So if you took a brand new highly desirable 3 bedroom
family home from say 1935 and you adjusted its original
purchase price for inflation today?
Right. Just.
Pure inflation, yeah, just strict inflation.
That brand new house would cost roughly 60,000 lbs today.
Which is just. I mean, it's a completely mind
blowing figure. It really is.
So why is that exact same house, which is now, you know, almost a
century old, probably quite drafty, leaking heat and
requiring pretty constant maintenance?
Why is it selling for half £1,000,000 today?
Or more, depending on the street.
Exactly or even more? Welcome to our deep dive.
Today we are taking a really hard look at the
financialization of the UK housing market.
And we're doing this by looking at some pretty incredible
primary sources. We are.
We're using original 1930s property brochures to decode how
this simple, you know, pile of bricks basically mutated into a
hyper valuable economy dominating financial asset.
Because it really is the central economic paradox of our time,
isn't it? We are essentially living inside
this giant, slow moving financial derivative that we
just mistakenly still call a house.
A financial derivative with Bay windows.
Right, exactly. And to really ground this for
you listening, I want to take a mental walk down a very
specific, yet entirely ubiquitous kind of St.
The. Classic British suburban St.
Yeah, picture an ordinary suburban St. in southeast
London. If you spent any time at all in
the UK, it is practically baked into your cultural subconscious.
You can see it with your eyes closed.
You really can. Rows of semi detached houses,
modest brick walls, pitched roofs, the classic Bay windows
in the front. It's the absolute definition of
ubiquitous. I mean, there is no grand
architectural statement being made here at all.
No, none. And you have to look at the
context of the street itself too.
Like they small front gardens that were originally intended
for, I don't know, a few rose bushes or a neat little lawn.
Right, the whole Metroland aesthetic.
Exactly. But today they have almost
entirely been paved over to create parking spaces for cars.
Completely bathed. It is entirely utilitarian now.
And when you look at these buildings, they were clearly
designed to just do a job, you know, to be a basic shelter.
Which is what a house is supposed to be.
There is absolutely nothing about them that screams luxury
or or exclusivity. They're just perfectly ordinary
brick houses. Just.
Standard issue boxes. But then you go online, you look
at the property listings for that exact St., and the whole
narrative just completely shatters.
Because you see the numbers. Half £1,000,000, sometimes 600
or even 700,000 lbs if you happen to be like a 5 minute
walk from a rail station. Which is, frankly, an
astronomical sum for a structure that was never, ever designed to
be anything more than standard functional shelter for a single
income working family. The disconnect between the
physical reality of those aging bricks and the economic reality
of the modern price tag is just it's staggering.
And that is exactly what we are unpacking today.
And to be clear, we are not just going to sit here and complain
about the housing market being expensive.
Because, I mean, everyone knows that that's not news.
Right, you don't need us to tell you that we're going to do
something much more forensic. I have a stack of historical
records sitting right in front of me, specifically to original
1930s property brochures advertising brand new homes in
Bexleyheath in Barnhurst. Which is prime southeast London
commuter territory. Exactly.
And we're going to use these brochures as a baseline to
really understand the invisible and honestly almost inescapable
economic traps that are keeping us all locked into these 100
year old buildings. Because to understand the
madness of a half million pound price tag on a basic semi
detached house, we really have to establish that baseline.
You have to know where we started.
Right, we have to look at the psychological and economic
environment into which these specific houses were born.
So let's open up these brochures and if I mean the very first
thing that jumps off page when you look at these is the tone.
It's so different from how we talk about property today.
It is the marketing is so incredibly confident and just
deeply, deeply optimistic. Listen to this specific
phrasing. They used to sell Bexleyheath
they call it. Quote the health resort of
Greater London A. Health Resort.
I mean, it is wonderfully evocative, isn't it?
It's amazing. But it also tells you exactly
what they were selling, and, perhaps more importantly, what
they were not selling. Right, because they go on to
boast about the fresh air, the space for children to play, the
gardens, and then they heavily promote the infrastructure,
making a huge point of noting that there are electric trains
every 10 minutes into the city. Which, if we look at the
macroeconomic environment of the 1930s, makes perfect sense.
Because London was pretty grim back then, right?
Exactly. London was rapidly
industrializing, but it was also literally choked with smog.
The inner city was incredibly crowded, it was polluted, and
frankly, it was often highly unsanitary.
So getting out was the dream. It was the ultimate dream.
These brochures were selling a really profound promise to the
emerging middle class. So your clerks, your managers,
the skilled tradesmen. The people who had steady jobs
but didn't have massive generational wealth.
Right. And the promise was basically,
you can escape the soot, you can raise your family in clean air.
But, and this is the crucial part, you won't sacrifice your
livelihood to do it, because this fancy new electric train
connects you directly back to your desk in the city.
