government and central bank credit controls of the sort implemented between 1945 and ~1970 would be an efficient yet massively unpopular way to make housing more affordable, hitting existing home-owners’ wealth and potentially causing a banking crisis as the collateral value of the mortgages on banks’ balance sheets fell with falling house prices.
Higher interest rates also provide a check on credit creation, but the fall in house prices due to central bank rate hikes in the last few years has so far been modest, especially relative to pre-pandemic levels. Perhaps the lag effect of higher-for-longer interest rates will change this in due course.
Once again, the long-term benefits of more affordable housing are part of a political calculus that has to be weighed against the short-term voter horror that serious reforms to bank lending standards would cause. There is nothing to suggest that a future Labour government in the UK is serious about tackling this problem. But then again, it doesn’t seem that anyone else is serious about it either.
For a more in-depth analysis into housing, money, credit and inflation, my recent book Jam Tomorrow? Why time really matters in economics is now available on Amazon (Amazon Link) as an audio book as well as in hard back.
Sam-Johnson-Schlee, How central heating changed everything about our homes, Financial Times, 22/03/2024.
Phillip Inman, 10 years on, what did George Osborne’s Help to Buy scheme really achieve? The Guardian, 31/03/2023.
The only thing it helped to buy was private jets for the boards of house builders.