I TAUGHT economics for 25 years – including to two subsequent Scottish cabinet ministers – and came away with the impression hardly any student understood a word I said.
This might be down to my teaching. But it’s also because people think economics is merely “common sense” and so happily ignore its scientific logic.
A case in point is the daft idea being punted by the Royal Institute of Chartered Surveyors (Rics) that the Bank of England should limit house price increases to 5 per cent per annum to “take the froth out” of an incipient price bubble.
Rics is not silly enough to demand a legal cap on prices, which would be a bureaucratic nightmare. Rather it wants Mark Carney, the Bank’s new(ish) governor, to use his existing powers to force buyers to stump up a bigger deposit when house prices rise too quickly – effectively choking off demand.
Prices are a market signal reflecting the balance of supply and demand. If prices are going up it means either supply is constrained, or demand is in excess. House prices have started to accelerate since the spring.
Rics blames this on rising demand fuelled by the Chancellor’s Help to Buy scheme. According to the Halifax index, the average UK house price is up 4.6 per cent on the year.
The flaw in the Rics argument is that the UK suffers a massive shortage of the right kind of housing stock. Artificially constraining demand won’t make this problem go away.
Reducing people’s access to borrowing won’t make folk less in need of a roof over their head. All that constraining monetary demand does is remove the very incentive builders need to construct more homes.
Annual housing starts in Britain are still 40 per cent below their 2007 peak. You can see the lack of housing supply writ large in the rent statistics.
The average monthly house rent in the UK has risen by 11 per cent since 2010, while earnings have increased by only 1 per cent. The Rics plan would see rents climb even faster. There is an easier solution to the housing problem. Even in the boom years, the UK built far fewer houses per head than other European nations – the French regularly build twice as many.
Why? Because we artificially limit land availability through planning red tape. Remove the planners and there would be more houses. And cheaper ones.
Twitter hoping to avoid Facebook IPO gaffes
THE Facebook initial public offering (IPO) last year was a monumental disaster, as a result of over-hype and poor organisation. Shares fell below the IPO price on only the second day of trading.
It wasn’t till last month Facebook recovered its first day value. No wonder that Twitter, the micro-blogging social network, announced its own public launch without fanfare – on Twitter, naturally.
The difference between Twitter and Facebook is that the company was ad driven from day one. To date Twitter’s chief executive, former comedian Dick Costolo, has fought shy of going public, because the company is cash rich as a result of booming advertising sales.
But with a projected value of about £7 billion, investors are clambering for a piece of the action.
Twitter’s public debut could spark a revival of high tech flotations after Facebook soured the market.
Next up is Alibaba, the Chinese e-commerce group. Alibaba could be worth £10bn.