The classic Metroland dream. Just life out in the leafy
suburbs. Precisely.
But here is the real kicker for me looking at these pages.
Nowhere in this brochure. Not in the fine prints, not in
the bold headlines. Nowhere do they say buy this
house and it will double in value in 10 years.
Which is how literally every property is marketed.
To exactly. Asset speculation is just
completely absent from the pitch.
Because it wasn't a thing. They were selling a consumable
lifestyle product, a utility. Like buying a really nice
washing machine or something. Exactly.
They were absolutely not selling a financial asset.
They were selling a promise of a better life that was, crucially,
structurally within reach for the ordinary worker.
And when we actually look at the original, prices Within Reach
wasn't just marketing fluff, it was reality.
What were the actual numbers? I guess so the prices listed for
these brand new health resort adjacent homes are 575 pounds,
660 lbs and £750 for the really big ones.
So. Obviously we have to adjust for
the era, right? Because to a modern era, you
know, £500 sounds like a slightly expensive weekend away.
Yeah, it's maybe a couple of nights in a nice hotel.
Right, but in the 1930's the average wage for, say, a clerk
might have been around 150 to £200 a year.
OK, so let's do the math on that.
So a £600 house was roughly 3 to 4 times the average annual
income. OK, which means it definitely
required saving. Yeah, you couldn't just find 575
lbs down the back of the sofa. No, it was a major life
purchase. You needed a deposit, you needed
a mortgage. Which, by the way, we're mostly
handled by local building societies back then, right?
Not these massive, faceless global bank.
Exactly, it was community based lending.
So it required financial discipline.
It required discipline, yes, but it was structurally possible.
That's the key. Because the numbers actually
made sense. Right.
The mortgage repayments were directly aligned with the actual
wages being earned in the local economy at that time.
The entire financial apparatus was designed around this idea
that the home would be paid off over, say, 20 or 25 years by a
single breadwinner. A single breadwinner?
That's almost unheard of now. It really is, and the whole
point was that by doing this it would leave the family with a
secure shelter for their old age.
That was the goal security, not wealth generation.
OK, let's unpack this and bring that 660 LB figure into the
modern day, because this is where my mind just sort of
melts. The inflation adjustment.
Yeah, if we strictly adjust that for inflation, meaning just the
pure purchasing power of the pound, from 1935 to today, that
brand new 3 bedroom house cost roughly 60,000 lbs.
It is a figure that completely, totally shatters our modern
expectations of what housing costs. 60,000 lbs.
I mean you can barely get a high end.
It's an extension in London for £60,000 today.
Let alone an entire 3 bedroom house with a front and back
garden. Brand new from the developer.
No, it's impossible. Buying a house in the 1930s was
essentially the equivalent of buying a dependable, maybe
slightly higher end family car today.
That is a really great analogy. Actually, like it's a major
purchase. Obviously you take out a loan,
you make your monthly payments, but ultimately you are buying a
utilitarian tool. You expect a car to transport
you, and you expect a house to shelter you.
And crucially, following that car analogy, you don't expect
your family estate car to magically make you a millionaire
over the next 30 years. Right.
You don't buy a Honda Civic expecting to retire on it.
Exactly. You view it as a consumable
necessity, one that will eventually wear out, need
massive repairs, and maybe eventually need replacing
entirely. Yes, and that analogy perfectly
encapsulates the psychological chasm between the 1930s buyer
and the modern buyer. The 1930s approach was grounded
entirely in utility. Where is today?
Today, the expectation is a maximum financial leverage.
You buy a house because the asset is expected to appreciate
completely independently of its actual utility as a shelter.
Which brings us to the great decoupling.
Yes, the crux of the issue. If that house, the exact same
arrangement of bricks from 1935, is now selling for half
£1,000,000, we have to figure out what actually gained 440,000
lbs in value. And this is a conceptual hurdle
that is just absolutely vital for anyone listening to clear We
must rigidly, strictly separate the value of the physical
building from the value of the land beneath it.
Because they are two completely different things.
They are. When people say house prices are
going up, they are almost always using the wrong terminology.
House prices aren't going up. Right, because let's actually
look at the physical building itself.
Have these 1930s semi detached houses become 10 times
structurally better over the last 90 years?
I mean quite the opposite. From a purely structural
standpoint. They are actively depreciating
assets. They have aged the brickworks
balls, the timber rots, the roofs need completely replacing
after 50 or 60 years. They require continuous, really
expensive modern maintenance just to not fall down.
Just to remain legally habitable, yes.
Not to mention the energy efficiency because we are
talking about what solid brick walls or maybe very early cavity
walls with absolutely 0 insulation inside.
Them the exact. Suspended timber floors that
just let the draft right up through the floorboards into the
living. Room.
Oh, the drafts are legendary in those houses.
