The UK's Forgotten Economic Crisis
Summary
TLDRThis video explores the British financial crisis of the 1960s, triggered by housing market mismanagement. It discusses the government's attempts to control the economy through strict mortgage rationing, leading to a decline in housing quality and affordability. The script contrasts the era's policies with the 2008 housing crisis and examines the effects of alternating government strategies, from Labour's cautious approach under Harold Wilson to Conservative Prime Minister Edward Heath's relaxation of financial restrictions. The video concludes by questioning whether the crisis could have been avoided with better understanding of supply and demand.
Takeaways
- 🏛️ The British economy faced a housing crisis in the 1960s, leading to unaffordable houses and a decline in living standards.
- 🏗️ Post-war reconstruction saw Victorian houses replaced by tower blocks, aiming for utopian living but resulting in community separation.
- 📉 Economic growth was inconsistent, with Britain's annual trade deficit being a significant concern, affecting the value of the pound.
- 🏦 The government attempted to control the economy with strict mortgage rationing, leading to a housing market crisis.
- 🔄 Harod Wilson's labor government tried to stabilize the housing market by reducing wages and prices without raising interest rates.
- 🚫 Mortgage rationing led to a decrease in housing quality and a false sense of supply and demand, causing economic stagnation.
- 📉 The housing market suffered from shrinkflation, with 77% of new builds being below 1,000 sq ft and a lack of reception rooms.
- 💸 Edward Heath's government relaxed financial restrictions, leading to a surge in housing prices and a short-lived boom.
- 📈 Inflation and economic instability in the 1970s were exacerbated by government policies aimed at stimulating the housing market.
- 🏡 The crisis led to a housing shortage and a divide between those who could afford private property and those stuck with low-quality public housing.
- 🔄 The 1980s brought some stabilization as the government's interventions and market dynamics began to even out after years of fluctuation.
Q & A
What was the economic situation in Britain during the 1960s?
-The 1960s in Britain was marked by a struggling economy, with unemployment rising, salaries stagnating, and housing becoming increasingly unaffordable. The country was dealing with a housing crisis that had been exacerbated by the government's attempts to control the economy through strict mortgage rationing.
What were the architectural changes in Britain's housing during the 1960s?
-The architectural landscape of Britain changed significantly in the 1960s with the replacement of Victorian architecture and quaint villages with brutalist tower blocks and commercial centers. This was part of an effort to create a utopian vision where more people could live closer together.
How did the housing policies of the 1960s impact the British economy?
-The housing policies of the 1960s, which included strict mortgage rationing and attempts to control the housing market, led to a rapid growth in the housing sector that almost tanked the country's finances. The policies resulted in a false sense of supply and demand, leading to the construction of subpar housing and a decline in living standards.
What was the role of Harod Wilson's labor government in the housing crisis?
-Harod Wilson's labor government, which came to power in 1964, attempted to stabilize the housing market by reducing wages and prices without increasing interest rates. They introduced measures to control who could get a mortgage and how much they could borrow, which ultimately led to a financial crisis due to restricted supply and demand.
What were the consequences of the housing policies on the quality of homes built during the 1960s?
-The housing policies led to the construction of smaller and lower-quality homes as developers tried to economize on limited capital. This resulted in a decline in housing quality, which persisted for decades, contributing to social inequalities and a widening gap between the haves and have-nots.
How did the economic policies of the 1970s affect the housing market?
-The economic policies of the 1970s, particularly the relaxation of financial restrictions by Edward Heath's conservative government, led to an influx of credit and a surge in housing prices. This resulted in a housing market boom followed by a crash, exacerbating the housing shortage and leading to a period of economic instability.
What was the 'stagflation' phenomenon mentioned in the script, and how did it impact Britain's economy?
-Stagflation refers to a period of slow economic growth accompanied by high inflation, which occurred in the mid-1970s. In Britain, this phenomenon led to a decrease in the real value of mortgage debt, making it easier for borrowers to repay their loans, and it helped stabilize the housing market by wiping out debts of building societies.
