St Paul's Institute

The Inflation We Love

by The Rt Revd Dr Peter Selby

Posted: 29 May 2013

We are, are we not, against inflation. It worries the commentators that the Bank of England has not met its inflation target for many years now, and we know that for the foreseeable future it will not be able to meet that target if it is to address what we claim as our predominant concern at the moment, which is to stimulate economic growth. The traditional weapons against inflation, restricting the money supply and raising interest rates, have been kept in the bottom drawer at the Bank of England for such a long time now that we can't yet see when it might be possible to use them again.

Folk memories of inflation are still fresh in our minds, and that is why we continue to regret the fact that it cannot be brought under control in this period of recession. The outgoing Governor must be quite exhausted from thinking up new reasons to give in the letter of apology he is required to write to the Chancellor of the Exchequer every time he misses the target. In a phrase, the target will never be met until a sustained economic recovery is under way.

That is where we come up against a basic inconsistency in the way we think about these matters. For one of the ways in which we assess whether a recovery is happening is the state of the housing market. If house prices are going up we are encouraged to be pleased: not just are homeowners enabled to borrow against the rising value of the property they live in, but the sense that your home is worth more than it was encourages 'consumer confidence', that most significant of requirements for economic growth. When consumers are 'confident' they go out and spend money (rather than saving it), and if their home is not rising in value they lose confidence and as a result hold on to their money, even though interest rates are at an all time low.

But for 'rising house prices' read 'house price inflation'; and for that we make no apology. If cauliflowers and electricity become more expensive we get worried; if the same happens to houses we are really pleased. Our pleasure is of course self-interested, the result of three decades of encouraging 'home ownership' (for which read mortgage debt). The number of us who 'own' our own homes (funded by debts to banks and building societies) now significantly exceeds those of us who rent our home (and who accordingly pay more in rents). More significant still is the fact that the 'owners' of property vastly outnumber those who aspire to be in that position, and who therefore are prevented from even starting out on the 'property ladder' by the inflation in property prices, especially in London.

Crocodile tears are wept over the plight of first time buyers, but that is exactly what they are: crocodile tears. For we know that the self-interest of the large majority of citizens lies precisely in the house price inflation which makes life so difficult for those seeking to begin the process of owning a home. There's a generational issue too: many home owners find that their housing outgoings - interest and capital repayments - are minuscule in comparison with the prices their children and grandchildren find themselves having to pay. Meanwhile the middle aged look to the increase in house prices as the means of funding their future social care in old age while resenting the prospect of watching their parents having to sell their home - and reduce their expected inheritance - in order to fund their own social care.

What has happened is that in the boom years the readily available credit offered by banks and building societies is funnelled into a steady increase in the price of land, the real root of the house price inflation. As Mark Twain observed in relation to the price of land, the price is bound to keep going up 'because they aren't making it any more'. And Sir Mervyn King has already signalled his concern that the current programme of funds of lending may simply result in further house price inflation: nothing will be gained from easier credit for prospective first time buyers if all they see is that they have to pay more than they can afford for the property in which they wish to live.

Drawing attention to basic inconsistencies of approach, to paradoxical outcomes of what are claimed to be good intentions, has been a prominent element in the tool kit of religious teachers throughout the ages, Jesus of Nazareth not least. And the reason for their availing themselves of that piece of pedagogical equipment is not far to seek: if land is above all else a gift, something we neither earn nor deserve, then making it into an index of prosperity by producing price increases that put housing themselves way beyond the reach of those with no land and no home denies the very belief in divine creation that religious people claim to profess.

So isn't it time the profits we make from the land we are 'lent' for our lifetime are regarded as revenue to be shared with those who are deprived of that most basic of human requirements, a home? And isn't it time we saw rising house prices as no more desirable than rising gas prices?

About this author

The Rt Revd Dr Peter Selby is the former Bishop of Worcester. Following his role as part of the Interim Directing Team from 2012-2014, he continues as an adviser to St Paul's Institute.

Anthony Sperryn - Posted: 13 Jun 2013

One of the drivers of house price inflation has been the incentives given to brokers (and, perhaps, bankers) by way of front-end fees when they arrange mortgages. This was particularly apparent at the time sub-prime loans were offered to all and sundry in the USA. Similar things were going on in Britain.

It is a pity that, in recent years, the prosperity of our financial services industry has rested on what most people would consider to be a fraudulent base. In any case, the industry appears to have scooped ever-larger amounts out of the Nation's wealth and a major correction should be called for.

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The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.