Single glazed windows originally, which OK, they
probably replaced with double glazing by now, but even that
double glazing is probably 20 years old and blowing its seals.
Right, they leak heat like an absolute sieve.
So they fall drastically short of modern standard.
They fall short on space, on insulation, on environmental
performance, because you have to remember they were built for a
1930s lifestyle. Which means what practically?
It means a lifestyle where perhaps you only heated one
single room in the house with a coal fire during the winter.
You didn't heat the bedrooms. Oh wow, yeah, you just wore more
jumpers, right? They were not built for a twenty
20s lifestyle where we expect 21° of central heating in every
room. Multiple bath, bathrooms and
home offices. OK so let me get this straight,
if the physical house is depreciating and actively
draining my wallet with maintenance costs every year and
basically bleeding expensive heating into the atmosphere, yes
I am essentially paying half £1,000,000 for a patch of dirt.
Precisely, You are paying for the legal right to occupy a
specific set of geographic coordinates.
The value we see in the market today is completely 100%
decoupled from the structure sitting on top of.
It it is like, OK, it's like paying millions of dollars at an
art auction for a terrible, rotting painting simply because
it happens to sit inside a priceless, exquisite frame that
is permanently bolted to the wall of the Louvre.
Oh, I like that you were just buying the location on the wall.
The house itself is just a decaying placeholder sitting
inside the frame. It is a stark visual, but
economically it is highly accurate.
So the question we must ask is, why did the value of this
specific frame, this patch of dirt in southeast London?
Why did it skyrocket so violently?
Yeah, what drove the land value to such absurd heights?
Well, the data points directly to the agglomeration effect of
London itself. Agglomeration effect.
Yes, over the past century, London didn't just expand
physically, it fundamentally changed its economic nature.
It became this incredible economic black hole, pulling in
talent, capital and global finance from all over the world.
Agglomeration economics is the key term here.
Exactly as London transitioned away from being a manufacturing
center with docs and factories and became a global hub for
finance, technology, media, and law, employment became
massively, massively concentrated in the center
right. And when you concentrate that
many highly skilled industries in one place, the productivity
of a worker in London becomes significantly higher than a
worker doing a similar job elsewhere.
Because they're surrounded by other high productivity workers
and companies. Exactly which drives up wages in
the capital, which in turn acts as a magnet and draws even and
more people in. And then the infrastructure
evolved to support that magnet. I mean, those 1930s electric
trains were just the vanguard. They were just the start.
Now you have the DLR, you have the Jubilee Line extension and
obviously Crossrail. The Elizabeth line changed
everything. It really did.
The transport network basically acts as a giant funnel, allowing
millions of people to commute into this highly concentrated
zone of high paying employment every single day.
Therefore, the demand for the right to live within a one hour
commute of that specific economic engine intensified
exponentially over the decades. Everyone wants to be near the
money. Right.
But, and this is where the entire system broke.
If demand intensified that much, why didn't supply simply rise to
meet it? Yeah, as traditionally economics
suggests it always should. Right.
Normally, if everyone wants a product, companies make more of
that product. Why couldn't we just build
millions of houses around London just like they did in the 1930s?
Because, as our sources point out, the 1930s actually saw the
biggest private house building boom in British history.
They were building everywhere, but that boom was halted
abruptly by a massive structural change in how land was governed
in the UK. OK, what happened?
We have to look at the post war period, specifically the 1947
Town and Country Planning Act. The 1947 Act.
Yes, this piece of legislation is arguably the most important
factor in the modern housing crisis because it effectively
nationalized the right to develop land.
Wait. Nationalized the right to
develop. What does that mean in practice?
Well before 1947, if you owned a field on the edge of London, you
could pretty much just decide to build houses on it.
You just hire some builders and go.
Pretty much, yeah. But after 1947, you still own
the field, but the state now owned the right to develop it.
You had to ask the government for permission to change what
the land was used for. And at the exact same time, they
instituted the Greenbelt policies, right to stop London
from just endlessly sprawling out into the Home Counties.
Exactly. The Greenbelt placed a hard
physical legal corset right around the city.
So they literally trapped it. They did.
So you have a booming economic engine drawing in millions of
people, generating massive wealth.
But you have artificially capped the total amount of land
available to actually house those people, right?
And on top of that, you have created this discretionary
planning system that makes it incredibly slow, risky, and
difficult to build even on the land that is theoretically
available inside the Greenbelt. So you basically have boiling
demand just crashing straight into an artificially restricted
supply. And when demand consistently
outstrips supply over decades, not just for a few years but for
generations, prices don't just rise, they compound.
The snowball effect. Yes, the appreciation of one
year becomes the baseline for the very next year.
This creates what economists call economic rent.
Economic rent. Define that for me.
In this context, it's basically unearned income derived simply
from owning A scarce resource. In this case, the resources land
with planning permission near a global economic hub.
