24 December 2008

The Really Big Ponzi Scheme

While the Ponzi scheme that Bernard Maddoff is alleged to have operated is in the news, I feel it's worth re-iterating a comment I made three months ago - the British housing market is a huge Ponzi scheme.

Like other Ponzi schemes, investments in the housing market don't generally produce anything tangible, they just shuffle money around within the scheme; in fact, an increase in the supply of housing could actually cause the scheme to collapse, by suppressing the increase in house prices.

Like other Ponzi schemes, the viability of the housing market depends on being able to deliver a profit to people who invest in the scheme by getting subsequent investors to put even more money into the scheme, while maintaining the impression that nobody stands to make a loss. Of course, if the profits are significant, at some point the pyramid will collapse.

Gordon Brown's efforts to keep credit flowing into the housing market in order to keep prices inflated is a classic attempt to prop up a failing Ponzi scheme. The money coming into the pyramid from the bottom has started to dry up, threatening a collapse which can only be delayed be creating more debt and feeding it in to the system.

The Ponzi scheme that is the British housing market is far larger than anything Bernard Maddoff is alleged to have created and as the British economy is so heavily fueled by house price growth, it could be argued that Gordon Brown has been running the entire economy as a Ponzi scheme for years.

2 comments:

Mark Wadsworth said...

Yup.

Before we even argue between ourselves on the respective merits of taxes on rental values or capital values (bubbles are in capital values and not rental values, so bubbles would not be affected by a tax on rental values) we have to take a step back and work out how to educate the great British public on why low and stable house prices are A Good Thing.

But they fall for rising house prices every time, whether it's the Tories or Nulab in charge, and it works in the USA, Ireland, ANZ, Spain as well.

Paul Lockett said...

I've been thinking a bit more about the whole capital value/rental value rebate and I've started to think that it could be a bit of a red herring.

In terms of preventing bubbles, the key is setting the charge at a high percentage of the value. If you do that, the two charges will tend to be quite similar anyway, as a charge on sale prices will tend toward the rental value as the charge suppresses selling prices.

The difference between the two bases of valuation is only relevant if the charge is set at a low percentage of the value, in which case, it will have little impact on bubbles anyway.

If someone gave me the option of an LVT on rental values gradually increased to 100% of market rental values or an LVT on selling values gradually increased to 100% of selling prices, I probably wouldn't be too bothered either way.