Most ‘Wealth’ Isn’t the Result of Hard Work. It Has Been Accumulated by Being Idle and Unproductive.

It’s time to call the housing crisis what it really is: the largest transfer of wealth in living memory.

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By Laurie Macfarlane

One of the basic claims of capitalism is that people are rewarded in line with their effort and productivity. Another is that the economy is not a zero sum game. The beauty of a capitalist economy, we are told, is that people who work hard can get rich without making others poorer.

But how does this stack up in modern Britain, the birthplace of capitalism and many of its early theorists? Last week, the Office for National Statistics (ONS) released new data tracking how wealth has evolved over time. On paper, the UK has indeed become much wealthier in recent decades. Net wealth has more than tripled since 1995, increasing by over £7 trillion. This is equivalent to an average increase of nearly £100,000 per person. Impressive stuff. But where has all this wealth come from, and who has it benefitted?

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Just over £5 trillion, or three quarters of the total increase, is accounted for by increase in the value of dwellings – another name for the UK housing stock. The Office for National Statistics explains that this is “largely due to increases in house prices rather than a change in the volume of dwellings.” This alone is not particularly surprising. We are forever told about the importance of ‘getting a foot on the property ladder’. The housing market has long been viewed as a perennial source of wealth.

But the price of a property is made up of two distinct components: the price of the building itself, and the price of the land that the structure is built upon. This year the ONS has separated out these two components for the first time, and the results are quite astounding.

In just two decades the market value of land has quadrupled, increasing recorded wealth by over £4 trillion. The driving force behind rising house prices — and the UK’s growing wealth — has been rapidly escalating land prices.

For those who own property, this has provided enormous benefits. According to the Resolution Foundation, homeowners born in the 1940s and 1950s gained an unearned windfall of £80,000 between 1993 and 2014 alone. In the early 2000s, house price growth was so great that 17% of working-age adults earned more from their house than from their job.

Last week The Times reported that during the past three months alone, baby boomers converted £850 million of housing wealth into cash using equity release products – the highest number since records began. A third used the money to buy cars, while more than a quarter used it to fund holidays. Others are choosing to buy more property: the Chartered Institute of Housing has describedhow the buy-to-let market is being fuelled by older households using their housing wealth to buy more property, renting it out to those who are unable to get a foot on the property ladder. And it is here that we find the dark side of the housing boom.

As house prices have continued to increase and the gap between house prices and earnings has grown larger, the cost of homeownership has become increasingly prohibitive. Whereas in the mid-1990s low and middle income households could afford a first time buyer deposit after saving for around 3 years, today it takes the same households 20 years to save for a deposit. Many have increasingly found themselves with little choice but to rent privately. For those stuck in the private rental market, the proportion of income spent on housing costs has risen from around 10% in 1980 to 36% today. Unlike homeowners, there is no asset wealth to draw on to fund new cars or holidays.

In Britain, we have yet to confront the truth about the trillions of pounds of wealth amassed through the housing market in recent decades: this wealth has come straight out of the pockets of those who don’t own property.

When the value of a house goes up, the total productive capacity of the economy is unchanged because nothing new has been produced: it merely constitutes an increase in the value of the land underneath. We have known since the days of Adam Smith and David Ricardo that land is not a source of wealth but of economic rent — a means of extracting wealth from others. Or as Joseph Stiglitz puts it “getting a larger share of the pie rather than increasing the size of the pie”. The truth is that much of the wealth accumulated in recent decades has been gained at the expense of those who will see more of their incomes eaten up by higher rents and larger mortgage payments. This wealth hasn’t been ‘created’ – it has been stolen from future generations.

House prices are now on average nearly eight times that of incomes, more than double the figure of 20 years ago. It’s unlikely that house prices will be able to outpace incomes at the same rate for the next 20 years. The past few decades have spawned a one-off transfer of wealth that is unlikely to be repeated. While the main beneficiaries of this have been the older generations, eventually this will be passed on to the next generation via inheritance or transfer. Already the ‘Bank of Mum and Dad’ has become the ninth biggest mortgage lender. The ultimate result is not just a growing intergenerational divide, but an entrenched class divide between those who own property (or have a claim to it), and those who do not.

Misleading accounting and irresponsible economics have provided cover for this heist. The government’s national accounts record house price growth as new wealth, ignoring the cost it imposes on others in society – particularly young people and those yet to be born. Economists still hail house price inflation as a sign of economic strength.

