Page 4, 3rd November 1972

3rd November 1972
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Page 4, 3rd November 1972 — A mood which spells disaster
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Organisations: US Federal Reserve
People: Paul Johnson

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A mood which spells disaster

by Paul Johnson

IAM writing this from a remote corner of the Welsh mountains, as far from the problems of the metropolis as one can get without actually leaving Britain. Yet the talk here is all of inflation and rising house and land prices.

Even wild Wales is feeling the shock waves set up by the collapse in the value of money. I was told of one little hill farm — "a miserable 61 acres it was" — sold last week for £30,000; of cottages which, a few years ago, would have been worth barely £500, being eagerly brought for £6,000. The Welsh view this extraordinary rise in the value of their humble properties with a mixture of admiration and dismay. They are delighted to think they may be sitting on a fortune: horrified at the way "foreigners from the city" are moving in and taking over everything.

The stampede of city money into the countryside reflects a devastating lack of confidence in any form of productive investment. At Portmadoc 1 saw a new housing development overlooking the harbour, consisting of cleverly designed holiday flats for yachtsmen.

The man in the sales office told me that every flat had been sold on the day he opened, and that he had since turned away scores of would-be buyers. "They want to get rid of their cash, you see. They think it may be worthless tomorrow, so they want to turn it into bricks and mortar."

I believe this mood to be very general in the country today, and it is a mood which spells economic disaster. For people to distrust money itself is one thing — it is a characteristic of advanced economic societies — but for them to distrust any form of investment other than real estate means that they condemn themselves not merely to a slow, bat to a declining growth rate. Industry cannot expand, renew its plant, conduct research and development, adopt new techniques and market new products unless it is fed by a continual flow of cash from the investor. If this source dries up, foreign competitors will rapidly take over.

The investment rate in British industry is already low in comparison with other major industrial powers; it is perhaps the most disquieting feature of our present economic performance. But our industrial managers cannot be expected to raise the rate unless those who own and save money are prepared to risk it.

By contrast, investing in real estate, while it may be safer in the short term, must bring economic ruin in the end. To buy a house or a piece of land, in the expectation that its value will increase, is not only non-productive — it is actually counterproductive. If land and property values rocket, industrial costs rise accordingly, and our goods become less competitive. Wage claims, too. reflect the rises in rents and the cost of somewhere to live.

Equally serious, property 'inflation freezes the geographical pattern of industry. It adds enormously to the cost of moving a plant site or building a new one. It raises the bill for overheads. particularly of offices in city centres. Worst of all, it prevents labour moving to where it is needed. This explains the desperate paradox which faces us today: of very high unemployment combined with rapid wage inflation. The economists used to say 'that such a thing could not happen. But of course it must happen if an unemployed man is unable to move to an area of over-employment simply because he cannot find the barest aczemmodation there for himself and his family.

The property boom, in fact, has knocked recent economic strategy on the head. Despite huge injections of purchasing power, the unemployment rate remains high and may well increase beyond 1,000,000 during the winter; yet at the same time demand for labour in key areas is still so acute that wage rates continue to rise. It is no coincidence that these areas are also the ones where property values have risen fastest.

I do not believe that this aspect of our economic problem can be solved without very radical measures. In conversation, I find that more and more people are discussing the possibility of outright nationalisation of land, which would allow any increase in its value to accrue to the public, and would also allow public authorities to regulate its price. There are many alternative ways such a transfer of ownership could be brought. The details matter less than the object, which is to combine a measure of social justice with economic efficiency.

Ultimately, we shall, I think, be driven to this drastic step. For what investors rushing into the property market tend to Forget is that the value of real estate itself ultimately rests on the nation's general economic performance. If industry is starved of funds, if inflation carries all before it, if the economy plunges downwards — and all these things will happen if present trends continue—then the value of houses and land will collapse along with the value of everything else. There is no "safe" form of investment in a ruined economy.




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