Ritchie on asset prices and interest rates


There are several commentators calling for economic orthodoxy in the FT this morning. Chris Giles for example ( no links today – I am writing in haste and on an iPad) calls for interest rates to rise now because he thinks UK employment is already below 7%, there is no excess capacity in the the economy despite an effective full time equivalent unemployment rate of well in excess of 3 million, and he is terrified of inflation.

This terror of inflation intrigues me. He celebrates the UK’s new growth. He ignores the fact that it is based almost entirely on inflation of UK domestic housing prices, putting them even further out of most people’s reach, and then demands that what would, in effect, be wage inflation be curtailed to make sure it stays that way.

I think we should have no doubt at all that this demand is not economic policy. This is in a sense not even political policy. Let’s call it class warfare, because that it what it is. What he is demanding is that the economy be run for the benefit of the minority who do not see houses as homes but as assets, and he wants to both preserve that asset base for the benefit of the few in this situation and to ensure that those remaining owners can use their increased asset worth as the security for the debt that they owe to that same minority in society.

So we actually have a policy that picks and chooses the inflation it wants. Asset inflation they say is good; wage inflation, they say, is bad.

What this country very clearly needs is the reverse. We need real wage inflation to corrct years of stagnation in the purchasing power of ordinary people and we need asset values to fall, firstly so that people can buy property and secondly because we want a reduction in personal debt – which debt is owed to a small group in society.

So do not for a moment be confused by the demand that we must increase interest rates to beat inflation. That is not true unless the aim is to preserve wealth and income inequalities in society. I want to beat those inequalities. In that case I do want to curb inflation – but it’s the inflation in asset prices and debt volume that worries me – and the FT isn’t saying much on that yet. More worryingly, when it comes to policy it will be the FT’s position that will be considered.

Be worried. Inflation is out to beat you, but not in the way most commentators report.


I quote at length so that you can see that I’m not misquoting.

He’s arguing that a rise in interest rates would mean that house prices either stay high or get even higher.


In a world where most housing is purchased with floating rate loans how on earth can this be true?

34 thoughts on “Ritchie on asset prices and interest rates”

  1. Although the general quote is economically problematic, the central assertion- that government home-ownerism is tantamount to class warfare- is valid.

  2. what’s with the idea that the current economic growth is based on rising house prices? So increased output in manufacturing and the services sectors is all generated by demand effects emanating from the housing market?

  3. Like others, I’m having trouble finding anything to disagree with. Increases in interest rates will cause house prices to stay high, or much more probably increase. because everyone & their estate agent believes house price rises will exceed the real cost of interest rates.& general inflation rates.
    I know it’s illogical. And it is indeed “class based”. Property owners want to keep the roundabout turning. Last one on’s a cissy.

  4. Prediction. One day people will work out a consumer good, housing, is only an investment if you keep pouring money in at the bottom of the Ponzi pyramid to keep it up. Spain it happened. The money stream stopped. Property prices collapsed. So did an economy based on property speculation.

  5. Ah, was it only yesterday that he was totally relaxed about inflation?

    He fits right in with the modern political elite, with his snowflake in hell policies.

  6. When did anyone here last ‘consume’ a house?

    Ponzi Scheme?: I personally bought my home when prices were high, watched the ‘value’ decrease in the last 10 years as the market dived, now am watching it increase SLIGHTLY. In that time I’ve got married, brought my wife into my home, transferred it to a joint ownership… and all the while paid the mortgage and and joyed living here. Snr Ponzi would be very disappointed with me as a victim.

    As I understand the argument, this ‘Ponzi scheme’ works by people seeing the price of paying their mortgage rising, thinking this must mean house prices will rise even faster and accordingly and going out and bidding more for the house than they would otherwise. So, raise interest rates to 100% and we’ll all be beating the doors down of the estate agents’ offices to make bids many times higher than the asking price will we?

  7. bis

    on come on, if mortgage rates were say 10% houses would be completely unaffordable at current prices

    it’s not just house prices that react to interest rates – other asset classes, equities and of course bonds do. AFAIK interest rates up, asset prices down.

    interested – well, it’s semantics, but I think in the jargon of economics I purchase a durable good (a house) an consume a flow of housing services from it. If I didn’t maintain it, I would eventually be consumed (i.e fall down and provide no more housing services)

  8. “When did anyone here last ‘consume’ a house?”
    So what do you do with your one?
    You have a structure to keep the rain off your head that, left to itself, will eventually fall down.* By living in it, you add to the wear & tear & accelerate the process. In what way does that differ from a washing machine & doing your laundry in it? You don’t expect to make a profit on used washing machines.

    *Done this before, but no domestic accommodation has ever been built with a design life exceeding about 40 years. About the life expectancy of the commissioner. That university college rooms are still in use 600 years after is immaterial. At current minus 560 they worked with what they had. Current minus 559 was not in the mind of the original builder. And in minus 560 they looked to minus 520. What you live in today is a reflection of your needs, not the person who built the house.

  9. this debate is really quite baffling. For the last 60 years, people have geared up to take the highest mortgage they can afford to service, in the hope that their wages will rise and render it more affordable. If interest rates rise at a time when wages are not rising, there is going to be a lot of pain in the housing market. There will be defaults and repossessions. I am very surprised that only Ironman and Luis seem to understand this.

