Fred Harrison: House prices will peak in 2026
Merryn talks to Fred Harrison, author of #WeAreRent about why land is so lucrative to investors and when house prices will level off.
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Merryn Somerset Webb: Hello and welcome to the MoneyWeek magazine podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine, and with me today, I have Fred Harrison, thinker, author, and self-described social justice campaigner.
Fred, you've written a lot of books, but we're here today to talk a bit about your one called #WeAreRent. This is the second book in a three-book series. Third one on the way.
The subtitle is Rent Seeking: the Crime Against Humanity. Or, as Martin Wolf, my FT colleague, calls it in his comment on the back of this book, the great destroyer of civilisations. This is all going to make sense, listeners, in a few minutes. But we're going to start by saying, welcome, Fred. Thank you for joining us.
Fred Harrison: And I'm pleased to be with you, Merryn.
Merryn: What I want to talk about first is house prices, because that leads us on to everything else. We had the Halifax numbers, last week are the most recent ones, showing us since the first lockdown just over two years ago that the average house price is up by over £43,000. House prices hit a new record high in London. Average house price is £535,000. We saw margin loan house prices at 1.4%. That's the biggest increase in six months.
And an extraordinarily high average house price, that is despite the fact that interest rates have risen admittedly very slightly from 0.5% to 0.75%. But when people know that interest rates are going to keep going up, they know the house prices are already very high. And they also know the cost of living crisis is making it harder than ever to save up a deposit. And we know, for example, that house prices have grown by more than double wages since 2000.
You look at those numbers and you can only think, this can't go on. There's a huge crash just ahead of us. Is that right? Is that fair?
Fred: Yes, there's going to be a huge crash. But the question is, when? And I'm afraid that conventional economics doesn't answer that question very efficiently. For example, back in 2005, there seemed to be a consensus that house prices would stabilise, that they would turn down a bit and moderate and then continue their long-term upward trend. That was 2005. They didn't know that, actually, that prices peaked in 2007.
And there would be this enormous crash, including the seizure of the banking system. Yes, the house prices will continue going up. But the question is, when do they turn down? And I'm in a minority in being very specific about when that's going to happen.
Merryn: That's what we need. Everyone wants the date. Everyone wants to know when to sell or when to start thinking about buying. You say you’re specific. Tell us the date.
Fred: It will be in 2026, that is at the end of a 14-year cycle in house prices within a business cycle of 18 years. The cycle ends in 2028, but it actually is land rather than houses. Peaks in 2026. They will continue going up till then because, among other things, the present government has promised to cut taxes in 2024 in the election. And those tax cuts will be capitalised into higher land prices, which will be the final upward twist until when we reach 2026, prices will level off.
Merryn: You say they’ll level off, but then they'll fall fairly dramatically. Level off for how long?
Fred: They’ll level off for a matter of months and then they start to go down. They must go down, whatever the economic environment or military one may be. We saw that with the peak in the late 2007, it took till 2008 for one of the crises, the banking crisis, to emerge. Of course, everybody now looks back and thinks that it's a financial crisis. But it wasn't a financial crisis. It was a housing or rather land crisis. And all else that followed was a consequence of the downturn in house prices.
Merryn: Let’s go back a bit. Would you mind explaining to us the economics behind the idea that there is an 18-year business cycle and a 14-year bottom to peak house price cycle? How does that work?
Fred: First of all, this is an empirical finding. We've had these 18-year cycles for centuries. The challenge is to provide a theoretical explanation for an empirical fact. The empirical trends, of course, have been disrupted, but only by something of the proportions of a world war. For instance, the 1938 cycle should have ended in 1938, except Mr Hitler intervened and all hell broke loose for other reasons. But short of a world war, the 18-year cycle repeats itself.
Merryn: Since when, Fred? When’s the earliest we can trace this to?
Fred: I've tried to explain the 14-year periodicity of the housing market in terms of the 5% interest rate, rate of return on mortgages, historically, the average in the long run, which gives us a payback period of 14 years. And when people stop taking out mortgages, when prices have been driven up as high as they can go, according to levels of income at the time, the whole house of cards collapses. I posed this 5% theory in a book in 2005.
Unfortunately, economists have not chosen to test it. I can't say with certainty whether it's correct. But that's the best that I can offer at the present time. And this goes back to the 19th century when the mortgage market was one in which people borrowed… people got together in groups. They bought a piece of land. They all contributed to the paying back of the mortgage. Each one acquired a home as they were built.
And then the whole thing was wrapped up at the end of 14 years. Very often, this was done through the local pub. And there seemed to be no explanation for why it should be 14 years other than the 5% interest rate. I can't be more certain than that, Merryn, other than that this is something that's happened over centuries. There is no reason to believe that this time, it's going to be any different.
Merryn: We can't quite explain it, but it just is?