So you don't actually have to do anything.
Nothing at all. The landowner does absolutely
nothing to improve the land, but their wealth skyrockets simply
because the society around the land becomes more productive and
more desperate for space. Which perfectly sets up this
frankly bizarre thought experiment from the sources.
Oh I love this one. It's so good.
OK, let's say we recognize that the 1930s houses are old, but we
still really like the style. Sure, people love the aesthetic.
Right, so let's imagine we have a time machine.
We go back to 1935. We scoop up a crew of original
1930s builders. We grab all their tools, their
blueprints, and we bring them forward to today.
OK, 10 traveling builders. Got it.
And we drop them on an empty plot of land right next to our
street in southeast London. And we tell them build the exact
same 3 bedroom, semi exact same bricks, exact same labor hours.
Right Here's the question. Would it cost £60,000?
And the math on modern construction tells us absolutely
not. Not even close.
And the crucial thing to
understand here is that it's not because the cost of bricks has
massively outpaced inflation. Or because modern brick layers
are demanding exurberant wages compared to the 1930s guys.
Right. The physical cost of
construction, the actual material, the timber, the
concrete and the labor is only a fraction of the final price of a
modern home. OK, here's where it gets really
interesting. Let's break down the math.
Why can't I build that house for £60,000 if the materials aren't
the problem? Because of how land valuation
works in an artificially restricted market, it comes down
to a concept called residual land valuation.
Residual land valuation. OK, walk me through it.
When a modern developer looks at an empty plot of land, they
don't look at what the land is, they don't see a patch of grass.
They look at what the finished houses will eventually sell for.
OK, so they look at the 90 year old houses right next door that
are currently selling for £500,000.
Exactly. They see the market rates, so
they calculate what's called the gross development value, or GDV.
GDV, right? Let's say they can fit 2 semi
detached houses on this empty plot.
Based on the neighbors. That's a GDV of £1,000,000, half
a million each. Got it. 1,000,000 in total
revenue. Then the developer subtracts the
actual cost of construction. Let's be generous and say it
costs £300,000 to build both houses to modern building
regulation. OK, so we're down to 700,000
left. Then they have to subtract the
required profit margin because they won't build for free.
They subtract the cost of financing the debt to build it,
the massive cost of navigating the planning system for three
years. Because they have to pay lawyers
and architects just to get permission.
Exactly, and then they also have to pay section one O 6
contributions to the local council.
Wait, wait, pause. What are section one O 6
contributions? It's essentially a tax levied by
local authorities on developers. If you want permission to build,
you have to agree to fund local infrastructure, maybe expand a
school, or provide a certain percentage of affordable housing
on the site. OK, so it's basically the
Council extracting some of the value of the development for the
community? Exactly, it's yet another
massive cost layered on to the process.
So the developer subtracts all of these costs, Construction
Profit, Finance Planning Section One O 6 from that initial
£1,000,000 GDV. And whatever money is leftover.
Whatever is leftover, the residual is exactly what they
can afford to pay the landowner to buy the dirt.
And obviously the landowner already knows all of this math.
Of course they do. The landowner isn't stupid, they
know the finished houses will sell for half a million each, so
they will not sell the dirt to the developer for £10,000.
No, they'll demand the absolute maximum.
They will demand the absolute maximum residual value, so the
land already prices in the massive shortage of housing
before a single shovel even hits the dirt.
So you're telling me that even if we invent a time machine,
bring back our 1930s builders and construct a whole new
street, the modern economic system just instantly swallows
it up and slapped a £500,000 price tag on it anyway, purely
because of the location and the scarcity?
Yes, the baseline cost is astronomically high purely
because of the dirt. That is wild.
And this completely subverts the really easy political sound bite
we hear all the time of just build more houses.
Oh, we hear that constantly. Supply and demand.
Right. We are constantly told that
basic supply and demand will fix.
This increases supply of houses and house prices will naturally
fall. But if the new supply has to be
built on land, that already assumes a £500,000 end product.
Building more homes doesn't actually actually lower the
baseline price. Because the land is too
expensive to start with, you are just adding more half million
pound assets to a market that is already full of half million
pound assets. Exactly.
It's like you're expanding the size of the casino.
You're putting in more roulette tables, but you aren't actually
lowering the minimum bet at the tables.
That is a perfect way to put it. The new supply is just instantly
absorbed into the existing highly inflated pricing
paradigm. OK, so if building new suburban
sprawl doesn't solve it because the new land is already priced
too high, it really forces us to look at the land we are already
using. The existing footprint.
Right, we have all these 1930s houses sitting on these massive,
relatively speaking, plots of incredibly valuable dirt.
From a purely logical, almost robotic perspective, the obvious
answer is demolition and densification.
The SIM City approach to urban planning.
Exactly, I used to play SIM City.