The result is a world which is rather different to that described in economics textbooks. Most of today’s ‘wealth’ isn’t the result of entrepreneurialism and hard work – it has been accumulated by being idle and unproductive. Far from the positive sum game capitalism is supposed to be, we have a system where most wealth is gained at the expense of others. As John Stuart Mill wrote back in 1848:

“If some of us grow rich in our sleep, where do we think this wealth is coming from?  It doesn’t materialise out of thin air. It doesn’t come without costing someone, another human being. It comes from the fruits of others’ labours, which they don’t receive.”

Britain’s housing crisis is complicated mess. Fixing it requires a long-term plan and a bold new approach to policy. But in the meantime let’s start calling it what it really is: the largest transfer of wealth in living memory.

Originally published on Open Democracy here.

2017, November 13

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  • Farmer Giles

    Mrs. Macfarlane once again lays out the case for the greediest generation… Generation ME! My pet peeve is the career theft. It is widely reported that so called “administrative” jobs have exploded in recent decades, leading to huge increases in the price of everything from education to entertainment to groceries. Who holds these “administrative” jobs? Baby Boomers of course, and don’t expect them to step aside -no thank you. It our time now! (they say).

    I am often struck by the stark contrast, at least here in America, between the Baby Boomer generation and their parents, what we call the, “Greatest Generation.” These people, the few who are still around, seem so oriented towards providing something for society, leaving something for their children… such a contrast!

    Of course, I don’t think Baby Boomers are evil. I don’t think they sit around in smoke filled rooms planning this “generational theft.” Of course not, they are, simply, like the vast majority of people, oblivious. The Government says that Capitalism proves that they earned whatever wealth they can lay claim to, and that is good enough for them. They just don’t think about it any further. Meanwhile, a bunch of loser Gen Xrs and whinny Millennials sit around reading great articles like this… but do nothing about it.

  • A Guitar

    This article is such utter nonsense, I almost don’t really know where to start.

    How about, the fact that the writer doesn’t mention that House price inflation has actually been driven by the fall in the cost of borrowing.

    In the 80’s my £20k mortgage cost around £265 monthly, interest rates peaked at about 16.5%.

    The same mortgage now costs me £25 monthly at 1.25%.

    That means I could borrow over ten times as much for the same payment.

    House prices have nothing to do with multiples of average incomes, because that does not affect what the monthly repayment is. It is interest rates that affect that, and the market has simply adjusted to the change.

    I am not saying it is a good thing, or that it is easy for young people. But I can assure you it wasn’t then either !!!

    The Economics profession has been massively politicised to the point where they believe the sort of tosh written in this article. Of course don’t get me started on the Brexit forecasts lies of the same liberal elite economists.

    • Critical Inquirer

      Hmmm I’m not sure you read the whole article Mr Angry Middle Aged HTFU Young People Brexiteer. The point is that the proportion of earnings consumed by RENT has more than tripled since the 80s (something barely helped by regional house price variances as these are largely in line with regional and sectoral earnings, something which you ignore for some reason) and this has a sclerotic knock on effect to the rest of the economy (hence why personal debt is at an all time high – another form of wealth extraction in an increasingly RENTIER economy). The current low cost of servicing a mortgage is neither here nor there if you are forced into renting in the first place, and your comments about scrimping and saving tp buy are economically illiterate and also illustrate the fundamental structural weakness of an asset bubble led market – if liquidity in the economy slows because people stop spending in order to save up for an unproductive asset, then all the jobs, incomes and taxes which rely on people spending suffer too.

      As for your comment on Brexit forecasts..well, it hasn’t happened yet, has it? Let’s just see how it pans out…I’m sure people like you will find every conspiratorial reason to blame anyone and anything other than the verifiable evidence of intractable reality in front of your own selectively biased nose

    • Bosh

      With respect to you’re talking out of your bottom. Just take into account the fact that a property is £400,000 where as it used to be £30,000 – that £400,000 divided by the number of months and you have the amount of capital repayment due. Whilst the interest is lower, the actual svr on most mortgages is around 4.5-5%. The oft misquoted 15% interest rates only lasted for a few months and this was at a time when wage inflation was also very high. The boomers have absolutely pulled the ladder up behind them in terms of house prices pensions and many other aspects.

  • digitaurus

    It’s hard to fathom the point of this article. As far as I can tell, in the UK the affordability of housing hasn’t actually changed much over time. Housing has got more expensive in the south east (especially in London) and either stayed flat or declined elsewhere (e.g. Northern Ireland).