Fred: At the present time, that's the reality.
Merryn: And the 18-year business cycle?
Fred: Keynes said that when you have a large collapse, it lasts for three to five years, which is an average of four. And lo and behold, 14 and four is 18. And that seems to fit the empirical facts. The cycle goes down, we assume two years at the end of the cycle and then two years of flatlining at the beginning of the next one. And that gives us our 18-year, or thereabouts, periodicity.
Merryn: If we want to get out at the top, we need to start thinking about selling in mid-2025, given how long it takes to sell houses in the UK?
Fred: That's right. And that will be with the benefit of the chancellor's tax cuts, which will be capitalised into house prices. People will be buying merrily, not aware of the fact that they're buying right at the peak of the cycle.
Merryn: Explain to me what you mean by these tax cuts will be capitalised into house prices.
Fred: It's to do with something called zero elasticity. The one factor of production… There are three, land, labour and capital. The one that has the greatest pull is land. And as they used to say, they don't make any more of it. It has the greatest attractions for investors. If, for instance, in a market, we need more labour, we can go to the other end of the world to get the labour, bring it in and compete with local labour.
And it's the same with capital. But if we want to set up a business in the middle of Manchester or Birmingham or London, we can’t import more land into the locations where people need to either live or work. And this has to do with the elasticities of demand, as it's called, the flexibility. There is no elasticity in the supply of land, which means it has the greatest gravitational pull for whatever money it happens to be going.
If the chancellor cuts taxes, for example, the first port of call is to pour as much of that extra revenue into buying a house at a higher price, because people are competing now. And it's this elasticity effect that makes land the least risk-free and the most rewarding in terms of capital gains.
Merryn: Fred, that we buy property when we have extra cash because we feel that this is one area where there's a shortage of supply and we're almost guaranteed to make money. But land and property is also generally favoured by the tax authorities. That’s another reason for us to go there?
Fred: That's correct. It's the least taxed asset of them all, which is why it's so attractive for investors. And the rest of us get co-opted into wanting to get on the housing ladder, just as much to make a profit as to have a home for our families. And that's the tragedy of the modern economy. We’re all co-opted into being essentially speculators or free riders, as I call them in my books. This is a tragedy, but it's the reality.
You see, when somebody claims a rent for owning land, this is what the economists called a transfer income. You produce it because you're working and I collect it, giving you nothing. A transfer income is not an equal relationship, which is the result of historical events, obviously, the enclosure of the commons and such like.
But we have, within the heart of the capitalist system, this exploitative relationship where I as a landowner can demand that you yield up some of the income that you've produced to me for no better reason than that I have my name on a property deed. I've not added to the wealth of the nation at all. It's a transfer income.
Merryn: Fred, isn't that just an argument for everybody being encouraged to own their own home? There is no transfer income.
Fred: It is transfer because, look, the people who live in the high-value homes in the centre of London, they pay, out of their very high incomes, the highest taxes to the Exchequer. But the rate of increase of their properties far eclipses what they pay to the Exchequer. In other words, they get back more than they pay in to the Exchequer. They are living tax-free.
Merryn: They only get that money if they sell the house. If they remain in the house or they buy another house nearby to move into, etc, they gain nothing.
Fred: That's not the case. We can borrow money, it’s called equity withdrawal, as the price of our home goes up. And invest that in a business or whatever or go on holiday with it. Of course, we can live off the current increases through the equity withdrawal process.
Merryn: In an ideal world, what would happen? Property prices would just stay flat? They would be the same everywhere? How would this work?
Fred: In an ideal world, we wouldn't have the tax burdens on earned incomes and the enterprises that are actually generating wealth. We would be drawing our revenue, as Adam Smith said long ago, from what he called the peculiarly suitable source of revenue, which is rent.
Quite recently, a study was done here in the UK in which they examined what would happen in the post-Covid era if, for instance, in the US, they shifted the tax burden on land from half a percentage point to five and a half percentage points and reduced the tax burden on capital and labour by a corresponding sum, so that the Exchequer had a revenue-neutral outcome. The result of that tax shift would increase output by 15%.
Through the increase in productivity arising from getting rid of the bad or deadweight taxes on labour and capital, that 15% in American terms, GDP, is an extra $3trn in the economy without actually doing anything much more than improving the productivity from rearranging the tax regime. That three trillion extra dollars is enormous. It would straighten out so much of the problems in the modern economy.
A similar effect would occur in the UK. The efficiency gains from moving from the bad taxes to the good one, as Adam Smith called it, would be enormous. And that would stabilise house prices. We wouldn't have the booms and busts. We wouldn't have the same level of land speculation. Houses will be built according to need rather than how much I can make in capital gains by hoarding land, which is what building companies do. And life would be totally transformed.