If the land is worth an absolute fortune and the house sitting on
it is a drafty energy inefficient liability, just
bulldoze it. Just wipe it out.
Buy up for these adjacent semis, knock them all down and build a
beautiful, modern, highly energy efficient mid rise mansion block
on the exact same footprint. Right, going up instead of out.
You could house 20 families on the footprint of four,
drastically improving the environmental impact, reducing
carbon emissions from heating, and actually adding meaningful
housing supply to a place with a train station.
Why aren't developers doing this on literally every street in
London? Well, if the market function
purely on the basis of physical efficiency and logic, we would
see exactly that. Cities would just naturally
renew themselves. Yes, the housing stock would be
constantly renewed, constantly adapting to the population
density needs of the present. But we don't see this.
No, we don't. We are basically frozen in time.
And this brings us to the absolute core of the crisis, the
systemic traps that actively, aggressively prevent the dynamic
evolution of our cities. So we are paralyzed.
Completely paralyzed. Let's dissect these traps then,
because this is where the sheer crushing weight of the economic
system becomes terrifyingly clear.
You have millions of individuals who are trapped geographically,
financially and psychologically. It's a multi layered trap.
Let's start with the most immediate visceral danger to the
individual homeowner, the macroeconomics of the mortgage
system. Right trap #1 the mortgage
system is basically the linchpin holding this entire illusion
together. When someone buys that £500,000
house today, they aren't paying in cash.
Obviously not. They are taking out a mortgage
for say 400,000 or 450,000 lbs. Their personal solvency, their
entire financial existence, is completely predicated on that
house never dropping below the value of the debt they owe the
bank. Right.
If the market corrects, say prices drop by 40% and the house
drops to 300,000 lbs, they suddenly owe the bank £150,000
more than the asset is actually worth.
Which is negative equity and we all know the danger of negative
equity. For the individual it is a total
financial nightmare. You can't move, you can't
remortgage. It destroys lies.
It does, but at a macro scale, it's even worse.
Having a significant percentage of suburban homeowners
underwater on their mortgages effectively paralyzes the
broader national economy. How so explain the macro effect
of that? It creates what we call labor
market ossification. Ossification like bone.
Exactly. It becomes rigid.
Imagine you live in Bexleyheath, you are in deep negative equity
and you suddenly get offered a fantastic, highly productive,
much better paying job in Manchester.
You literally cannot take it. You cannot sell your house in
Bexleyheath without crystallizing a massive 150,000
LB debt that you have to pay the bank immediately, which you
don't have. So you turn down the job.
You stay in a less productive job in London purely because
your massive housing debt traps you geographically to that
specific semi detached house. So the entire national workforce
becomes rigid and inefficient. People can't move to where the
best jobs are. Yes, the economy slows down
because labor can't flow efficiently, and furthermore,
the banking sector itself holds trillions of pounds in this
mortgage debt. Right, it's on the balance
sheets. If the underlying asset values
collapse, those loans go bad and bank balance sheets become
completely insolvent. We saw a version of this in
2008. The great financial crisis.
Exactly. So the banking system
essentially holds a gun to the head of the government, forcing
lawmakers to prop up house prices at absolutely all costs
just to avoid a systemic financial meltdown.
Wow. So that is the geographic and
the financial trap. But there is a psychological
layer here too, isn't there? Because as we discussed, in the
1930s, it was just a house. Now it's the financialization of
the middle class. Yes, trap #2 the investment
paradox. People aren't just scared of
losing money, they are actively, aggressively relying on this
1930s brick box to fund their entire future existence.
Housing has become deeply intertwined with personal wealth
generation. It is no longer just shelter.
It is a savings account, right? It is the collateral used to
start small businesses. It is the primary vehicle for
generational wealth transfer, passing money down to your kids,
and most critically of all, it is the primary source of
security for old age. People literally look at their
drafty 3 bed semi and think this is my pension, I'm going to
downsize when I'm 70, move to the coast and live off the 300
grand in equity. They absolutely do.
The expectation of continuous above inflation appreciation is
completely baked into the cultural psyche of the UK.
People don't just hope their house gains value, they
structurally rely on it to survive retirement.
And this creates massive political inertia, doesn't it?
Massive if a politician stands up and suggests policies that
would genuinely actually lower house prices to make them
affordable for the next generation.
Like 60,000 lbs affordable. Right.
If they try to do that, they are simultaneously threatening to
vaporize the life savings and retirement plans of their
largest, wealthiest and most reliable voting demographic.
The homeowners. Yes, it is complete political
suicide to suggest lowering house prices.
Let me try another analogy here, because I think I'm really
starting to understand the sheer weight of this trap.
Go for it. It's like, OK, it's like being
handcuffed to an antique car. Let's say you have this
sputtering, incredibly inefficient antique car from the
30s. You desperately want a modern
electric vehicle. It's cheaper to run, it's better
for the environment. It makes way more sense.
