What’s a house worth in real money? Not in electronic numbers or bits of paper but in something extremely useful and globally sought after, such as oil.
It’s a question worth asking because in the end money is only as valuable as the physical work it can buy (‘do’). This chart shows how many barrels of oil it took to buy the average UK house over the last 15 years:
You could say that things are OK as long as the amount of oil you could trade your house for keeps pace with its price in pounds. That suggests that the rising value of your house is backed by a similar increase in the equivalent amount of energy that could be put to work growing the economy.
Of course, for that to happen (i.e. for house prices to rise sustainably), the oil needs to remain level or, better still, keep getting cheaper. And for that to happen, under conventional olde worlde economics, more oil needs to be produced so that supply doesn’t fall below demand because if it did the price would go up.
Indeed, oil and house prices kept more or less in sync between 1995 and 2003, apart from a blip in 1998 caused by a short-lived plunge in oil prices that made house prices momentarily look very good indeed.
But the trends started to diverge after 2003 – coincidentally just around the time that conventional oil production hit its peak. Oil began to get a lot more expensive, which made houses worth less in real (energy-backed) money.
If those were the only fundamentals behind house prices, the market should have corrected in 2004. But of course they’re not. Cheap debt allowed prices to rise for another three years. And since then the UK Government has done everything in its power to prevent home values dropping back to the long term average in relation to incomes (or barrels of oil).
QE1, QE2, and other forms of make-believe money have helped to hold house prices up despite a massive slump in sales. But who is that helping?
Remember, the shorter the vertical bars on the chart, the more expensive oil is and so the more that people have to pay for road fuel and other necessities (like food) whose cost is affected by the price of oil. The increasing struggle to pay for higher-priced energy is exacerbated by the cost of mortgage payments on high-priced homes. Ordinary people are being slowly crushed by the consequences of the rush for growth fuelled by debt instead of real resources.
In the meantime, it’s a bonanza for those with access to oil wealth. To them, the price of UK houses is less half what it was in 2003: hence the relative immunity of high-end properties in and around London from price-falls.
It makes you wonder why Governments are so terrified of deflation. Yes, millions of unrealistic expectations would be brought tumbling down along with prices and levels of debt. Yes, consumer demand would crater. But such a slump would also bring down the price of oil and narrow the gap between ‘real’ energy-backed values and the prevailing phoney, debt-backed, put-it-on-the-grandchildren’s-tab values.
Right now that’s too much to ask. UK Business Secretary Vince Cable was burbling about renewed stimulus yesterday- i.e. more thin-air money; more synthetic demand and therefore higher prices for scarce energy. All that will do is make the crash, when it comes, that much harder.