Merryn: I just want to be clear that we're talking about a land tax, not a tax on houses. No one is saying you would pay on the value of the house. Just the value of the land on which the house sits?
Fred: That's correct. It would be purely on the site value, excluding the building. Because the building is the result of labour and capital. And that ought not to be taxed at all.
Merryn: It's effectively, we're talking about a land value tax, which you could also say is a wealth tax. What we're doing is we're going to stop taxing income so much and we're going to start taxing wealth?
Fred: The problem with the wealth tax is that wealth is also generated by labour. You might find, like Mr Dyson who employs a lot of people and they ingeniously produce valuable products which people want to buy, he's wealthy, but he's wealthy because he's worked for it. On the other hand, he owns a lot of land now and he doesn't generate wealth out of that on the basis of what he adds to the value of the total wealth of the nation. It’s a transfer income.
In the case of the recent study that I've referred to, it's published by the Centre for Economic Policy… What do they call it? The Centre for Economic Policy Research. They found that an equivalent tax on wealth as opposed to the site value would only generate half the gains. Because a wealth tax is a burden on productive enterprises, as well as on the unearned income. The talk of a wealth tax, I'm afraid, doesn't overcome the problem of exempting the fruits of one's labour.
Merryn: How should Mr Dyson… Let's stick with Mr Dyson. Let's say he wants to retire and let's say, for the sake of argument, he's got £100m. How should he distribute that cash in order to earn a passive income? Because all of our retirees in the end become rent seekers one way or another once your productive life is over and you want to live off the fruits of your labour. How should that be invested? How do you earn that income if you can't do it via property, which of course is what so many people would like to be able to do?
Fred: But we're talking about a different world here where pensioners invest their savings in pension funds that are investing in enterprises that are producing real wealth, that are creating jobs, that are generating a revenue that is earned. There is no problem about where to place your funds that you've saved out of your untaxed wages. You're just adding more to the wealth of the nation and doing good, as opposed to imposing the deadweight that we'd now endure in many ways because of the tax regime.
Merryn: Equity markets are fine. We don't consider investing in a range of equities to be rent seeking?
Fred: Yes, when one wants to invest in equities that are helping the economy to be enterprising, rather than free riding.
Merryn: I was going to say… If I could go back briefly to the idea of the land value tax. If you were to have your way, and I agree with you mostly, and make this transferrable tax burden, what makes you think that the 14-year cycle we have discussed would go away, when we can't explain why it exists in the first place?
Fred: The 14-year cycle is based on the inexorable rise of land values. Until halfway through the cycle, they reached the point where they're going up faster than people's earnings, because the shortage of property is such that that's an inevitable consequence. Under the regime where the government… Where people are pooling their rents, it's a whole different game from being arbitrarily taxed by government.
Where they're pooling their rents, they're creating a stable property market. And the 14-year cycle gets erased from history. Now we have what we call sustainable growth. Sustainable growth is something that all economists are groping for, but they don't know how to deliver it. The only sustainable growth is one where we don't have the booms and busts which are driven by a tax regime that creates the 14-year cycle that facilitates land speculation and disrupts the enterprise economy.
Merryn: My worry is that… Let's say that you get some political traction with this idea… And I've written about land value tax before. But when I've done it, I've noted that were any governments or politicians to be persuaded that this is a good idea, what they would actually do is make it an additional tax rather than alternative tax.
Fred: And that's why we need to be working towards an authentic democracy. When people are directly involved in paying into the public purse by paying rents… Look, according to the OECD definition, a tax is an arbitrary impost by government which can up the rates or reduce the rates at will, depending on whatever the climate happens to be. You can't do that with rent. Rent is a market-based value. Everybody can measure it.
You can't be arbitrarily told to pay more than that. And if you're paying less, then you are capturing some of that rent, which is not helping the economy. And yes, there is the temptation to add this to the system rather than subtract it. But in doing so, you don't gain the benefits of increased productivity. And this comes back to democracy and whether people are involved with their fate and demanding that their representatives do the right thing by them.
Which unfortunately, under the present tax regime, they can't do. They're at the mercy of the politicians.
Merryn: I’m going to entirely agree with you. The bit I don't see is how that changes.
Fred: It only changes if there is an enlightenment. And Scotland had that enlightenment once before. Why shouldn't it have it again? When things get so bad, people might just decide to get together and figure out, look, if there is a more sensible or rational and enlightened way of doing things, why don't we do it? And to heck with the politicians who are representing the free riders.
Merryn: Scotland so far has done various things to try and shift land around the place in community ownership. Some talk about what sounded like it might be an LVT a few years ago. But they've also raised income taxes at the same time. And so far, the community ownership has been an absolute disaster. Slightly feels like this is the wrong leadership to have this enlightenment.