OK, but years ago you took out a massive life altering loan using
the antique cars collector value as collateral for the bank.
It's close, but we have to push back on that analogy slightly to
be totally accurate. Oh really?
Why? Because a car, even a very rare
antique, generally depreciates eventually or just remains in
each asset for collectors. It doesn't drive the whole
economy. Fairpoint.
The danger with housing is that the antique car in your analogy
actually allows you to take out cheaper loans to buy other
things. It collateralizes your entire
life. Oh, I see.
The trap isn't just that the car is expensive to maintain, it's
that the antique car is the literal bedrock of your entire
credit rating and your financial security.
OK, I see the distinction. So you can't scrap the car,
because then you owe this massive loan, but you have no
asset to back it up exactly. And you can't afford to replace
it because you can't get a new loan while holding the old debt.
So you are completely paralyzed. You are forced to just keep
driving this wildly inefficient machine, paying exorbitant
maintenance fees every month, simply because the financial
mechanics of the loan prohibit you from moving forward.
Exactly. And that paralysis at the
individual level, the homeowner who can't move scales up to
create paralysis at the development level, which is the
structural reality of why we don't bulldoze and rebuild like
we talked about in some city. Right, back to the developer
problem trap #3 why doesn't the math work for a developer to
just buy these houses and build flats?
Because of the insane baseline cost of the land, combined with
the extreme risks of the planning system we talked about,
let's look at the numbers again. Let's do it.
If a developer buys four of those 500,000 LB houses with the
intention of knocking them down, their baseline cost is
£2,000,000 just to get the keys to the dirt. £2,000,000 before
they've even hired a single Wrecking Ball, yes.
Then they have to pay for the actual demolition.
Then, crucially, they face the discretionary planning system.
Right, the 1947 Act. Remember, they don't have an
automatic right to build a block of flats there.
They have to ask the local council for permission and the
local council is elected by the local homeowners.
Who definitely do not want a block of flats on their St.
The NABY factor in my backyard. Precisely.
The existing homeowners will fight it tooth and nail because
they think a block of flats will devalue their own antique cars,
so to speak. So they object to the planning
application. And that planning application
might take years, it might cost hundreds of thousands in legal
fees, and at the end it might be rejected entirely.
Leaving the developer where? Leaving the developer stuck with
2,000,000 lbs of debt, paying interest every month and
absolutely nothing to show for it but four empty rotting
houses. That is an insane amount of
risk. It is, and even if the
application is approved, they then have to pay modern
construction costs, comply with highly stringent modern
environmental regulations, manage supply chain risks for
materials. By the time they actually build
something new, they've spent a massive fortune.
So for the developer to make any profit at all on this venture,
the new flats they build would have to sell for astronomical
prices. Prices at the local suburban
market probably won't even support.
Because nobody's going to pay £1,000,000 for a flat in
Bexleyheath. Exactly.
The numbers simply do not work. The economic reality is that
replacing an old, inefficient home is far, far less
financially viable than simply leaving it standing, maybe
throwing a quick coat of fresh paint on the Bay window and just
selling it to the next buyer who is desperate for a patch of
London Bert. Wow, so we are locked into
preserving old structures out of brutal, inescapable economic
constraint. We are.
We freeze our cities in time. Not because we love 1930s
brickwork, though some might, but mostly because the math
dictates it. That is incredibly bleak.
It really makes you realize the housing crisis isn't a lack of
rocks or lack of builders, It is a systemic mathematical
paralysis. It is entirely systemic.
So if we are trapped by mortgages and we are trapped by
pension investment expectations and we are trapped by
construction math, yeah, how do we get out?
That is the trillion pound question.
Like how do we realistically rebalance the scales for future
generations so my kids can buy a house without just detonating
the entire economy today? Well, macroeconomists generally
frame the solution as a very stark, almost binary choice.
OK, what are the two options? There are really only two
mathematical ways to improve housing affordability.
Option 1 is that house prices fall dramatically back down,
closer to their pure utility value.
And option 2. Option 2 is that incomes rise
dramatically to the point where a £500,000 mortgage is no longer
a crushing burden for an average worker.
OK, let's look at option one first.
Prices crash. We touched on the macroeconomic
fallout of negative equity earlier, but what would actually
happen if the government just decided to pop the bubble?
Like say they banned foreign investment, raised interest
rates to 15% and intentionally crashed the market.
It would be genuinely catastrophic in a modern Fiat
economy. Worse than 2008?
Potentially much worse. When asset values collapse that
quickly, you don't just hurt rich property speculators, you
destroy the collateral of the entire banking system.
As we discussed, credit freezes entirely.
Normal businesses can't get short term loans just to meet
their payroll. People lose their jobs.
The domino effect. And furthermore, you trigger a
massive loss of consumer confidence.
