The recent massive hike in the cost of buying a piece of development land is proof enough to anyone that there is no real connection between the price of land and its real value as a productive resource. That is to say that the value of that piece of land ten years ago would have been understood by most people to have represented something of its real value in terms of how much productive wealth could be produced by it or how much cultural or aesthetic value it held in terms of its being located within an established community of interests.

No other commodity, if indeed it is such, would tolerate such a massive increase in such a short space. If we were asked to pay five pounds for a loaf of bread we would obviously realise that we could get it cheaper elsewhere or make it ourselves. And this is the crux, the essential difference between a tradable commodity such as bread and the consideration of land as a comparable commodity.

Because land is absolutely fixed to a place and because it exists as an absolutely finite supply or quantity, it acts in a categorically different way to other commodities which can be increased as demand increases and concentrated in areas where the demand is greatest. The effect of an increase in demand for land is to increase its price because there is a finite supply, but the effect on the price of a commodity is a decrease in price because manufacturers benefit from the economies of scale that increased production brings.

So despite the fact that in the UK, in contrast to other European countries, we now have a record income to debt ratio, we are asked to believe that the current price of land represents a balance between what we can comfortably earn, and what we can reasonably expect to borrow as a reflection of our projected needs in the future. The purpose of this article is to show that the sense of incredulity that most people on the bottom end of the property ladder have is a reasonable one, and that the myth that house prices represent a real equivalent value to the earning potential of their labour is a complete delusion based on a well-worn confidence trick.



The Sod and the Coin

The two parts of this equation both have historical precedent. In the case of the value of land we can see that this was effectively stolen from public ownership in the course of what is now known as The Enclosures, which, by the middle of the nineteenth century had shored up the legal ownership of virtually all the productive land of Britain and thus forced the peasantry into the role of servile tenants. Their dependence on a supply of money to conduct their business was equally usurped by the institution of private banking, pioneered by the Goldsmiths, who realised that they could not only charge interest on their loans, but could effectively create money out of nothing by lending money as credit notes in greater quantity than the gold reserves which they held.

Both these facts grossly distort any understanding of how the land is a natural source of wealth and also how money should be a representation of an exchange of commodities or services of equal value. In both these equations it is the product of labour which is stolen by the Aristocrat and the Banker. The so-called Landowner denies the right of access to the only source of material wealth which exists and effectively puts a tax on any productive use of the land in the form of rent. The banker then undermines the value of the workers money by increasing the supply of money through loans and effectively decreasing the buying power of the money which already exists and which represents the value of labour.

The initial effect of increasing the money supply, apart from creating instant wealth for the banker, is to increase the rate of exchange of goods and services in society and thereby stimulate production through increased consumption, and competition to meet the increase in demand. But as demand outstrips supply so the price of goods can increase and the effect of inflation is felt as the decrease in the value of wages. If employers increase wages they would then have to increase their prices and thereby take out more loans to afford the increased cost of materials. And so the spiral upwards continues until it reaches a threshold. Crucially this process, known as the business cycle, can be influenced by the availability of money from the banks through their control of the interest rate charged on loans.

The other side of the coin

Since the middle ages public works had to paid for by the Landowners, who admittedly were the ones who profited most from the improvements in the infrastructure of production they brought. Whether to pay for these works such as roads and civic institutions, or more often for the huge cost of armaments in battle, Income tax was introduced to offset these costs. Initially the whole economy was subject to taxes on production which included the idea that Land could be considered as productive income, notably through the collection of rents or productive cultivation. But a gradual shift in conception of land as something sacred which was borrowed or used, to a commodity which could be sold on at a profit, led to changes in the taxation of land such that it was considered to be a form of capital and not income.

This was basically a means of increasing the wealth of the rich landowning class because they could make more money from speculating on the increase in land values through inflation, than they could from renting to a working class whose wages they had an interest in keeping to a minimum. As in the pioneering days of the railroads in the wild west of the USA, landowners could speculate on the increase in value of the land due to infrastructure improvements which they had themselves initiated. But the dividend that they collected was paid for by the taxpayer as government subsidies while they pocketed the profits in real estate sales which were considered as capital gains rather than income.