  10. Luis-

    It is to an extent a matter of semantics, or more the case, that human categories are naturally somewhat vague at the boundaries. I remember somebody at Samizdata once defining an investment good as something that lasts longer than a year, in which case I joked that my toothbrush is an investment good. Consumption goods therefore being something that lasts less than a year.

    These aren’t very useful definitions. It’s more useful to think of investment goods as, being things that produce other things, or enable one to, in the commercial market. A production line, for instance, that produces millions of pots of jam to sell to other people the value of which far exceeds the cost of the production line. This makes it economically rational to borrow money to build the production line, and then pay a proportion of the money from the pots of jam back to the lender as interest.

    In these terms, a house is a consumption good, not an investment good; you consume its housing services in the same way as somebody purchasing jam is consuming its “spread on toast” services. The house is something you buy, not something that makes a greater quantity of other things.

  11. Let’s try & explain that last para.
    I’ve been involved with a rural house in the French midi-Pyrennee. Brit’s have bought it as their “place in France”. It was built with stone from the fields, timber from the wood, roof tiles made locally. Ground floor, the “cave” to garage the animals, 1st floor to live in, loft to store hay. About 200 years ago. When farming, that part of France changed, it no longer had a purpose. it was left to fall down. Absent stupid Brit’s it would continue to do so. The man who built it did not consider its eventual appearance on Rightmove. Or likely farming practices in !864.
    Historically, that’s how people considered housing. Current situation’s an anomaly. That tomorrows use will be higher value than today’s use.

  12. I have just read the FT article that Ritchie is so excited about. Chris Giles does not call for a rate rise, he makes the point that the BoE have been wrong about the pace of recovery so they must show that they are seriously considering rate rise. That is consider a rise, not actually implement a rise. To quote:

    “For me, the logic begins to point towards a rate rise, but I still favour holding off for a while longer. I would be willing to tolerate a period of higher inflation if my hopes about the degree of slack were baseless.

    Mr Carney might well agree. But, after being so wrong about unemployment, he must show that he takes the consideration of rate rises seriously.”

    (I also do not understand where people are coming from that think a rate rise will push house prices up. Asset prices and yields are inversely related. I see no reason for house prices to be unaffected by this – even if the negative effect of higher interest rates is offset by other factors affecting house price inflation, HPI will be lower if rates rise).

  13. If interest rates rise significantly, lots of people will be repossessed* and house prices will fall.

    *Excpe that the government will outlaw repossession. Class war? Ha!

  14. @ Bloke in Spain

    Did you miss the 2008 crisis? The whole thing was propogated initially by….guess what…rising interest rates as mortgage rates on subprime and Alt-A mortgages reset much higher.

    Whilst that is a special case, rising interest rates make debt financing more expensive, which tends to cool a housing market. Likewise, rising rates tend to strengthen the local currency which reduces the prices of imported goods, again reducing inflation. By no means lastly, rising rates attract more investment to bond markets whilst also making capital investment more expensive (as the risk free rate increases), all of which tends to cool economic growth. Which tends to lower inflation again.

    Lower inflation increases real wages, even if it has no effect on nominal ones.

    So Ritchie’s point is nonsense at best. Though I think we all expected that.

    We could also look at the evidence that in this post 2008 period of zero rates/QE. It has been the rich who have actually done the best in terms of wealth, whereas the poor have actually been badly hurt by a combination of factors, not least negtative real wage growth.

  15. “I also do not understand where people are coming from that think a rate rise will push house prices up. Asset prices and yields are inversely related.”
    But where do you think “asset prices” come from? They simply reflect what buyers are willing to pay. If people who consider housing as an “investment.”, which seems to be the mindset, regard increased interest rates as a reason for rising house prices, house prices will rise as they back their judgement. it doesn’t have to be sensible to be true.

  16. Is not the ‘houses as investments’ concept that the UK public are currently wedded to an entirely rational response to the post 1970 fiat currency world? Ie rather than hold cash the best thing to do is hold something the State and the FRB system cannot conjure up at the push of a button, and also has the added advantage of being the solution to one of life’s basic needs?

    And that if we returned to a world where a £1 saved today would buy the same amount of goods and services in 20 years time as it does today, the current fetish for housing would lose a lot of its allure?

  17. @ bis
    600 years? – you obviously went to Fenland Polytechnic. The outside walls of my second year rooms were 10th century (the innards had been refurbished updated a few times over a millennium).
    But you general presumption is junk. Houses were built to last *beyond* the limits that the builder could foresee. They were *not* built to fall down after 40 years (except under Attlee and Wilson) – they were built to *not* fall down for *at least* 60** years.
    ** Young guy getting married late teens, early twenties expects to live to three score years and ten with possibility of four score.

  18. John
    When did ever young guys in their late teens early twenties pay people to build houses? What with? The accumulation of their childhood earnings?
    It’s not what a builder can foresee. Builders can foresee all sorts of things. It’s what the person paying for it foresees. If the 10th century builder of your college walls had been paid to provide student accommodation for 21st century students, he’d have been only to happy to oblige. He presumably built a house for 10th century people to live in..That’s what they asked for.

