Chris Johns
A listener to our recent podcast recently had occasion to post this thoughtful reply to points we made about the ways the younger generation look to be disadvantaged relative to their parents.
I’d referenced conversations with people somewhat younger than me and the anger they feel about the many ladders my generation have pulled up behind us. I’d listed some, Cian added others to the things that, rightly, anger plenty of people.
I posed a question: why have all those who peer up at disappearing ladders remained so docile? Where are their pitchforks?
‘Just wait’, was the response. In Ireland, the suggestion is that Sinn Fein will be that pitchfork. That is consistent with the way populist governments have popped up in the UK and elsewhere.
If there is a single issue at the top of most lists, it is house prices.
Writer Dan Davies makes a number of related points in this very good piece
Davies despairs (nearly) about the lack of understanding about why house prices, globally, are high and marching ever higher. It’s mostly (but not entirely) about interest rates and bond yields. On our podcast, we talk about bonds a lot and lose listeners every time we do. But they are possibly the most important thing in all financial markets - and non-financial assets, especially housing. Other things could combine to deflate the housing bubble but you are fighting a very strong headwind so long as interest rates hover around zero.
The solution? Create the conditions that will normalise interest rates. Yes, that means get interest rates up. For that to happen, economies have to be run so hot such that wages and most/all other prices go up. For that to happen, governments should, in a blast from the past, target full employment.
We used to be told that wartime government spending and borrowing couldn’t be repeated in peacetime. Then came the financial crisis. And now the pandemic. Who is going to believe the next economist who preaches austerity?
Achieving higher interest rates is not to be desired for its own sake but for what it requires: rising wages and full employment. Government policy that is directed at these two aims will deal with many sources of inequality and have the happy outcome of deflating the housing bubble.
The first stage is to run both fiscal and monetary policy at flat-out maximum: massive government borrowing at zero interest rates. Done for long enough that will achieve full employment and a tight enough labour market that generates those inequality-reducing higher wages. Higher interest rates will follow, eventually.
Sound familiar? Without advertising it explicitly in the terms I have described, this is exactly what the Biden administration is up to. Success is by no means guaranteed but at least they are trying.
Sound unfamiliar? It is exactly what no government in Europe, including the UK, is remotely thinking about.
Until we get enough economic growth that allows central bankers to raise interest rates we are doomed to live in a housing bubble.
Intergenerational equity requires higher interest rates. When you think about it, a lot of other desirable outcomes require higher interest rates. Funny old world.
Chris, superb piece as always.
Just to delve a little deeper into one point
"Sound unfamiliar? It is exactly what no government in Europe, including the UK, is remotely thinking about."
I'd have completely agreed with you up until last week, but the ECB's new policy (QE for longer) appears to go against that.
Having said that, I'd suggest that at the first sign of inflation, the Germans/Bundesbank will insist the ECB taper QE and start raising interest rates.
As you pointed out in a previous podcast, rising interest rates will fix Ireland's house price inflation.
Chris - Thanks for an interesting article. Two questions which perhaps you and Jim could clarify
1. If interest rates increase then so does the interest payments Governments repay for their borrowings - how are increased payments repaid by Governments ? Possibly with increased taxes which reduce the benefit of the increased wages? I appreciate the impact of this depends on the scale of interest rate increase.
2. In relation to house prices in Ireland - I agree with the impact of low interest rates, but is there also a contributory factor of people hoarding land to limit housing supply? Perhaps higher interest rates may nudge those landowners to release land to pay for increased interest charges ?