In the reality of modern day Britain, the value of proximity to infrastructure is replaced by the scarcity of land as a finite resource. The scarcity of prime development land serviced by the trappings of the modern economy commands a price directly proportionate to its limited supply. Ironically one of the effects of decoupling the taxation of development land from its potential for productive use is actually to restrict the availability of that land for development. Believing they can get a higher rate of return than putting the land into productive use, speculators leave their land idle. In the age of the car urban development sprawls out into the suburbs in search of cheap land. Factor into this equation the attempt by the Planners to restrict this sprawl by further restrictions on the availability of land, and we have the absurd contemporary situation that the massive windfall gains of obtaining planning permission are created by neither the industrialists nor the speculators, but by those in the civil service.

The Gold Standard

Coming back to the question of how the price of land is distorted by the process of inflation and the greed of land speculators, we can see that classical economics has excused its bias for a landowning elite and offered as an explanation the supposedly natural fluctuations in consumption patterns of the business cycle. That these are neither natural nor reflective of consumption requires a more in-depth analysis of the inadequacy of such wealth indicators as GDP and indebtedness. But for the sake of argument, let us say that we can understand the distortion in our perception of the values of land as largely due to the same process as when Gerard Winstanley of the Diggers described the way in which Landowners got their land: “they or their fathers got it by the sword”.

This system of unequal distribution therefore relied on both the pressure exerted on landless peasants by the extraction of high rents and also the speculative individualism of the merchant classes. In the attempt to even out, or at least to regulate, the peaks and troughs between speculation-fuelled periods of inflation, measures such as the Gold Standard were introduced to supposedly provide a reference of value. Because gold is a scarce commodity it could be relatively easily monopolised and policed so as to act as a fixed measure in society against which all other values could be compared.

Notwithstanding that gold coinage was strictly controlled by the authorities to encourage or constrict production, it forms one part of a system of exchange in which various factors such as supply and demand, as well as labour and trends in consumption, all interact to produce the characteristic pattern of Boom and Bust. Therefore the idea that there is somehow a fixed relationship between all these components, which go to create an equitable economic pattern, is a woolly delusion because there are not only a huge number of variables which are themselves prone to change, but the very process of growth itself fundamentally shifts the balance of particular values.

On this basis we can now re-examine our idea about the increase in house prices, (which is really the value of scarce land), and the relative decrease and inflation of commodities, services and wages. The point of this analysis will soon become clearer in light of the latest housing boom, but at this stage it is important to understand how the various elements in the equation are not actually fixed, but represent fluctuating trends in a complex soup of changing social behaviours.

In the book Boom Bust by Fred Harrison, he identifies the main characteristic of the housing–led business cycle as the 18 year cycle which initially related to the creation of Building Societies at the beginning of the nineteenth century. Loosely, this derives from the sense that the rate of interest at 5%, when compounded, gives a figure of 14 years payback, and that when combined with both the factor of the expected longevity of the builders and allowing for static periods between cycles, it tends to emerge as something near the modern 18 year cycle. From this we can sense that, not only does the pattern of investment in housing reflect the most significant determinant of the cycle, but that it is really also just as subject to the process of inflationary growth and decay as any other part.

The reason I am focussing on this is its relevance for the modern Housing Boom. What is peculiar, not to say, extraordinary, about the modern phase, is the decision by the chancellor to decouple the inflation of house prices from the normal index of inflation. The effect of this is the runaway rise in house prices of the last ten years. I can only guess that his intention was to attempt a kind of financial severance between the life cycles of property and that of the industrial or consumer economy. Again, this is a topic which merits closer scrutiny which I will not delve into here. The point in the current context is to focus on the role of a segregated housing cycle, and its similarity to the effect of a Gold Standard as a measure of a controlled value system.


Bricks and Mortar

I have suggested that there are two main factors in the perception of the value of property, namely the fluctuations in an artificially created economic pattern of boom and bust, and the attempt to exert control over this cycle by means of control of the various inputs. In reality I am now suggesting that the concept of fixity and control is an illusion and loosely serves to disguise a process of blatant exploitation by means of the invention of absolute ideals such as a Gold Standard which conveys a sense of certitude or permanence on the proceedings. Before coming to the vital question as to the real role of debt and its necessity for a capitalist economy, I am intrigued by the question as to not only why people let themselves into such huge debts, but how houses can act as a repository of the nations wealth all the while being, as the proverb goes, like the emperor’s clothes, merely a paper thin illusion subject to the erosion of wind and rain.