Economists call this the wealth effect.
How does that work? When people see the theoretical
value of their home drop by 200,000 lbs on paper, they feel
significantly poorer, even if they aren't planning to sell.
Oh, so they stop spending money? Exactly.
They stop going to restaurants, they cancel their holidays, they
delay buying new cars. The velocity of money in the
economy just plummets. So it's a localized Great
Depression. A deep, immediate, very painful
recession becomes almost inevitable.
Therefore, no rational government of any political
stripe will ever intentionally engineer a massive drop in
nominal house prices. Because they'd be voted out
immediately, assuming the economy didn't collapse first.
Exactly. Which leaves us with option 2,
incomes rising. The soft landing.
Yes, the soft landing. It is the historically and
politically preferred path. OK, For housing to become
genuinely more affordable without destabilizing the whole
financial system, average earnings must rise.
Structurally, the ratio between house prices and earnings, which
has decoupled completely over the last 20 years, must narrow.
Meaning wages have to go up while house prices stay flat.
Right earnings must grow significantly faster than house
prices for a sustained extended period of time.
But wait, let me make sure I'm following the math here, because
this sounds flawed. Real wage growth in the UK has
been virtually stagnant since the 2008 financial crisis,
right? It has been very poor, yes.
So if wages grow at a sluggish, say, 2% a year, and the
government miraculously manages to keep house prices perfectly
flat at 500,000 lbs with 0% growth.
Which is very hard to do. Assuming they can even do that,
it would take decades, decades and decades of flat prices and
2% wage growth for that house to actually feel as affordable to a
normal worker as the £60,000 equivalent did in the 1930s.
Your math is completely correct. Are we basically doomed to just
wait it out for 50 years of slow wage growth?
Because that doesn't help anyone trying to buy a house today.
That is the grim reality of the soft landing approach.
It requires generational patience.
Entire generations will be priced out while we wait for the
race you to correct. That's depressing.
But economists and housing advocates argue that to
accelerate this, we don't just have to sit and wait.
We need profound structural shifts in policy to actively
push prices down and wages up. We have to actively reform the
mechanics of the market. OK, what kind of reforms?
Because we hear a lot of noise about the Y, MB, Y movement,
yes, you know, in my backyard who are really aggressively
pushing for zoning reform. And zoning reform is absolutely
critical. We have to address the
discretionary planning system that was created back in 1947.
How do we fix it? Well, look at other developed
economies for examples. Japan is a fantastic counter
example to the UK and the US. Japan.
I always thought Tokyo is insanely expensive.
It is expensive, but it has remained relatively affordable
compared to wages because they constantly build.
Japan has a nationalized rule based zoning system.
Rule based? What does that mean?
It is heavily standardized into basically 12 national zones.
If your land is zoned for residential use, you have a
presumptive right to build on it up to certain standardized
density limits. So it's not discretionary at
all. You don't have to spend three
years begging the local council and fighting off the neighbors
complaining about their view being blocked.
Exactly. You don't have to ask permission
in the same way. It's what planners call a
nuisance based system rather than a discretionary system.
Meaning as long as you aren't a nuisance, you can build.
Right. As long as you aren't building a
toxic chemical plant or an industrial slaughterhouse right
next to a primary school, you can build residential housing.
And as a result of that constant predictable supply, Japanese
housing actually depreciates over time, much like a car.
Wait, really? The houses lose value.
Yes, the physical structures are viewed as temporary consumable
goods and the city's constantly dynamically rebuild themselves
to meet demand. You see 30 year old houses being
knocked down and replaced with modern flats all the time.
That is fascinating. It completely breaks the UK
paradigm. Yeah.
So the Y MB Y movement here is essentially pushing to move the
UK towards a more rule based right to build system to strip
away all that risk and time cost for developers.
Yes, to make the SIM City densification mathematically
viable again by removing the planning risk, you lower the
cost of building. But, and this is a big but,
zoning reform alone isn't enough.
Why not? Because it doesn't solve the
core issue of land value capture.
If you just up zone a street in London, meaning you suddenly
allow blocks of flats to be built, the value of that dirt
instantly skyrockets even further.
Because the GDV goes up. Exactly.
The landowner just gets richer and the end product is still
expensive. This is where economists
advocate for a very specific tax reform, a land value tax, or
LVT. OK, I've heard this term thrown
around in policy circles. How does a land value tax
actually work in practice compared to the tax system we
have now? Well, currently we have council
tax, and council tax is based on the combined value of the
property, meaning the land in the building sitting on top of
it. But this system actually
penalizes development. Think about it, If you take an
empty, derelict, useless lot in a city center and you spend
millions to build a beautiful high density block of flats,
your tax bill goes up astronomically.
Because the property is worth more.
Right, you are actively punished financially by the state for
improving the land and providing housing.