  19. I think there is a sufficient disconnect between central bank rates and the interest rates people actually get charged that a rise would not make a fat lot of difference.

    Before 2008 lending was cheap. The central bank rate was not low though. It was enabled by potty discount periods, high loan to values and re-mortgaging just before the discount period ended.

  20. On reflection, John, you destroy your own argument. if your college had actually thought to the future it’d have knocked down those 10th century walls, sometime over that millennium, & built a nice square building with double glazed windows & ducts for aircon & computer cabling.to run through. Say about 1500.. .

  21. @ bis
    i) Mediaeval lads built their own houses. Earnings started around 13.
    ii) You are attributing to me a claim that i never made. When did I say that they planned for a millennium ahead and used materials not invented for a few hundred years? I said that they did *not* build houses to fall down after 40 years. Try reading what I actually said.
    iii) ” He presumably built a house for 10th century people to live in.” Precisely: and it is still standing in the twenty-first century. So if he designed it to fall down after 40 years, he got it dramatically wrong.

  22. Gareth, lots of mortgages track the central bank rates, and bank’s own variable rates (non-trackers) are highly correlated

  23. John77

    Give up mate, I have.

    I am not even prepared to insult Ritchie’s belief that QE was class warfare.


  24. How on earth is house-price deflation going to co-exist with wage inflation? Only with dramatic increase in supply, which aint gonna happen any time soon.

  25. I’ll just add my usual comment at this point that my own experience of being a domestic electrician was that much of the housing stock I was working on in London was utterly dire and in desperate need of a bulldozer, extended far beyond its natural life, patched up and patched up again. Plasterboard has a lot to answer for.

  26. There should be at least one use of the word “knobhead” in any comments thread that is based on the musings of Richard Murphy.

  27. Is it politically desirable/possible to have a lot of reposessions? We all know the answer to that one – no.

    It will certainly be political suicide to permit any large fall in house prices, especially in the South with all of those marginal seats.

    So either interest rates aren’t going to go up, or the government will come up with some wheeze involving other people’s money to prop the whole bubble up.

    The last two taboos in British culture – the NHS and falling house prices.

  28. John
    I could say read what i actually said. i said buildings are built for a design life of about 40 years. Even one today is. Design life on a flat roof is 15 years. Pitch roof round about 40. Windows & external doors, similar. It doesn’t mean someone won’t teleport over from Alpha Centaurus in 3014 to comment on how substantial 21st century buildings were & the advantages of incorporation their structures in blargfoodles.
    And medieval lads didn’t build themselves houses hung around for 1000 years. Wattle & daub huts, maybe.There’s a whole investment in the tools & skills needed. There’s no B&Q or convenient builders merchants or helpful DIY books. Just to lay bricks you need to know how to burn the stone, makes the lime, goes with the aggregate….

  29. My house is a liability, not an asset. I spend money on it, not generate money with it. Value goes up is meaningless unless I choose to sell, and find a buyer willing to pay that amount.

    Back to Ritchie’s post. Wage inflation, more money to purchase stuff with. I may be a bit thick but didn’t we generally have increased inflation with increased wages? Not to mention reduced exports as items became more expensive due to rising costs (making automation more viable too).

  30. @ BIS
    Yes, you could say “ead what i actually said. i said buildings are built for a design life of about 40 years.”
    My reply is that only applies to Attlee’s prefabs and Wilson’s tower blocks and a few trashy office blocks.
    ” Design life on a flat roof is 15 years. Pitch roof round about 40.” So Marley Tiles 50-year guarantee on its concrete tiles should have bankrupted the company when all the roofs it was retiling collapsed? And the roof over my son’s bedroom which is pushing 200 years should have collapsed 5 times by now?
    Generally houses were built to last *beyond* the lifetime of the occupier and even the trashiest houses built in the Victorian era (the worst speculative housing boom in history) were knocked down in the 50s rather than falling down. My example of walls standing for a millennium is only exceptional because the Saxons had a tradition of building in wood rather than stone.

  31. John
    It seems very hard to get through to you, “design life” is a term to describe the minimum period of time an article is expected to function. It’s not an estimate of how long it would last. For the obvious reason it’d be an average & if your house fell down after 10 years your builder would be able to say “Well they do that sometimes. Me grandad built one still standing after 70 years. Tough luck”.
    Your 50 year guarantee Marley tiles aren’t far off the “about 40 years” mark, but that’s all they’ll guarantee them out to. They may last 100…200…but past 50, you’re on your own.
    The Saxons may have been fine builders (although, having seen some of their work, close up, perhaps not) but by your reckoning most English city centres should be mostly Saxon buildings. They being built to last a millennium. And the current City of London skyline should remain largely unchanged until when? 2500?
    Read what IanB’s written above. We’ve both had extensive experience of London housing stock, built around the previous turn of the century. The majority of it is poorly constructed from substandard materials held together with endless repairs. At a guess it’s “design life” was the amount of time it took the builder.to get to the end of the road with the final payment in his pocket.

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