This translates roughly to the question ‘why should anyone choose to invest so massively, acquiring a lifelong debt, in a project which blatantly bears the hallmarks of corruption and consists of no more than a pile of rocks?’ Indeed when you think about it, what does the process of home-owning actually convey on the mortgaged soul other than a sense of being the master of her own castle? Actually the main effect is to deny that very concept, because with debts at twice that of our European counterparts we are further than ever from that elusive goal.

I could wax lyrical about a nostalgic sense of a return home, a severance from a golden age of rural idealism, a hankering for the domestic bliss of a community of souls, a village life away from it all, but unfortunately the reality is that we have been denied that right ever since William the Conqueror parcelled the whole country out to his nobles using the Domesday Book and then Henry VIII conferred the legal title of ownership on his loyal subjects. Effectively it was always ours as a common heritage and birthright; the hankering for communion with nature which characterises this obscene grab for personal possession is really a suppressed urge to restore what is frankly part of our natural condition.

With this somewhat satirical evocation of the relationship with Mother Earth that lurks behind our every move, I hope to have expressed something of the yearning and frustration which characterises the modern desperation for ownership. As I will describe in the next section, one of the ways that capitalism has traditionally used to encourage people into debt is through fear. In times of adversity people barricade themselves in and feel the insecurities of recession more acutely. Therefore the process of war and internal struggle leads people into debt; but we can now ask, in this age of exponential growth and global corporate domination, whether the promotion of the ideal of home ownership is in fact just another device to further the ends of the bankers who realise that personal loans are legally binding and are less prone to default than loans to limited companies?


By the sweat of their brow

Cynical as this assertion may seem, it derives from the realisation that capitalism cannot function without the mechanism of growth and debt to stimulate its captains of industry. Just imagine what would happen if governments paid off their loans to the private banks, resolved everyone of their personal debts and issued exactly the right amount of state-controlled currency to satisfy the demands of an economy in a steady state of growth and production. Add to this a tax on the productive wealth of every piece of land in the land in order to pay for the infrastructure which underpins its particular value. What would be the purpose of the banks other than to process wage checks and store peoples savings? What would be the point of people buying land and leaving it idle if any increase in the value of the land was offset by an increase in a land tax which moved with the infrastructural development of the area?

Obviously this presumes that there is no need for debt. That people only spend what they have earned and that people are more likely to share and give of their services within their community if they know that there is little chance of that personal debt being squandered. That the relationships forged by working together on communal projects constitute an investment in the future of the community, a value which can only be measured in experience. Such a situation is not only possible but it probably provides the essence of what we retain as a sense of decency in all those areas of life which have not been regulated by the police or taxed by the government.
The point of these questions is not only to show that there are alternatives, but to imply that once we can see a better way of doing things we start to realise what purpose our current system serves. So when I suggest that massive personal debt in the UK serves as not only a means of disguising the disastrous slump in British manufacturing and wage levels in relation to house prices, but also as a means of bolstering a capitalist system which fundamentally relies on the economic growth brought about by debt, I feel justified in asking: “what kind of growth is this?”

Growth of the paper-thin illusion that the same bricks and mortar are worth five times as much as they were ten years ago?

Growth of the concept of land ownership which has fuelled a tenfold increase in the cost of development land underpinned by massive hoarding of that same land by companies who are supposed to be responding to the need for more houses and awarded government grants and planning concessions to do so?

Growth of the profits of multinational corporations who spend more and more on advertising substandard disposable goods to a gullible and impoverished population?

Growth of the Western Imperial Empire with its increasing expenditure on arms manufacture paid for by the taxpayer to the benefit of company executives? Arms sales which rely on the increased conditioning and harassment of the population through scare tactics, control of the media and breakdown of local institutions which foster real security?

Growth of third world debt through their coercion into lopsided development programmes propped up by corrupt puppet regimes?

And lastly, to come back to my first tentative question, why not:

Growth of personal debt as a way of bolstering the illusion of national growth all the while exonerating government of the burden of public debt and complicity with the corporate interests of private banks?