Most people are wrong about the cause of rising house prices

I suspect this will win me few friends as I thoroughly intend to stomp all over misconceptions on both sides of the political isle, but it's imperative that what I'm about to say is more widely understood if the housing situation is ever going to improve.

During the run-up to the UK election - and still ongoing now - two competing narratives have dominated the discussion on house prices. The first narrative suggests that house prices have risen so drastically due to high immigration. It posits that the influx of people has generated so much competition for properties that they're now unaffordable. The second narrative proposes that rising house prices are caused by a lack of supply - we're simply not building enough.

Ultimately, both perspectives are underpinned by the same core rationale; house prices are rising because supply cannot keep up with demand. Whilst I won't claim there's no merit whatsoever to this viewpoint, the reality is that the supply and demand equation is not the primary driver of rising house prices.

Here's what nobody ever seems to mention. Since the year 2000, the number of homes in the UK has grown faster than the population. There are now more homes per person in the UK than there were 24 years ago. If this was really a simple supply and demand equation, one would expect the average home to be slightly cheaper than it was 24 years ago. However, since the year 2000, the price of the average home has quadrupled.

What is really causing this? The below is simplified a tad for illustrative purposes, but it's broadly true:

Since the year 2000, the amount of Great British Pound in existence has quadrupled. UK house prices have quadrupled. UK land prices have quadrupled. The S&P 500 index (a basket of shares in the most successful US companies) has quadrupled. Fine wine prices have quadrupled. Fine art prices have quadrupled. Rare whiskey prices have quadrupled.

Since 2000, the average salary has only doubled.

If you were to look at house prices (or anything else listed above) by '% of total amount of GBP', you'd see that none of them have actually risen. Everything listed above costs pretty much the same % of the total amount of money as it did 24 years ago. We're simply being paid half the % of the total money supply as we were 24 years ago. House prices have not risen. Salaries have halved.

Why did workers accept a halving of their salary? Simply because it didn't happen transparently. It's not clear how much one's salary needs to rise each year to maintain purchasing power. Most of the people I know believe they're doing alright if their salary keeps pace with inflation. But inflation only tracks your salary against mass-producible goods like a packet of rice, a tin of paint, and a smart TV. None of the things I listed above - the constituent parts of the very essence of wealth - are factored into the calculation. Even if your salary rose faster than inflation for every single one of the last 24 years, it's still entirely possible (in fact likely) that you're getting paid much less now than than you were in 2000.

The point is this: if you cut immigration to 0 tomorrow, or the new government is successful in building 300,000 new homes a year - or even both - house prices will not fall. They will simply rise a little less quickly, but likely still faster than wages. The truth is that when salaries were paid in a finite asset, it was not possible to reduce someone's pay without decreasing the numerical quantity of the thing you were paying them with. Unfortunately, the modern monetary system (a relatively new invention) enables employers to cut someone's salary simply by not raising it annually by some opaque, unknown %. This deceptive sleight-of-hand explains why property prices appear to be 'rising'.

For those that get all this and are suffering because of it, I'm sincerely sorry it's like this.

P.S. to head off one obvious critique... no - salaries didn't fall because of immigration. Just like houses, there are more jobs in the UK per person than there were in the year 2000. But even if not a single extra job had been created, a 17% increase in population wouldn't explain a 50% decrease in salary.