What was the role of the 1974 snap election in Britain's economic policies?
-The 1974 snap election, called by Conservative Prime Minister Edward Heath in response to a coal miner strike, resulted in his loss and the return of Harod Wilson's labor government. This change in government led to a shift in economic policies, including a deal with building societies to cap mortgage rates and a bailout, which helped stabilize the housing market.
How did the housing crisis of the 1960s and 1970s influence the construction industry?
-The housing crisis led to a period of shrinkflation, where developers built smaller and lower-quality homes, and later, many house builders went under due to the retightening of lending practices and a lack of demand for their products. This resulted in a hit to the construction sector, with fewer homes being built and an exacerbated housing shortage.
What lessons can be learned from Britain's housing crisis of the 1960s and 1970s for future economic planning?
-The crisis highlights the importance of understanding supply and demand dynamics, the potential pitfalls of government intervention in the housing market, and the need for a balanced approach to economic policy. It also underscores the long-term consequences of rapid expansion without regard for quality and the need for robust economic systems to handle population growth and housing demand.
Outlines
🏛️ The Housing Crisis of the 1960s
This paragraph discusses the economic challenges faced by Britain in the 1960s, including unemployment, stagnant wages, and housing unaffordability. It highlights the government's efforts to address the housing crisis through the construction of tower blocks and suburban sprawl, which ultimately led to a financial slump. The era's economic struggles are contrasted with the architectural and societal changes of the time, such as the replacement of Victorian architecture with modernist designs. The paragraph also touches on the government's strict mortgage rationing and its attempt to control the economy, which contributed to the financial difficulties.
📉 The Impact of Mortgage Rationing
Paragraph 2 delves into the consequences of the labor government's policies under Harold Wilson in 1965, which aimed to control the housing market by capping lending and restricting mortgage availability. The policies led to a decrease in housing quality as developers sought to minimize costs, resulting in smaller and lower-quality homes. The paragraph explains how these measures created a false sense of supply and demand, with a persistent feedback loop that disincentivized the production of better housing. It also discusses how the government's policies inadvertently contributed to economic stagnation and social inequality, as well as the eventual introduction of capital gains tax and its impact on home ownership.
💹 The 1970s Financial Shift
Paragraph 3 describes the shift in financial policy under Edward Heath's conservative government in 1970, which relaxed financial restrictions and used the central bank's interest rates to control the money supply. This approach led to an influx of credit, causing the fastest price increases in British housing history. The paragraph outlines the government's attempts to stimulate growth in the housing sector, which instead led to a seller's market and increased financial strain on first-time buyers. It also discusses the broader economic context, including the 1973 oil crisis and the devaluation of the pound, and how these factors, combined with the government's housing policies, contributed to a period of stagflation and economic instability.
🏗️ The Resolution and Aftermath
The final paragraph discusses the resolution of the housing and financial crisis in Britain during the 1970s. It details how the government's policies, including fiscal stimulus packages and tax cuts, initially led to a surge in housing demand but ultimately resulted in an overheated economy and a subsequent crash. The paragraph also covers the role of inflation in stabilizing the housing market and the government's efforts to support building societies and homeowners. It concludes by reflecting on the long-term effects of the government's interventions on the housing market and the economy, suggesting that a better understanding of supply and demand could have led to different outcomes.
Mindmap
Keywords
💡Unemployment
💡Stagnating Salaries
💡Unaffordable Housing
💡Brutalist Architecture
💡Mortgage Rationing
💡Trade Deficit
💡Housing Market
💡Economic Stagnation
💡Inflation
💡stagflation
💡Fiscal Stimulus
Highlights
The British economy is facing challenges such as rising unemployment, stagnating salaries, and unaffordable housing.
The current economic slump has roots in a financial crisis from almost 60 years ago.
The 1960s saw a shift from Victorian architecture to brutalist tower blocks, impacting housing affordability.