Fred: I'm afraid Scotland is not being very well led. We've tried to explain the huge gains to Scotland that would arise from the tax shift, which the Scottish government has the power to do. It’s had the power devolved to it to zero-rate the income tax and raise the lost revenue via a reform property tax. Holyrood could do that next year. There's no excuses, but the SNP government chooses not to listen to these words of wisdom.
And we have to keep on at them because there would be no need to level up with the help of Mr Johnson in London if the SNP government in Holyrood used the powers at its disposal today.
Merryn: It’s interesting, isn't it? It's the different ways of looking at the SNP. The SNP in the main like to pretend they don't have any powers because they think that is the best way to get more independence. But I always look at it and say, if you performed better, if you were good leaders, if you used your power better, then people might say, hey, this could work. Let's go for independence. They're doing this completely the wrong way around.
Fred: Exactly. Any agency that's failing will look for scapegoats rather than looking inside itself to find out what it's not doing right. And that's what's happening in Edinburgh. The government could do so much more of the right thing. It could follow the advice of Adam Smith, for goodness’ sake. He said that a land tax is a peculiarly suitable source of revenue. And yet the SNP simply are not interested. And therefore, the poor performance of the Scottish economy can't be blamed, not wholly, on Westminster.
Merryn: Let's go to what happens in 2026, because I suspect that our listeners at this point are going to be concerned. Let's say that we do have this massive collapse in house prices or more land prices in 2026, that surely will then cause a financial crisis again and a stockmarket collapse, etc. All these things presumably will happen at once, just like they did last time around.
Fred: Yes. And what we had last time was subprime mortgages. We're getting that now. People are borrowing money, 35- and even 40-year mortgages, and paying through the teeth. When interest rates are finally driven up, there will be a lot of mortgages that are unsustainable. Banks will find themselves with bad debts. And I'm afraid this time, it's going to be even worse than 2008, 2009. Because we've got to view this in the global context.
We've seen already, China's property market is on the brink of collapse because of the reckless expansion of buildings there that are bought by speculators, middle-class families buying portfolios of properties, which they're not renting out. They're keeping them in order to collect the capital gains. That's just one example of the global context. And it's more than that. We've seen the violence in Ukraine, which will be part of the environment that will exist as we head towards the end of the cycle.
We will see more migrants wanting to move into Europe from Africa, because of the food-hunger crisis. And all of these things will converge in what I call in book two of my current trilogy, the Great Convergence. There will be the convergence of all these existential crises triggered by the economic crisis that is driven by the land value cycle tipping downwards.
Merryn: Fred, cheer us up. Is there any way we can protect ourselves from this as individuals?
Fred: I'm afraid that in this world, there is nowhere to hide. You can't move out into the country because the river will flood your home. There is no escape from inflation wherever you go. There are no assets that you can switch to that will be protected. We're all in one boat that's heading for a huge collision, unless we get something like another Scottish enlightenment, which will then help to build the hope that will help people to negotiate their way through the next crisis.
Because despair is one of the enemies of stability. But if people have been prepared for what's going to happen and can have hope that they will get through to better times on the other side, then we can start to negotiate it. We can see this in Ukraine now. People, despite the terrible things that are happening in the demolition of their homes, really believe that they're going to ultimately fend off Mr Putin's army and that Europe will come to their aid in rebuilding their country. It's that hope that keeps them going. And that's what we need to deal with the next terrible recession.
Merryn: That's all we've got, hope, and possibly a house in the country that isn't by a river?
Fred: If you're on a hilltop and you can avoid the inflation that's coming down the road, then fine.
Merryn: I’m going for a house on a hill with a wood-burning stove, I think.
Fred: Look, we've got to take the long term. For people like me in their 70s, there's no need to worry because we're beyond worrying. But for young people, they have to look into the future and understand that if they start pushing government to realign the tax regime, to recalibrate, to start shifting the tax burden off their wages so that their real wages start to rise, and draw the revenue from rent, then we begin to head towards what we really need.
Which is the kind of behaviour that addressed the climate crisis, the territorial military adventurism of nationalist politicians and all the rest of it. It's only with that hope of putting in place a redesigned tax system that we’ll actually make it through this next phase, I'm afraid.
Merryn: Fred, that was quite a hopeful ending. I think we will end it there. But thank you very, very much indeed. Everybody, please go out and buy Fred's new book, #WeAreRent. Read that and buy book one as well and wait for book three, which has more on geopolitics, I understand, in it. And while Fred can’t offer you any good news, he can at least prepare you for the bad. For more on Fred, you can follow him on Twitter. It's @geophilos, Fred?
Fred: That's correct.
Merryn: Or go to Fred's website, landresearchtrust.org. Fred, thank you so much for joining us today. We hugely appreciate it. And I hope it doesn't get quite as bad as you suggest and I also hope that there are some politicians listening to you.
Fred: Thank you, Merryn.