    In Japan, housing has been a terrible investment for 30 years. In the USA, house prices fell by 70% over a four year period 2008-12. People who invested in housing got lucky in the UK. In general, a more diversified investment strategy is to be preferred!

    I don’t recall that saving up for a deposit in the 1970s was particularly easy and mortgage rates were 10-15% through most of the 1980s and early 1990s. If you do the numbers (see the comment by A Guitar below) it all works through.

    My guess is the author is a professional living in London. If you want to have it “good” like your parents back in the 1970s (!), may I suggest you live like them. Ditch the iPhone, the Sky subscription, the meals out, the partying and the foreign holidays. If you want true authenticity, try going without electricity for a couple of days a week. Ditch the car (get something old and small if you are living in the country). Move somewhere cheap – there are some beautiful spots in the UK where house prices are 3-5x average wages (Google it) or persuade your parents to take you back for a few years. You will find it actually isn’t that hard to save up for a deposit (or for a more diversified savings strategy).

    But you are not going to do that, are you?

  • steve13565

    ===== quote =====
    Last week The Times reported
    that during the past three months alone, baby boomers converted £850
    million of housing wealth into cash using equity release products – the
    highest number since records began.
    ===== /quote =====

    This is what happened in the USA before the real estate crash. Instead of rising incomes, people were able to finance their life styles by borrowing. This false sense of wealth came crashing down in 2008/2009. I am surprised to hear that the bubble is still going on in the UK. I don’t know how long this game can continue in the UK, but I would think it would have to end badly as it did in the USA.

  • Robert DeLorey

    A lot depends upon what you consider “hard work” and what you consider “Idle and Unproductive”. Wealth does tend to accumulate across generations. It usually takes two or three generations of hard work and discipline to accumulate a significant amount of wealth. It is not unusual for it to be lost in a single generation. Sometimes in a single war. Equal opportunity is the best you can hope for. Equal outcomes if achieved today would result in inequality again in a few generations.

    • Reron

      Robert, couldn’t agree more.

  • Reron

    Seems what your describing is asset inflation, the stated goal of worldwide Technocrats. Or its the effect of the present value of money. Don’t see how this is earthshaking info. Don’t think anything can be done from a policy point.

  • sd

    I know plenty of people who are “idle and unproductive” who gain no wealth.

    The article has a point but its overwhelmed by the stupidity of the headline.

  • rogerinflorida

    This is just straight forward asset inflation. When Central Banks around the world keep interest rates artificially low and increase the money supply, allowing banks to reduce lending standards and lend absurd amounts without risk to themselves, this is the result to be expected.
    Remember this has happened (and is still happening) in Canada, Australia, New Zealand, Hong Kong and many other places. There are massive amounts of money seeking a safe haven, particularly from ME oil states and China.
    David Stockman wrote an article describing how $220 Trillion of global debt had resulted in $29 Trillion of increased global GDP, where did the balance go? Into assets; real estate, stock bubbles, fine art, etc, with only a tiny proportion going to wages.

  • roboser

    Since the author refers to Adam Smith, in passing, he might have also mentioned that Adam Smith writes in Chapter IV of Book II that the ordinary market price of land (i.e. houses) depends on the ordinary market rate of interest. Whose fault is it to have a regime of low rates of interest? Not the property owner. Adam Smith also writes that a [person who has capital from which he wishes to derive revenue, should buy land with it. It is never too late to become “wealthy”. Wallowing in the politics of envy will get you nowhere.

  • Rien Vermeer

    and inequaulity rises further and further, too bad politicians in general won’t talk about such mechanismes, thank you for your article. In my country there is even en enforcing element: payed rent on the mortgage for the house you live in is (income) tax deductable, entering the house market is only possible when you have een farly good income, or…rich parents.

  • chris goodwin

    Typical, stale leftist rant: nothing new here, just the same old error in a new setting. John Stuart Mill’s comment (I will not dignify it with the word “thought” – more an off the cuff commonplace, but just as wrong for all that;) that “wealth … doesn’t materialise out of thin air … doesn’t come without costing someone, another human being. …from the fruits of others’ labours, which they don’t receive.” This is just another of the “That man is rich, he must have got his wealth from me!” arguments, which is very understandable, very appealing to the poor, very convenient to the populist politician, very, oh so very “enobling” to the “disinterested” media pundit, and based on nothing at all in the way of a logical argument.

    I thought Evonomics was supposed to be bringing us some NEW insight into political economy, not just the same old, same old. Silly me.