The rapid growth of the housing market during the 1960s nearly collapsed the country's finances.
Government attempts to control the economy through strict mortgage rationing led to a housing supply-demand imbalance.
Harold Wilson's labor government in 1964 introduced policies to stabilize the housing market without increasing interest rates.
Reducing wages and prices to stabilize the housing market led to a financial crisis.
Mortgage rationing in 1965 resulted in smaller, lower quality homes and a false sense of supply and demand.
The government's policies created a housing market with a surplus of poor quality homes and a lack of good housing options.
The Parker Morris report of 1961 recommended better housing standards, but these were not made mandatory until 1967.
Housing prices remained stable, but the quality of housing declined significantly.
Edward Heath's government in 1970 relaxed financial restrictions, leading to a surge in housing prices.
The 1970s saw high inflation and a devaluation of the pound, impacting the housing market.
The 1972 budget introduced the largest peacetime fiscal stimulus package in British history, leading to a temporary boom in housing demand.
The mortgage market crashed in 1973, leading to a mortgage famine and a freeze in housing transactions.
Rapid inflation in the mid-1970s helped stabilize the housing market by reducing the real value of mortgage debt.
The 1980s brought some stability to the housing market after almost 15 years of government influence through credit markets.
The crisis highlighted the importance of understanding supply and demand in the housing market to avoid financial instability.
Transcripts
the British economy is in a bit of a mess at the moment to put it mildly unemployment is rising
salaries are stagnating houses are unaffordable cities are going bankrupt and our public utilities
are in dire disrepair and people are covering this shortfill with debt but what if I told you that we
have actually been here before and that this slump was set in motion almost 60 years ago with these
boring British tow houses these quintessentially British living quarters are the remnants of a
forgotten financial crisis that actually saw house prizes become even more unaffordable than they
are today depending on who you ask the 1960s was either an era of free love and radical thought or
an overrated blip of color in a drab decade either way when it came to the economy Britain was going
through a dark period and it was all because of the housing situation Victorian architect Ure
and quaint Villages were torn up to be replaced by brutalist tower blocks and Commercial centers
instead of white picket fences Suburbia spred with glaring brick work and Factory backdrops
Architects believed they were Paving the way for a utopian Vision where more people could
live closer together with more neighbors for a stronger community in reality the rapid growth
of the housing market almost tanked the country's finances completely and those tower blocks didn't
house any more people than the streets anyway they needed more space to separate the community
housing as per health and safety considerations and instead of improving the living conditions
of the growing population the rows of subpar new bills made things worse for everyone but
the spoiling of the British landscape wasn't just down to wannabe revolutionaries it was a result
of the government trying to control the economy with strict mortgage rationing the postwar boom
was over and the rise in population was getting expensive in 196 4 harod Wilson's labor party
ended the conservative party's 13-year rule under Tory rain economic growth had been inconsistent
especially when compared to Her Majesty's European neighbors Britain's annual trade deficit was
around 800 million which was about 1.8% of the GDP Returns on foreign assets helped decrease
the deficits though a lot of that had already been sold off to fund both world wars but it also came
from borrowing from foreign lenders and the sales and returns of domestic UK assets however this
weakened the pound and created a double-edged sword on the one hand British assets became
cheaper to invest in foreign investment paid for the gap between imports and exports the downside
was Foreign imports became too expensive in the end people bought less of them nowadays balancing
a deficit this low wouldn't be much of a problem unfortunately Britain didn't have an adequate
system in place back then in essence the dam had sprung a leak but fixing it wasn't as simple as
it seemed Britain needed a way for domestic assets to become cheaper to balance outflows
of foreign currency however Britain also needed a way to ensure that Imports didn't become more
expensive because then they'd lose foreign money they had to act fast but not hastily so Wilson's
government did the usual things like cutting spending raising taxes and Hiking interest
rates to protect the pound but these were just temporary Solutions like slapping on some cheap
wool filler to the giant cracks in your Dam that's why Wilson also did something risky he reduced
wages and prices without an increase in interest rates basically he banned prices from getting