That seems backwards. It is backwards.
A land value tax flips this entirely, and LVT ignores the
physical building completely. It only taxes the unimproved
value of the dirt beneath it. OK, so how does that change
behavior? Well, let's say you own a highly
valuable plot of land near a major train station in London
under LVT. You pay a massive tax bill
because the location is highly desirable, sure.
But you pay that exact same massive tax bill regardless of
whether there is a single drafty 1930s house on the plot or a
purpose built block of 20 flats. The tax is on the land, not the
building. Oh, I see.
So if you just leave the single 1930s house there, you are
paying this massive annual tax bill out of your own pocket, but
you're generating no extra income to cover it.
Exactly. It bleeds you dry.
But if you knock the house down and build 20 flats, you generate
rental income from 20 different families which easily pays that
exact same tax bill with profit leftover.
Exactly. It creates A fierce, unavoidable
financial incentive to develop land to its absolute maximum
productive use. You have to pay the tax either
way. Right.
It punishes land hoarding, it punishes speculation, and it
heavily rewards density and development.
It actively forces the landowner to put the land to work, which
drastically drives up the supply of housing and ultimately pushes
down prices. That is, I mean mechanically
that is brilliant, it uses the markets own greed to force
housing supply. But I imagine politically trying
to implement a land value tax on middle class homeowners who are
currently sitting on £1,000,000 dirt in London, that would cause
an absolute riot. Oh, it would be political
warfare. Which brings us to the ultimate,
and arguably the most difficult shift required to fix this
crisis. And it's not a tax policy.
No, it is not legislative. It is deeply psychological.
It goes all the way back to what we talked about with those 1930s
brochures. The mindset, yes.
We have to fundamentally shift how housing is perceived by
British society. The fundamental disconnect
between a house and an investment.
Exactly the synthesis of this entire crisis.
Everything we've talked about today boils down to a single,
irreconcilable conflict. UK housing currently occupies 2
completely opposing roles at the exact same time.
It's. Trying to do 2 things at once.
Yes, it is a home, a basic fundamental human necessity for
shelter, and simultaneously it is a financial asset, a
speculative vehicle for wealth generation.
And you simply cannot have it both ways.
It is mathematically impossible. Think about it.
If a house is a good financial asset, its price must constantly
rise, it has to outpace inflation and it has to outpace
wages to actually deliver a return on investment to the
owner. Right.
Otherwise it's a bad investment. But if it constantly outpaces
wages, that means by definition it becomes increasingly
unaffordable as a home for the next generation of workers.
Conversely, if it is an affordable home, it's price must
remain tied closely to local wages, which means it won't
skyrocket in value, which makes it a terrible stagnant financial
asset. So as long as we demand our
houses be our pensions, we are actively, consciously demanding
that our children be unable to afford them.
That is the brutal, unavoidable truth of the current paradigm.
As long as these two roles remain inextricably intertwined
in the cultural and economic reality of the country, real,
transformative change is completely impossible.
We are stuck. Wow, that is that is a lot to
process. It genuinely changes how you
look at the entire built environment.
Like a brick wall isn't just baked clay anymore.
It's a solidified manifestation of economic rent and zoning laws
and immense political inertia. It is a physical embodiment of a
broken economic model. It really is.
As we wrap up this incredibly deep dive, I want to bring you,
the listener back to where we started at the very beginning of
the hour. I want to bring you back to
those two original 1930s property brochures sitting on my
desk right now. The health resorts.
Yeah, the health resort of Greater London.
I want you to really think about those modest brick houses in
Bexleyheath over the last 90 years.
Those specific physical buildings didn't do anything
special. They didn't innovate, they
didn't cure a disease, they didn't become extraordinary.
They just sat there weathering the rain, getting older, getting
draftier and occasionally requiring new roofs.
Physical reality of the homes remained entirely predictably
ordinary. It was the world around them,
the massive global economic engine of London, the
nationalization of development rights in 1947, the subsequent
restriction of supply by the Greenbelt, and the heavy
financialization of the middle class.
It was all of that which mutated completely beyond recognition.
The houses stayed the exact same.
The economic system around them went mad.
And I think that leaves us with a really lingering question, a
provocative question I want you to Mull over the next time you
walk down an ordinary suburban St. and you look at those Bay
windows and those can completely paved over front gardens.
It's a question of what we actually value.
Exactly. If housing continues strictly
down this path, if it remains fiercely protected by government
policy and cultural expectation as a financial asset first and a
basic human shelter second, what happens to the very concept of
home for the next generation? Will the idea of a family
actually owning the land beneath their feet simply as a
utilitarian place to live become an absolute relic of the past?
Just a strange historical quirk that we only read about in 100
year old property brochures. It's a sobering thought.
It really is. It is something we all need to
think about very carefully. Thank you for joining us on this
deep dive.