25 years ago, if you had a job, worked hard, and were sensible enough to save a little, with the help of a modest mortgage you could buy yourself a house. It is something that many responsible people, now in their fifties and beyond, have achieved comfortably, seemingly without breaking a sweat. Fast forward 25 years, and a quick glance through the estate agent window tells you that it’s now not so easy.
One could argue endlessly about the causes, but somewhere along the way, the prerequisite of saving money in order to afford something, disappeared. It became seemingly a statutory right for anyone, regardless of how creditworthy, to own a house, a car to park outside it, and a dozen plasma screen televisions to decorate the walls. Since 1987 the amount of borrowed money owed by consumers has risen by an astonishing 718%, and now represents an equally incredible £23,285 owed by every man woman and child in the UK. The effect has been slow but powerful. Given the limited building space in the UK the average house price has soared from £41,000 in 1987 to over £160,000 today, even in spite of house prices still being 10% below their 2007 peak. It contributed to an unprecedented economic boom that was so long enduring as to be taken for granted; this combined with years of egregious government profligacy has given rise to a British population with a now hopelessly overinflated sense of entitlement
The older generations may tut tut about this blatant lack of responsibility, but they were in fact the biggest beneficiaries. Given that 85% of consumer debt is in the form of a mortgage, through the housing market, this staggering explosion in borrowed money effectively went straight in to the old codgers’ back pockets. The economic benefits were available to them at a time in their lives when they could earn the most money, and given they had no mortgage costs to worry about, they had plenty of spare cash to invest in all sorts of appreciating assets.
The recent and continuing economic turmoil has shown this debt fuelled economic growth to be entirely unsustainable and clearly the level of debt needs to be reduced to a more reasonable level relative to incomes. There are two ways of doing this, with very different consequences: The first, inflation, is perceived to be the more painless. By pumping printed money into the economy, the theory goes that prices will increase, but salaries will have to follow, meaning that people are no worse off overall. After a few years of rising prices and salaries the level of debt becomes rather more manageable relative to peoples’ incomes and suddenly everything is ok again. In the alternative scenario, deflation, people pay back their debt, reducing consumption and demand for assets; this leads to unemployment and a decimation of asset values.
We are now in a situation where the average house price is almost 11 times the average person’s disposable income and youth unemployment stands at 21.9%. For any hard working twenty something, there is very little hope of ever being able to afford a house. The problem with the ‘painless’ inflation scenario, is that it is once again the oldies who stand to benefit the most. They are the ones who own most of the durable assets that in an inflationary environment will continue to rise in value. Furthermore, the psychology is appalling. The individuals who borrowed far beyond their means, never suffer any consequence of their reckless behaviour, and as a result are incentivised to continue doing the same. The result for the younger generations is an ever more unaffordable world.
In the deflationary world, the value of the oldies’ assets decrease, those who borrowed the most suffer the most from having to pay it back, and hopefully learn from the pain. After a long and painful readjustment we might eventually get back to a situation where a hard working youth can afford to buy him/herself a house. The unemployment would clearly be horrendous and expensive, but seeing as the coffin dodgers did so well out of the good times, it seems only fair to fund it by taxing their auspiciously gained wealth. The tragic thing is that this can never really happen because the majority of voting population are old people, and politicians are too spineless and short-termist to care about anything other than winning votes. I guess those now in their twenties really are the luckless generation. Where’s Margaret Thatcher when you need her?
by Marcus Watson