any higher his logic was that limiting access to credit would stabilize the housing market while
broadening the economy as housing was set to become a real strain on the economy due to the
baby boom it made sense to focus on this sector unrestricted lending could lead to Bubbles and
financial catastrophe so Wilson thought if he could control who gets a mortgage and how much
they could borrow the risks from excessive borrowing and speculative investing would be
mitigated in many ways this was the opposite of the 2008 housing market that was caused by
complacent Bankers giving mortgages to people who they knew wouldn't have been able to pay it back
on this occasion Wilson was overcautious about finding the most dependable citizens to butress
the costs of the growing sector but this created its own financial crisis what was the point in
limiting mortgages for people who didn't even want the houses in the first place restricting
Supply without demand had devastating consequences on British living standards for decades to come
however Wilson's gamble seemed logical the economy was Fragile the pound was weakening an unregulated
for-profit property Market could benefit the f over the many so how exactly did these prudent
policies lead to a worse financial crisis and will Britain repeat the same mistakes now that the cost
of living is the highest it's ever been it's time to learn how history works as we remember
Britain's forgotten financial [Music] crisis in 1965 one year after Wilson's labor government came
to power Banks were ordered to Cap all lending at 105% of the nominal monthly rate the time to put
Wilson's plan into action had officially begun yet his Gambit had two immediate unfortunate
consequences the first was that the economy was so shaky that homeowners simply couldn't
access enough financing to purchase their homes because there wasn't enough Capital to go around
the second was that developers had less Capital to build with so what happened developers made
smaller and smaller homes of worse and worse quality in the hopes of snapping up the most
desperate homeowners this created a false sense of supply and demand demand sure there was demand
for housing there would always be a demand for housing when a population grows but the demand
was for good housing unfortunately the supply of good housing sucked and as developers lowered the
quality of housing to get the most out of their limited resources demand stagnated this feedback
loop meant developers were disincentivized to create better housing and the government
believed things were going well because there was always a queue of people needing homes so
they were disincentivized to release more Capital the the fact that normal citizens were put in die
straight didn't seem to bother either group yet this feedback loop persisted the economy didn't
get much better and housing quality got worse and worse strangely standards had been recommended
years earlier in the Parker Morris report of 1961 proposals emphasized the need to distribute
heating better so parlors were abandoned in favor of two living spaces one would be quiet or
communial like where your TV would go and another would be for eating with an enlarged kitchen for
modern appli es unfortunately it wouldn't be until 1967 that these recommendations became mandatory
in public housing by that time developers had created a bountiful stock of bad homes the only
good thing about this period was that at least housing prices stayed relatively stable volatility
from price increases were decades down the line but even if you could afford a home the mortgage
rationing became another obstacle between you and Home Ownership frustration from being locked out
of the market contributed to economic stagnation because getting onto the property ladder was
burdensome so families opted to rent or move in together there were all these new houses at
stable prices but no one was buying them plus the only way for developers to economize on mortgage
scarcity was to make homes easier to afford which meant making them shoddier in essence the housing
market suffered from shrink flation between 1966 and 1977 77% of new builds were below 1,000 s ft
almost almost half of the previous stock had two reception rooms whereas only 1/3 of new builds had
them buyers had a choice buy a bad house at the market price or get a discount on an even worse
home if you think your renting situation is dire spare a thought for young families trying to get
a start in life during the mid 60s it makes Harry Potter's cupboard Under the Stairs seem like a
trendy studio apartment as you can expect the Divide between the Haves and Have Nots widened
social inequalities middleclass families could turn to the private property Market with higher
living conditions and more space these builds came with all the luxurious trimmings of the 1960s
integrated garages spacious Whit halls and garden patios to capitalize on the British summertime all
two weeks of it compare that to the Victorian housing that was torn up in the first place
and it was clear how neighbors were on a more even playing field but by 1965 Wilson's government was
already sensing that their plan wasn't working they introduced some tax revamps to reduce the
pain of home ownership to start they introduced britan's first ever capital gains tax however
owner occupied houses were exempt which made them more tax advantaged than other Assets in layman's
terms this reduced the costs of buying a home so that they became a more tantalizing investment
compared to other assets the plan was to attract those with spare cash to use their Investments to
prop up the housing sector but this didn't help it was the equivalent of trying to block a leaky Dam
by sticking your fingers in the holes only for the pressure to create even more cracks that's
because these tax breaks ended up raising prices without raising Supply or quality oops it was like
Wilson's government had inherited a bad economy held together with tape and string but their way
to fix it was to prop it up with a rude Goldberg machine as the 1970s approached many believed the
latest homes were inferior quality to older social housing compare these two images and guess which
home was built in the 1930s and which was built between 30 and 40 years later and while all this
was happening wages had been increasing despite Wilson's wage freeze yet even with government
subsidies people weren't buying bigger and higher quality homes like other Western European
countries instead Brits were queuing up for die living quarters like their Eastern European
communist counterparts but that all flipped in 1970 suddenly credit was Unleashed on the
masses Edward Heath's conservative party won the next election and immediately relaxed Financial
restrictions this time the government enacted a policy to use the central bank's interest rate to
control the overall money supply their theory was that they would simply raise interest rates across
the board Whenever there was too much money in the system that way they wouldn't have to laboriously
calculate at and enforce lending limits for each Bank essentially the Tories reversed the labor
policies which had exacerbated the problems in the housing market think of it like instead of trying
to reinforce the Leaky Dam all at once they'd wait for leaks to appear and deal with them one by one
like an economist's version of whack-a-mole and the result cash flooded the housing market and
everybody lived happily ever after just kidding the inelastic supply of housing just meant that
price Rises became the fastest ever in British history oops what should have been a way to
stimulate growth in the housing and construction sectors did little to sty the problems as there
still wasn't enough Supply to meet demand firsttime buyers were hit hardest by the sudden
access to mortgages because now it was a sell's market in the same way that Wilson's government
had been over cautious with an unregulated Market Heath's government had overlooked how relaxing
credit controls too much would destabilize pricing of course there were other reasons why
why inflation was high in the '70s there was the 1973 oil crisis passing Rising manufacturing costs
onto customers and the continued devaluation of the pound but the UK government's hope to
motivate spending and investment in housing played a key role in reshaping market dynamics things got
worse in 1972 when unemployment rates Rose to a post-war record over 1 million people went without
work mostly due to declines in British industry even though the previous year years had seen a
rise in real earnings the increase in employment coupled with the overpriced housing market was
straining the economy to Breaking points prices were high cash was low something desperate had to
be done so in his 1972 budget the chancellor of the ex- Checker Anthony Barber announced
the largest peacetime fiscal stimulus package in British history the taxes that Wilson had raised
were cuts and the spending that was decreased was increased and the results growth suddenly
anyone who met the mortgage criteria could get a home loan and even take advantage of generous tax
cuts housing demand exploded increased mortgage Landing peaked at 123% by the end of 1972 by 1973
40% of all mortgages had been approved within the previous 2 years in just under 10 years the
whole situation had flipped well almost little had been done to fix the supply side of things
nowhere could accommodate the sudden release of housing demand at least not legally this meant
buyers competed desperately for the homes that had already existed the same homes they were denied
access to before but having a mortgage to buy them only worsen things for the average citizen
between 1971 and 1973 prices for these lowquality builds were up 70% Barber's budget had overheated
the general economy in other words the rubbe gold bug machine propping up the arious economy
had too many parts in response the government removed the stimulus Parts which caused the
whole Contraption to collapse the so-called Barber boom was short-lived along with any semblance of
economic Improvement the mortgage Market crashed leading to a mortgage famine but maybe it's better
to think of it as a mortgage drought while a leaky dam is threatening to flood the whole
village by mid 1973 inflation was up to 9% and the pound was under even more pressure thanks to
the collapse of the Breton Woods fixed exchange rate system that was basically the equivalent of
reaching payday only to realize that a phone app had a sneaky subscription fee now the government
had no choice but to hike Central Bank interest rates further boosting it by Just Four Points
was their last ditch attempt to prevent a currency crisis their policy dubbed competition and Credit
Control was scrapped controls over Bank lending were reintroduced yet even these efforts weren't
enough Savers and investors withdrew funds from building societies seeking better returns in the
market between 1973 in 1974 lending from building societies collapsed credit was scarce housing
transactions froze prices fell but wages weren't exactly increasing no matter how many fingers the
government used to plug the dam more holes were appearing could anything be done the building
societies desperately needed cash and the most obvious thing would be to increase interest rates
if the building societies want to attract more Capital they would have to raise interest rates
to compete with Market interest rates but doing so would have harmed existing mortgage rates remember
40% of mortgages were only a few years old if these citizens defaulted on their payments the
whole Dam would burst and at these prices it could trigger a collapse of building societies Banks and
any other lender Tangled Up in the ru Goldberg machine of the British housing market it felt
like anyone could make the situation better but no one had a real solution Britain was screwed the
country had had a decade of opposing governments trying opposing things to balance the situation
they taken turns introducing and repealing policies only for short-term gains to result
in deeper long-term problems well in a Twist of ironic fate the key to solving the problem
was simple all they had to do was do nothing in the end stagflation came to save the day here's
how it happened happened during the mid 1970s voters with mortgages could swing the election
when conservative prime minister Edward Heath called a snap election in 1974 in response to
the famed coal miner strike he promptly lost the vote because homeowners had shifted left Wilson
was back in power but time would tell whether homeowners were just punishing the Tories or
actually wanted the government to prop up the flailing building societies by now building
societies had to Bear the brunt of the financial instability thank y for them rapid inflation wiped
out all their debt although this came at the cost of homeowners and Savers in any case Wilson wanted
to be sure that he knew what voters actually wanted so he planned another election that
Autumn according to Legend he once remarked to a treasury Minister either we prevented
the mortgage rate going up and we would win the election or we allowed it to go up and we would
lose the election but the conservative party had also pledged to cap mortgage rates so will
offered the building societies a deal cap their rate at 11% instead of the Tor proposed 7% and
he'll bail them out it was an offer the building societies couldn't refuse this move for stalled
a massive equity and default crisis by people who had recently sold homes or taken out massive loans
in essence it prevented a fight or flight response from the people plugging up the Leaky Dam but
Wilson didn't do it alone soaring inflation was also helping to stabilize things borrowers had an
easier time repaying their loans because the real value of Mortgage Debt had decreased even though
prices had fallen 40% so building societies got propped up and homeowners effectively got
subsidies it seems like the crisis was finally over except for the building developers they were
left holding the bag they'd been forced to buy land at inflated prices use little money to build
houses that no one wanted which they couldn't sell because of the retightening of lending practices
between 1974 and 1977 many house builders went under the KnockOn effect was the construction
sector taking a hits even fewer homes and an exacerbated housing shortage but the night is
darkest Just Before Dawn with the 1980s on the horizon things were finally evening out
the clogged holes and paved cracks in the Dam's wall were holding the meddling that
started in 1964 had created almost 15 years of instability all because governments took turns
influencing the housing market through the credit Market if only the likes of Wilson and Heath had
understood the concept of supply and demand better so maybe things would have panned out
differently if lending was looser at the start of the 60s and Tighter at the end of the decade
and maybe if unemployment and the population hadn't been so high then the economy would
have been more robust or maybe just maybe the housing market wouldn't have led to a financial
crisis if the homes on offer were decent to begin with but what do you think did the baby boom put
the government in a catch 22 sit situation or does rapid expansion always come at the cost
of quality let us know your thoughts in the comments below if you liked this video check
out L1 on every economic crisis ever and be sure to subscribe to keep learning how history works
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